Toka Tū Ake EQC’s chief financial officer says $225 million catastrophe bond is ‘complementary’ to traditional reinsurance methods

Toka Tū Ake EQC says entering into the catastrophe bond market last year couldn’t have come at a better time for the Earthquake Commission as the wider reinsurance market entered a more cautious mindset with the increase in climate-related catastrophes.

Chief Financial Officer Chris Chainey says Toka Tū Ake EQC started monitoring the catastrophe bond market when it began in the early 2000’s and seriously considered going down that route in 2015 before deciding the timing wasn’t right.

But since then, as reinsurance cover has thinned out while becoming more expensive as a result of the increase in climate-related catastrophes, the catastrophe bond market started to look more attractive.

“The traditional markets have gone through a pretty tough time in the last five years or so,” Chainey says, pointing to bigger international events like recent US hurricanes and earthquakes in Japan as well as an increase in smaller, “secondary peril” events like floods and bushfires.

Chainey says some reinsurers have decided to exit the natural catastrophe market, making it more difficult for insurers to find reinsurance cover.

“That made us have another really good look at, well, what other capital is out there that we can secure? And actually, the catastrophe bond market provides that sort of opportunity to really do it.”

In June of last year, Toka Tū Ake EQC announced it had entered the catastrophe bond market for the first time, managing to secure a total of $225 million.

The Commission’s reason was that it wanted to secure catastrophe bonds in order to “diversify its sources for risk capital” which it said would give further protection to the Crown’s balance sheet.

The $225 million cover is at the “attachment point” of $2 billion, meaning Toka Tū Ake EQC can only reach for the reinsurance funds if the EQC scheme needs more than $2 billion to pay claims.

Chainey says Toka Tū Ake EQC sees the catastrophe bond as “complementary” alongside its traditional reinsurance methods – plus it has more time flexibility as the catastrophe bond has a four-year timeframe which won’t end until 2027.

“The longer the better for us because it does give us that sort of security of capital,” Chainey tells Interest.co.nz.

Traditional reinsurance on the other hand has to be renewed each year.

“In truth, whilst most people replace their capacity commitments, there's still always that danger that they may well withdraw from the market if things were happening,” he says.

Bloomberg says catastrophe bond issuance hit an “all-time high” of more than $16 billion last year – and Artemis, which tracks the insurance-linked securities market, estimates that the catastrophe bond market is currently worth $43.4 billion. 

More flexibility

Last year, Toka Tū Ake EQC also acquired a “record level” of reinsurance of just under $8.2 billion – up from $7.4 billion a year earlier.

Chainey describes the $8.2 billion figure as one of the biggest natural disaster reinsurance schemes in the world, but adds that the reinsurance market has been “hardening” recently due to the number of losses the reinsurance market has experienced in the last five years.

This has caused some reinsurance participants to withdraw from the market, which then puts more pressure on insurers to find the reinsurance they need.

“The overall capacity in the market reduced, but then also prices for capacity increased,” Chainey says.

“We have very good and open relationships with a number of our reinsurers. That said, we certainly weren't going to be immune from some of the broader global pressures.”

Securing a catastrophe bond gives more flexibility when it comes to accessing reinsurance funds in times of crisis as well as more stability as one mode of reinsurance doesn’t have to be relied on.

“Both within the traditional markets and also the catastrophe bond investors markets, the people who we’re securing capacity from have different appetites through our overall programme,” says Chainey.

“Some prefer to be at the lower end of the program and some at the higher end of the program. So actually, by having both tools available to us, it helps us sort of match appetite to where we need capacity.”

Looking at EQC’s programme and making some changes also helped, with Chainey saying the most important change was increasing EQC’s deductible by $500 million to $2.25 billion. 

“By increasing that deductible, it makes the chance of the reinsurance being required slightly more remote, which means that actually you get that coverage slightly cheaper because there's less of a chance for it to actually occur,” he says.

The million dollar question

Chainey says it’s quite literally the million dollar question in terms of what will be the next catastrophic event to hit the country in the bond’s current four-year timeframe.

“We are looking at the possibility of a pretty significant event,” he says.

“We are really looking at decent earthquakes, in truth. And clearly when they turn up is highly uncertain. What we do know is that through transferring risk, we reduce the volatility that is possible to our scheme considerably more.”

Chainey says EQC’s last estimated costs from the Canterbury 2010-2011 earthquakes were around $12.2 billion but reinsurance has shaved off a decent chunk.

“The fact that we've been able to get nearly $5 billion of that back from reinsurance has certainly helped protect both our scheme but also the broader Crown balance sheet from taking on those costs.”

Toka Tū Ake EQC placed the catastrophe bond via Singapore domiciled special purpose reinsurance vehicle, Totara Re Pty Ltd and had originally sought $250 million.

Chainey says issuing the bond from Singapore brought “some additional complexities” but Toka Tū Ake EQC was pleased with the $225 million it had been able to acquire from its first catastrophe bond.

The $225 million figure being in New Zealand dollars instead of US dollars was also a plus as catastrophe bonds are often held in US dollars.

“Our board was very keen for it to be in New Zealand dollars, so that we weren't exposing ourselves to any FX [foreign exchange] risk or that sort of thing,” he says.

“So overall, we were very pleased with the $225 million that we secured.”

What it is & how it works

Toka Tū Ake EQC is the Crown entity that was established under the Earthquake Commission Act 1993 and provides insurance to residential property owners while also investing in natural disaster research and education.

An EQCover premium, or levy, is collected by private insurers and is then paid into the Natural Disaster Fund (NDF)  and the Crown Guarantee – both of which are managed by Toka Tū Ake EQC.

The EQCover premium is 16 cents per $100 of the EQCover amount, up to a maximum amount of $480.

Toka Tū Ake EQC says in the history of the EQC scheme, the Crown Guarantee has only been needed following the Canterbury and Kaikōura earthquakes.

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