Christchurch City Council looks to ILS to boost cover; Mayor Dalziel visits EC3

Christchurch City Council is considering insurance-linked securities (ILS) to increase its insurance cover for underground assets such as water and waste pipes.

Mayor of Christchurch Lianne Dalziel and her team have been working with catastrophe risk modeling company RMS to build a deeper understanding of risk management and civic resilience more generally.

Daniel Stander, global managing director at RMS, told Intelligent Insurer that the City of Christchurch has put in place a five year strategy for risk financing going forward.

“The city as been on a journey and will continue on that journey, which is already five years old if not longer. The reason they have done it [put the strategy in place] now is that they have just renewed their insurance programmes as of 1 July and part of the presentation to council to sign off was not just ‘these are the terms to this year renewal’ but it was also ‘this is the high level strategy for what we want to do in 2020-2025’. One of the things on the roadmap, one of many things, is the use of ILS in the context of the council broadening the techniques it uses,” he explained.

Currently Christchurch has around NZ$3.5 billion above ground assets, which has increased from NZ$3 billion in last year and is expected to rise to NZ$4 billion over the course of this year as the city invests in and rebuilds more resilient assets, for example rebuilding its art gallery with base isolators to reduce the impact of earthquakes. For these above ground assets the city buys about NZ$2 billion of insurance cover.

In contrast, for the below ground linear infrastructure assets, such as water and waste pipes, there are more than NZ$8 billion assets, more than double the above ground visible assets. However, they are covered for less than NZ$0.5 billion.

Stander said: “In broad strokes, one side of the house has got 50 percent of your asset value covered by insurance, while the other side has got 15 percent covered. The aha moment for the Mayor was: ‘Is that right, are we a little bit over insured on one side and under insured on the other side?’.

“Part of the response from the people managing the insurance programme for her [the Mayor] in council was that the half a billion in cover for the horizontal assets costs more or less, not quite, the same as the two billion for above ground. Insurance for underground is expensive.

“The other thing was they have gone to the traditional market and it [NZ$0.5 billion in cover] was all the market would give them, they could not get more cover, even if money was no object.”

He said: “That’s where you start thinking, if I had alternative sources of risk capital, if I could go not just to the traditional market but I could also go to ILS funds, you can begin to imagine how the council could quite efficiently, quite cost effectively, access additional capacity when they need it by layering in ILS alongside the traditional.”

This kind of risk would also be quite attractive for ILS funds, he said, as New Zealand earthquake is very diversified from what is in the average ILS funds portfolio.

Mayor Dalziel recently visited the heart of London’s insurance district EC3 to meet with experts from the ILS market, the insurance market, with Lloyd’s of London and with the UK government to discuss risk and risk management, which Stander said “speaks volumes”. He added: “She wore out the soles of her shoes with me walking round EC3 and we met dozens of people, different syndicates and various ILS experts. She is hungry to absorb this stuff.”

He said that one of the areas the city council will hopefully address in the 2020 renewal (or in the 2021 renewal if there is not enough time) is ways to manage the NZ$8billion plus of below ground assets more efficiently.

"That’s where I can see them [the city council] using a combination of more sophisticated retention, continued use of traditional insurance and exploring alternative sources of risk capital (IE the ILS markets) to top that up.

"It's early days. The council has a five year strategy, it’s not going to rush in to doing anything, it will take its time and explore the options. It will judiciously evaluate its option over the course of the next six months and the extent to which ILS can play a role in programme and how quickly."

Intelligent Insurer also asked Mike Gillooly, chief resilience officer for Christchurch City Council, how much extra insurance cover the council hopes to buy via ILS funds?

While he, like Stander, said it was still “too early to say”, Gillooly added: “The answer will be a function of the risk, our risk appetite, the availability of cover in the traditional market and what is attractive to ILS investors. With RMS’ help, we will be exploring these very questions over the coming months. If appropriate, we may look at approaching the ILS market for 2020.”

Responding to a question about the council’s thoughts on expanding ILS cover in the future, he said the council was “carefully assessing all our options”.

“One thing is clear, the council is on a long-term journey to increase the sophistication of its risk financing programme. The next Long Term Plan (LTP) will be more risk-informed than ever before.”

The council’s LTP operates on a 10 year cycle, which is reviewed every three years, and the next  renewal is due in June 2021. Gillooly said the LTP is also supported by a 10 year finance strategy and a thirty year infrastructure strategy.

He added: “We will doubtless continue to have a large insurance programme and we intend to deepen our relationships with our insurance partners in the ‘traditional’ market. Equally, we imagine developing long-term relationships with ILS investors as we seek more capacity, especially to cover the services delivered by our horizontal infrastructure.

“As a city, our exposure is increasing and so is our risk. Christchurch has enough of both to warrant close and holistic inspection of alternative risk financing across not only council’s own portfolio of assets, but also the assets governed by our holding company – such as Lyttelton Port, Christchurch International Airport and Orion, Canterbury’s electricity distribution company.”

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