RBNZ says Kaikoura quakes could cost NZ$3-8 billion, including up to NZ$3 bln of Govt spend and up to NZ$5 bln of insurance; still confident on economy; says insurers can handle claims

By Bernard Hickey

The Reserve Bank of New Zealand, which regulates the insurance industry, believes the magnitude 7.8 Kaikoura earthquake on November 14 could cost up to NZ$8 billion to repair damaged infrastructure and buildings, with the Government paying up to NZ$3 billion of the repair bill and insurers paying up to NZ$5 billion.

The Government's initial estimates of its costs have ranged from NZ$2 billion to NZ$3 billion, but there have been no official estimate of the total potential costs until now. Boston-based insurance analysts Air Worldwide have estimated the total insurance industry losses at up to NZ$5.3 billion.

Governor Graeme Wheeler pointed to the initial estimates in the Bank's half yearly Financial Stability Report (FSR), which also said insurers had sufficient capital to cope with the claims. Wheeler also said the earthquake had not changed the bank's view that the economy was growing at an annual rate of around 3.5%.

Wheeler and his deputy Grant Spencer said the Government's accounts could handle the cost and Wheeler repeated comments from November 10 that there was no need for extra Government stimulus, given the economy was at or near its productive capacity.

"The government finances are in pretty good space and so we don't think they would have difficulty if the actual costs turn out to be more than the NZ$2-3 billion initial estimate," Spencer told a news conference after the release of the FSR (video above.)

"I would add that that NZ$2 billion to NZ$3 billion is the government cost around infrastructure replacement etc in the top of the South Island. In terms of the total cost you need to add in the expected insurance cost, which could be, we think, according to early estimates, in the NZ$1 billion to NZ$5 billion territory. So in terms of the total cost potentially of the Kaikoura quake you are adding those two components together to get something in the order of NZ$3 billion to NZ$8 billion," he said.

Spencer said the quakes would generate an initial downturn in local activity, but this would be offset by extra spending on repairs and recovery in both the short and long terms.

"In terms of an initial look at our GDP outlook, we don't think that's very different at this time in terms of the net of those two effects," he said.

'No need for post-quake stimulus'

Wheeler also repeated his view that fiscal stimulus was not needed in response to the earthquakes.

"At this point you've got an economy growing at around probably 3.5%, and at this stage based on how we are interpreting things, it is not an economy that's in need of substantive fiscal stimulus at this point," he said.

"If you look at it relative to the total economy, the economy is about NZ$250 billion in terms of GDP, and if you look what's driving growth in the economy, it's the very strong investment growth that we have been seeing, high tourist records, record migration flows and very high, historically high, labour force participation," Wheeler said.

"So there's a lot of momentum in the economy so we are still learning about the potential costs and impacts, but at this point that's our view," he said in confirming Spencer's comments about the quakes not changing the growth outlook.

'Insurers can handle the quakes'

Elsewhere in the FSR, the Reserve Bank said the insurance sector was well positioned in terms of catastrophe reinsurance cover and capital buffers.

It said it estimated insurers had NZ$14 billion more in reinsurance cover and capital buffers than at the time of the 2010/11 Canterbury earthquakes.

Insurers had paid out NZ$32 billion for the Canterbury quakes, which was 84-91% of the estimated total cost for insurers of NZ$35-38 billion.