The New Zealand property and business interruption market hardened rapidly following the September Christchurch earthquake, and tighter conditions can be expected to continue into 2012, according to a report by Marsh NZ.

It says insurers have become less flexible and very selective, and are increasing both premiums and deductibles. Increases on earthquake premiums are being sought nationwide and some insurers are raising non-earthquake premiums to boost their cashflow and underwriting results.

Marsh NZ Country Head Grant Milne says the market can change quickly but he believes some of the new requirements will become permanent.

Until recently most locations outside the Wellington area calculated the earthquake deductible on a percentage of the loss. Wellington has always been considered the country’s greatest earthquake risk and the deductible there was calculated on a percentage of the site value.

But after the February 22 quake, many more insurers are calculating the deductible on the site value for all regions, which raises the deductible significantly.

They are also becoming more conservative in the length of indemnity periods for business interruption.

Mr Milne told insuranceNEWS.com.au that insurers’ views of catastrophe risk in New Zealand have changed following the Christchurch earthquakes, particularly because of the amount of damage in the second event. The city had also been considered low-risk.

He says London insurers used to enjoy writing business in New Zealand because it was a competitive market with relatively light losses and provided very good financial returns. 

Prior to the first Christchurch quake, low-risk customers were enjoying the most cost-effective rates in decades. Clients benefitted from “very good terms and conditions” for a number of years and some will now be hit by “severe changes”.

“We are at a point where this is all very new and the market shift is quite substantial,” he said.

Marsh’s advice on how to get the best insurance cover in the tightening market includes beginning the process early and obtaining additional information such as updated valuations, detailed information on construction materials and method, and structural and/or geotechnical engineering reports.

It suggests clients obtain latitude and longitude information for every insured location and allocate business interruption values to individual premises. 

Mr Milne says providing more information about sites means clients with a property portfolio can show insurers that the risk is spread around different locations.

Clients should also get a new valuation annually as insurers are now insisting on current valuations. 

“There are situations in Christchurch where buildings are massively underinsured because the client has not kept the valuation up to date,” he says.

Marsh is also encouraging clients to discuss with their valuer the allowance that may be required for “demand surge” or the rising cost of rebuilding when labour and materials are in high demand because of widespread damage.

Mr Milne says the rebuilding of Christchurch is expected to provide four to five years’ work for the construction industry and building firms in other parts of New Zealand are considering moving there.

Many insurers have suspended writing new business in the Canterbury region while they assess risk, although Mr Milne has seen some consider a risk for an existing client who buys a new property. He says even then, insurers are seeking proof that the property does not have damage from the earthquakes.

Insurers are also being very conservative in their appetite for business in other higher earthquake risk zones, such as Wellington, and reducing capacity to individual clients seeking to cover large risks. Many are limiting the cover on buildings built before 1936, with some being unwilling to offer business interruption cover at all on these older buildings.

Mr Milne says the situation in Canterbury might change once the June reinsurance treaties are renewed and he is hoping insurers have more risk appetite then.