Should home insurance policies mandate catastrophic risk coverage?

Canada should look to the successes of New Zealand to handle catastrophic risk in home insurance policies, a regulatory executive said Wednesday at the CatIQ Connect conference in Toronto.

After major earthquakes in Christchurch in 2010 and 2011, New Zealand’s insurance industry saw “severely depleted capital” and had problems for years recapitalizing the industry, says Peter Routledge, superintendent at the Office of the Superintendent of Financial Institutions (OSFI).

“We learn a lot from the success of how New Zealand handled that issue,” Routledge says. “One of the things they did is they implemented a system on home insurance where there was a mandatory rider for catastrophe generally.”

According to the Insurance Council of New Zealand (ICNZ), there were four major earthquakes and more than 11,200 aftershocks in and around Christchurch between September 2010 and the end of 2011.

“Those shakes, collectively known as the Canterbury earthquake sequence, were the biggest insured event in Aotearoa New Zealand history and at the time the most expensive insured, global natural disaster to ever occur,” ICNZ says.

The combined events cost private insurers more than NZ$21 billion. The country’s Natural Hazards Commission (Toka Tū Ake EQC) paid a further $10 billion, bringing the total insured cost of the event to more than $31 billion.

“At current premium rates, it would take private insurers around 40 years to pay off the cost of the Canterbury earthquake sequence, provided no other earthquake claims were received in that time,” ICNZ reports.

Canadian cover

While standard home insurance policies in Canada generally cover perils such as fire, wind and hail, other catastrophic risks like earthquakes and overland flooding require endorsements.

And while home insurance in Canada is not legally mandatory, it’s often a requirement for a mortgage. During the fireside chat at the conference, Carolyn Murnaghan, partner, strategy, risk and transactions at Deloitte, asked Routledge if home insurance should be mandatory and regulated to ensure a stable housing and mortgage market.

He responded by pointing to what New Zealand did to implement a mandatory rider, or endorsement, for catastrophe in general. “In some parts of the country, people wanted wildfire; in other parts of the country, they wanted earthquake, etc. but the industry structure had priced those risks as independent risks,” Routledge explains.

“And what the aggregate rider did was enable the government to fund reinsurance coverage so that if there was another huge catastrophic risk, there was contingent capital available through the reinsurance coverage to aid in the recovery, and it was paid for in small amounts over time via this rider, which is the form of a premium to fund this backstop.”

Routledge acknowledges to get such a rider would require provincial and/or federal governments and legislators to pass a law. “And that would mean a rider is a cost, a real cost, and so politically, that’s difficult to achieve.”

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Another approach is the Terrorism Risk Insurance Act (TRIA) in the United States, which involves shared public and private compensation for certain insured losses resulting from a certified act of terrorism.

“They tended to adopt a similar financial strategy,” to New Zealand’s, Routledge says. “They adopted the true direct industry charges, as opposed to translating directly to individual policy.

“So, there’s numerous ways to add resilience for catastrophic risk to our system,” he says. “It will involve higher costs…”

Jason Contant

Jason has been an award-winning journalist with Canadian Underwriter for more than a decade, including the past three years as associate editor and, before that, as digital editor for seven years.