Settling insurance claims with cash or repair and housing market recovery after an earthquake

Abstract

On the 22nd of February 2011, most houses in the city of Christchurch in New Zealand were damaged by an earthquake. Atypically for an earthquake, practically all these houses were insured. We ask whether the way insurance claims were settled - in cash or through a managed repair program - was instrumental in mitigating the earthquake’s impact on the housing market.

We used a genetic algorithm to identify the dynamics of the housing market in the city using four data sets: Housing market transactions, earthquake insurance claims paid by the public insurer, building consents issued by the local authority, and shake-maps measuring the intensity of the seismic shock.

We found a negative correlation between insurance cash payouts and house prices after the earthquake, at the local level. Evidence suggests that this result is due to some damaged houses for which claims were provided in cash were not actually fixed. In contrast, damages that were actively repaired by the insurer did not lead to any relative deterioration in house prices.

This difference in the performance of the housing market post-disaster should be considered when insurers and their regulators decide how to settle claims in future disaster events.