Toka Tū Ake EQC adds catastrophe bonds to new record high reinsurance portfolio
Toka Tū Ake EQC has secured a record level of reinsurance of just under $8.2 billion, up from $7.4 billion last year, for New Zealand homeowners. The portfolio now includes reinsurance via catastrophe bonds, which Toka Tū Ake EQC has secured for the first time.
“We are extremely proud the global reputation of our scheme, and the science we invest in, has enabled us to secure significant reinsurance cover for major events. We have been able to increase our reinsurance cover for the year ahead despite the reinsurance market hardening. Global markets have experienced considerable losses over the past five years from a range of hurricanes, typhoons, floods, storms and wildfires, alongside the Covid pandemic and the war in Ukraine,” says Toka Tū Ake EQC Chief Executive Tina Mitchell.
Mitchell says Toka Tū Ake EQC has entered the catastrophe bond market for the first time, to expand and diversify its sources for risk capital to further protect the Crown balance sheet.
The first entry into the market yielded $225 million, and while this only makes up a small part of the overall reinsurance portfolio, Mitchell explains this first step is significant to secure long-term assurance for New Zealand homeowners.
“It is important that we have a diverse portfolio for risk transfer. By exploring catastrophe bonds now, we can access other reinsurance arrangements to complement the long relationships we have had with traditional reinsurers. This gives Toka Tū Ake EQC more options in the future, in terms of new risk capital markets and the duration of the contracts,” says the Chief Executive.
Mitchell adds that traditional reinsurance has to be renewed each year, while catastrophe bond agreements are typically for three to five years.
“The most important element in all considerations is that any additional or alternative source of risk capital comes from high quality sources, makes economic sense, complements our core reinsurance programme and demonstrates value for money for levy payers.”
Toka Tū Ake EQC each year secures reinsurance cover to protect the Crown balance sheet from catastrophic natural hazard events.
Reinsurance only kicks in if the EQC scheme needs more than $2 billion to pay claims. Before reinsurance kicks in, any EQCover claims are funded from the Natural Disaster Fund (NDF) and the Crown Guarantee, which Toka Tū Ake EQC can access once the NDF has been exhausted. In the history of the EQC scheme, the Crown Guarantee has only been required –between 2018 and 2020 - after the accumulated damage caused by the Canterbury (2010/11) and Kaikōura (2016) earthquakes.
“With the catastrophe bond in place, Toka Tū Ake EQC now has another form of protection, to sit alongside and complement the traditional reinsurance contracts we secure annually” says Mitchell.
Catastrophe bonds are funded by institutional investors who provide their money upfront. If the funds are not needed over the lifetime of the bond, they are returned to investors.
We have been really well supported by a number of advisors across our traditional reinsurance programme and the catastrophe bond transaction.
Securing the programme has required numerous conversations with reinsurers and investors by the Toka Tū Ake EQC chief executive, and she is proud of how well New Zealand is regarded in the reinsurance world, despite an increasing number of severe, and costly natural hazard events globally.
“The global reinsurance industry recognises the world-leading work Toka Tū Ake EQC undertakes to understand and quantify natural hazard risks and the steps we are taking to reduce the impact of those hazards for New Zealanders.”