What New Zealand can learn from Japan on earthquake insurance

Shortly after Associate Professor Rohan Havelock arrived in Japan to study its earthquake insurance system, a 7.6-magnitude earthquake damaged nearly 4,000 homes and buildings in Aomori Prefecture.

For the University of Auckland insurance law specialist, it was a reminder of the value of an insurance system that works for homeowners.

New Zealand’s earthquake insurance combines private insurance with government-provided statutory cover. Statutory insurance, says Havelock, pays first, up to a set limit for residential buildings and land, and private insurance typically covers additional building damage only.

After the Canterbury earthquakes, more than 460,000 claims were lodged with the former Earthquake Commission, far exceeding its capacity. Slow claims processing, significant litigation, and the insolvency of two insurers followed. Some claims remained unresolved after a decade.

New Zealand’s subsequent reforms included the Natural Hazards Insurance Act 2023 and the Contracts of Insurance Act 2024, but the dual system continues and Havelock believes similar problems are likely to occur after the next big quake.

“There’s a need for more carefully considered reform, especially relating to standard terms, handling of claims and dispute resolution.”

What can New Zealand learn from Japan?

Havelock says New Zealand could follow Japan’s lead in three ways:

First, Japan’s earthquake premiums are priced to match risk: they’re based on a building’s location, age, construction and earthquake strength. In New Zealand, Natural Hazards Insurance is funded through a flat levy: 16c for every $100 of insured building value.

“This means that owners of more risky homes are subsidised by owners of less risky homes, and also that there’s no incentive to strengthen homes against earthquakes, or for owners to move away from earthquake-prone areas,” he says.

Second, Japan’s earthquake insurance is based not on quantifying actual loss, which can be resource-intensive and time-consuming, but on classifying loss into four types: total loss, large half loss, small half loss, or partial loss.

Settlement is invariably by payment (instead of the insurer undertaking repairs or reinstatement), which Havelock says means assessment and claims settlement is rapid and there are fewer disputes over what is necessary.

Third, he says Japan’s dispute resolution process is notably efficient and arguably more claimant friendly.

“Insurers routinely offer re-inspection or review of decisions, which resolves a large proportion of disputes.”

If disagreement continues, Havelock says the main pathway is through the ‘Financial Alternative Dispute Resolution’ system, involving an experienced mediator. This is non-adversarial and is free of filing or hearing fees, says Havelock. “Very few disputes proceed to litigation.”