Quakes shake up councils' insurance cost

Local authorities are facing insurance-cost increases of up to 150 per cent because of Canterbury's earthquakes, which have wiped out the councils' own insurance companies' reserves.

Most councils insure their assets through the Local Authority Protection (LAP) Fund and Civic Assurance.

The LAP fund covers below-ground utilities, including water and sewerage systems. Assets above ground, mainly public buildings were, until now, mostly covered by Civic Assurance.

However, both the LAP fund and Civic Assurance reserves have been paid out on claims from the Canterbury earthquakes.

Civic has not been able to buy reinsurance to cover policies beyond this month, preventing it from providing cover from this Friday.

This has forced councils to turn to risk-averse private insurers charging much higher premiums.

Local Government New Zealand president Lawrence Yule said private insurers were charging at least double Civic's rates, with the higher costs borne by ratepayers through rate increases.

In a bid to reinstate the LAP fund, member councils have agreed to quadruple their annual contributions.

The fund pays for 40 per cent of damage to infrastructure, with the balance covered by the government.

Masterton District Council financial officer David Paris said the council's insurance bill would increase by 150 per cent, which would be covered by a 1 per cent rise in rates, already included in the annual proposed increase.

About half of the council's above-ground insurance had been placed with private insurer Vero at double the cost of last year's cover from Civic.

The council's brokers were working on "stitching a deal together" for the remaining cover with other insurers, Mr Paris said.

Mr Yule, who is also Mayor of Hastings, said his ratepayers faced a $500,000 increase in insurance costs, roughly double last year's bill. Although the increase would be covered out of this year's trading surplus, rates would need to rise about 1 per cent if insurance costs did not ease next year.

Some of the LAP fund's reinsurers had pulled out of the market, while those that remained were charging much higher premiums and providing less cover.

At the start of the week reinsurers for the fund were prepared to cover less than a third of the fund's liability, Mr Yule said.

But by yesterday that had increased to about two-thirds of the liability, leaving about a third uninsured.

Full insurance cover might not be available for five years, Mr Yule said.

Many local authorities would have assets of at least $500m that needed cover. "So we are just hopeful that the normal run of the mill events occur, but there is nothing big for a period of time, in which case LAP and other insurance products will re-establish and will be available."