5 December 2018

Reduce the financial damage of your natural disaster insurance excess

By global standards, natural disaster insurance for New Zealand businesses has historically been low, with low excess levels applying.

The earthquakes experienced in New Zealand over the last few years have led the insurance sector to re-evaluate the insurance cover they are prepared to provide New Zealand businesses, whilst also trying to keep premiums at an affordable level.

One of the changes implemented was the excess payable by the insured in the event of a natural disaster.

Excesses are now based on a percentage of total sum insured (of assets) at a site. In areas of Wellington and Marlborough, for example, a minimum excess of 5 percent of total sum insured (of assets) at a site applies, and for older buildings it can be as much as a 10 percent excess.

For example, a property sum insured for $5 million has an excess of at least 5% or $250,000. Clients have to fund all reparation costs up to the excess level out of their own cashflow or financial resources.

Assuming earthquake damage of $200,000 on that building, it would be uncommon for a building owner to be able to fund that amount out from cashflow, or even easily borrow it for the repairs; tenants are likely to move out in the meantime and income will reduce. This situation is worsened if there are also strengthening costs to pay for.

Solution - buy back cover to reduce excess levels

Excess Buy Back Cover is an insurance policy underwritten out of Lloyd’s of London and intended to dramatically reduce the claim time impact of the natural disaster excess.

In other parts of the world where natural disaster is also a high risk, such as California (earthquake) or Caribbean (hurricanes), the sale of this type of product is commonplace.

Two important notes:

1.      Excess Buy Back Cover is available to any commercial insurance client, whether they are a current Crombie Lockwood client or not. Excess Buy Back Cover will reduce the excess ceiling and clients can choose their preferred level of reduction down to as low as a 1 percent of the site value.

2.      Excess Buy Back Cover can be placed immediately. It can be added to any existing commercial insurance programme at any time and can be structured to fall into line with an existing policy.

Example: A property owner has a building worth $3,000,000 insured with a New Zealand Insurer. The excess is 5%, so $150,000.

A new Excess Buy Back cover can be added immediately, reducing the excess to as low as 1%, or $30,000 and the existing expiry date can remain as is, meaning insurance cover can be arranged just once a year for all the policies  they have.

Suburban superette affected by consecutive earthquakes

• Sum insured $400,000 stock and plant, ND Excess $20,000
• Lost stock to value of $10,000, mainly wine & other bottled stock. Under deductible
• Further stock loss again to value of about $10,000, much of which was replacing stock lost in the first earthquake. Under deductible.

A major single site property owner

• Sum insured $112,000,000, ND Excess $5,600,000
• Superficial damage to buildings and infrastructure, estimated damage $500,000. No claim as under deductible.

Typical natural disaster excesses

They do vary with each insurer but generally:

Zone A  Northland, Auckland and Dunedin.
2.5% of the Location Sum Insured. With a minimum of usually $2,500

Zone B The rest of New Zealand.
5% of the Location Sum Insured. With a minimum of usually $2,500 or $5,000

Pre-1935 building risks:

These apply where the building is constructed prior to 1935, or where the plant, stock or miscellaneous items are located in any building constructed prior to 1935.
10% of the Location Sum Insured with a minimum of usually $10,000.