A Risky Business

Or, How Insurance Companies (And Friends) Rule The World

- Liz Gordon

But they have been invisible, while a parade of men from Gerry Brownlee up have directed action, channelled resources, had their say and stated how things will be. It is amazing how arrogant some of these men in charge can be. Dean Beck of the Cathedral said recently that wherever Christchurch City was rebuilt, the Cathedral would be at the centre. What’s with that guy? How could anyone make such a claim? And don’t even mention Alasdair Thompson and his comments about women not getting equal pay because they have periods! We have renamed a feisty little punchbag at my women’s gym “Alasdair”. So there! Thompson has since been sacked as head of the Employers Association, because of his comments. Ed.

A Giant Pyramid Game

Anyway, this is all throat clearing for this column, which is about what a catastrophe reveals about how financial institutions work. It is a story of the big guy always winning and the little guy (or girl) always losing. It is also about how moneymaking organisations can appear to be very altruistic while really screwing you into the ground. It is also quite a sinister story about something called reinsurance, and a group of transnational corporations with names like Swiss Re, Amlin Plc and Scor SE, which perform complex dances among themselves to lay off and minimise risk. They reside, mostly, in Europe, and the executives would know nothing about New Zealand or Christchurch, but they call the shots when it comes to the future of our city. For the ordinary property owning person, these forces combine to achieve only one goal: to cut to the bone the amount to be paid out to you. The best way to understand the insurance industry is as a giant pyramid game. At the bottom are the bog standard insurance companies to which you and I pay our little premiums. They are not, generally speaking, New Zealand companies but they have a presence on the ground here, and you may meet them when your car gets dinged.

In the back office, these companies are stuffed full of people called risk assessors. The concept of risk is an interesting one because it is both highly subjective and absolutely crucial. The question of how much risk a firm carries is crucial to its sustainability and, in particular, to its profitability. In order to “spread the risk”, as they say, companies on the ground buy reinsurance cover from higher level agencies. The nature of the reinsurance contract between a company and a reinsurer goes something like this:

If an event, which is specified in the schedule to this agreement, triggers a potential liability to the company in excess of x, the cost over and above x will be met by the reinsurance company.

Unexpected events like the Christchurch earthquake really upset reinsurance companies. In recent years there have been a lot of really big claims, from the 1989 Exxon Valdez oil tanker spill in Alaska to the 2005 Hurricane Katrina in New Orleans. In 2011 the Christchurch and Japan earthquakes and the Australian floods together are set to cost reinsurers US$2.4billion. These reinsurance companies are like sharks cruising the insurance oceans of the world, taking bits from all the smaller players and hoping never to have to give any back. They hate paying out, and employ oceans of high priced lawyers to try and minimise payouts. Many of the big disaster payouts end up in the courts, and there are early signs that the Earthquake Commission might be sued by insurance companies for contractual breach; insurance companies may be targeted by homeowners (possibly in a group action); and the reinsurers may sue the insurance companies.

Drive To Minimise Payouts

Anyway, back to the pyramid. Because an event has to be large to trigger the reinsurance threshold, when reinsurers do have to pay out, the sums are often very large. They also will tend to want to insure themselves against such payouts, and also in turn lay off the risk to others further up the chain. Those re-reinsurers, if I may call them that, are even more reluctant to pay out, so try to minimise their own payment triggers. In short, there are a lot of really rich powerful and lawyerful people, very few of whom know a single thing about New Zealand, who are exerting strong pressure to minimise payouts to local families and businesses in Christchurch.

At the local level this is manifesting itself at the very highest level of the earthquake event, the so-called red zones (commercial and domestic). In the central city, it is the insurance companies who give the final decision on what will happen to properties, except where the Canterbury Earthquake Recovery Authority slaps a demolition order on. It may be the insurance companies that decide where the city centre will be in the future, by setting down rules about which properties can be insured, or not, and where. This may also manifest itself in building design and use. While the people of Christchurch are clamouring for local design, people-friendly rebuilding and decisions made by us and for us, the reality is that much of what will happen will be sanctioned a long way away.

The insurance industry’s drive to reduce payouts is also being felt by homeowners in the red residential zone – those who have been given nine months to get out of their houses permanently. Insurance companies are refusing to pay out for some houses which are not condemned by virtue of earthquake damage, but because the Government is closing off unsafe land. But if the homeowners go with the Government valuation “option”, they stand to lose a lot of money. Many of these households will be more than $100,000 worse off.

Every one of us will pay more insurance as a result of the Christchurch earthquakes, so that the international insurance industry can claw back its losses from these risky islands. Some may even come here, to have a look at the rebuilding and take in a nice winter holiday in Queenstown, paid for by the nice little bonus they got for screwing Christchurch’s insurance payouts into the ground, while upping the ante. While us women on the ground struggle through the sludge, look after our families, count our dwindling resources, wonder what is going to happen to us and, periods or not, continue the fight for equal pay.

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