A.M. Best's report examines the availability of non-life insurance and reinsurance capacity after the earthquakes and restrictions imposed on cover.

While reinsurance capacity is still available, coverage is more restrictive and comes at a much higher price. Reinsurers have raised rates significantly for risks in the Christchurch region and imposed more onerous terms and conditions, A.M. Best notes in the report.

Insurers continuing to underwrite earthquake risk are passing the bulk of increased reinsurance costs to policyholders.

As a result, more companies are considering alternative risk transfer, such as the use of captives.

Yvette Essen, report author and director of industry research for Europe & emerging markets, tells NU Online News Service in an email that the Insurance (Prudential Supervision) Act 2010 introduces a minimum solvency capital level of NZD 1 million (US $778,822) for non-life captives.

"Considerably higher rates and more onerous terms and conditions are resulting in interest in forming captives," Essen says, adding that losses in the region from the earthquake the tsunami in Japan and flooding in Australia have added further pressure to rates.

While captive insurance companies can be domiciled in New Zealand, the larger insurance brokers are carrying out feasibility studies for the use of captives, with Singapore expected to be a popular domicile for new formations, Essen says.

There is also some discussion with regard to using catastrophe bonds, Essen says, but to date, "the traditional insurance and reinsurance markets are considered preferable to alternative risk transfer."

Chi-Yeung Lok, associate financial analyst, says in a statement, "Even where reinsurance has been effective in absorbing earthquake claims, some non-life market participants still need to deal with the impact of accumulated loss retentions on their net assets as well as the large amount of reinsurance recoverables."

The report adds while the new regulation is not intended to directly fuel industry consolidation, this consequence is inevitable. Some insurers are expected to merge, while others could exit the industry.

The report will be unveiled tomorrow at "The Shifting Landscape" Insurance Council of New Zealand (ICNZ) conference in Auckland.

The report can be accessed at www.ambest.com/press/111402NewZealandMarketReviewSpecialReport.pdf.