The shake up to the insurance industry
In 2011, I was in New Zealand when the devastating earthquakes hit. It’s not everyday someone can say they navigated something like that. Aside from the impact of the natural disaster itself was the spiralling financial disaster that followed. Some insurers simply did not have the reserves for a large scale catastrophe loss such as an earthquake flattening most of the city. Christchurch was also not considered a high risk area for earthquakes.
What was happening prior to the earthquakes however, was the lack of good risk culture and the rush to write business profitably rather than sustainably. The earthquakes exposed large scale gaps in what the risk was assumed to be, and what the risk actually was. Business owners, home owners, and the government sector had far exceeded any projected estimates for direct and consequential loss. Liquefaction also meant entire suburbs were no longer on stable land. Bexley for example, a suburb in Christchurch looked much like a horror scene from a dystopian future. It was decided to not rebuild here, because the land could not be stabilised.
By the time I began my career, the insurance industry was well and truly in reactive phase, and still very much reeling from this loss. It was impossible to get property insurance without every piece of business essentially being re-written. There were several tough discussions with property owners with buildings that were constructed 1930s or prior and suddenly a very simple process would take weeks. The cost of purchasing insurance was suddenly very different.
The government intervention after the disaster mandated rebuilding with resilience and stricter code on infrastructure and housing. The added layer being that Christchurch was not a city of significant risk for earthquakes- stricter building code and compliance work was never previously required or factored in to construction costs. Which meant that claim costs to rebuild were significantly higher than what had ever been modelled.
It would have been short-sighted to think of rebuilding according to any previous standards as feasible, even from a claim cost mitigation perspective.
What all of this ultimately trickled down to, was an increased cost of insurance for the consumer in effect.
New Zealand is essentially halved with a fault line running straight through the middle of the South Island. In fact it’s in the “ring of fire” which also runs through Japan and is geologically significant for seismic activity. Why Christchurch was not also considered a risk and stricter building codes not enforced, is something I cannot personally fathom, considering the building code in Japan had been of a significantly higher standard for similar geological circumstances. New Zealand is a fairly new country historically so perhaps there was no recorded history of earthquakes in Christchurch. The information about the geological significance of New Zealand however, was not new. Why building and risk assessment standards were not modelled from other geologically significant countries is not something I can answer.
What this does show is that the rising cost cannot be attributed to government intervention alone. There is an emerging need to understand evolving risk due to geographical or climate factors and taking accountability for the financial impact large scale losses have by ensuring we are modelling our data from the most up to date information.
Instead of waiting for large scale catastrophe losses to occur, and looking at historical claims data, the industry needs to better protect its future by being proactive. This could be investing in better infrastructure to better support the use of scientific data in risk analysis. It could mean an investment in multidisciplinary staff so that the industry can be as agile as it needs to be. By modern standards however, the industry is yet to realise the old way of risk analysis is not working for us. We fail to recognise the importance of our own exposure if our methodology does not evolve.
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