Public Inquiry recommends seismic shift in risk from private insurers to EQC when it comes to insuring residential buildings against natural disasters

Public Inquiry recommends seismic shift in risk from private insurers to EQC when it comes to insuring residential buildings against natural disasters

The country’s state insurer should take on much more, if not all, the risk of insuring residential buildings against natural disasters, according to the findings of a year-and-a-half long Public Inquiry into the Earthquake Commission (EQC).

The inquiry recommends the cap on EQC residential building cover be lifted from $150,000 (excluding GST) to the average cost of building a house in New Zealand - currently about $400,000.

Alternatively, it recommends removing the cap altogether, so the sum-insured of a property is covered.

These recommendations reflect a seismic shift in risk exposure from private insurers to the EQC.

The inquiry, chaired by former governor general, Silvia Cartwright, didn’t include any maths on the extent to which the EQC levies that private insurance policyholders pay would have to increase to cover the cost.

Nor did it detail how much of a cash injection the Crown might need to make into the Natural Disaster Fund, as the EQC takes on more risk.

Cartwright pointed out that when the original $100,000 cap was set in 1993, the idea was to “protect the value of most home improvements”.

Yet with building costs much higher now, even the new $150,000 cap “would leave many homeowners unable to fully repair or rebuild their homes”.

“Moreover, insurance premiums have increased substantially since the Canterbury earthquakes and The Treasury expects that ongoing price increases will lead to lower levels of insurance cover in higher risk areas,” Cartwright said.

By increasing the cap, or doing away with it altogether, fewer claimants will have to deal with both EQC and their private insurers, making the process more efficient and reducing complexity around how costs are shared. 

"EQC has told me that, based on current models, the risk (and hence additional cost and liability) of moving from a $400,000 cap to an unlimited cap is likely to be insignificant," Cartwright said.

"This would be a fundamental change in New Zealand’s residential natural disaster insurance model which would have other implications needing careful consideration."

Cartwright recognised the private insurance industry is unsupportive of the idea.

It is worried that if EQC takes on more risk, there's less of an incentive for people to invest in property in lower risk areas. 

“I have also heard that the cost of EQC cover might be higher than that provided by the insurers and that this could penalise those in less risky areas, given that the current EQC regime favours community-based pricing with a common levy rate for all,” Cartwright said.

“The Insurance Council has also raised the possibility that EQC assuming greater financial liability would reduce the diversification of reinsurance, as EQC only purchases it for certain risks in New Zealand.”

Cartwright also dismissed the Insurance Council of New Zealand’s long-standing request for private insurers to handle natural disaster claims on behalf of EQC, and then bill EQC for the portion of the claim they’re responsible for. This approach was used following the Kaikoura earthquake.

Cartwright said she hadn’t seen enough evidence to make a call one way or the other over whether EQC or private insurers should be the lead agency handling claims.

What she did recommend however is that private insurers share more data with EQC on the properties they insure, so it has a more fulsome picture of its risk exposure.

These recommendations, as well as other included in Cartwright’s 240-page report will feed into a full review of the EQC Act, set to be undertaken next year.

The Government didn't provide any comment on the specifics of Cartwright's recommendations when it released her report. 

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64 Comments

I like the idea, but having just worked through some insurance negotiation I am aware the many of the world's re-insurers are still trying to recover losses incurred in the last few years, which highlights the shallowness of the current insurance model. so I believe some fairly firm regulation is required that would result in significant drop in premiums if the EQC picked up all this liability.

Fundamentally in every premium calculation, a portion of the premium is attributed to long term risks, 1:100 - 1:1000. But any premiums not paid out in claims in any one year are siphoned off as profits, while they should be put aside to cover those major risks. Instead, re-insurers are left to pick up that tab, I would guess at less cost than we are charged. That needs to change.

I've always found the way insurance companies operate to be counter-intuitive to the whole idea of insurance. It's ideal if an insurance company can be "profitable" but those earnings should be retained. Once the funds reaches a certain point in relation to the total insured assets value, then winding back of premiums can be done to a point where overheads + growth to match values is maintained.

But nah, let the leeches suck what they can and underwrite the risk provide an IOU for if things turn sour.

Ye cannae tar All insurance companies with the same breezily waved brush.

Mutuals like FMG distribute any 'profits' straight back to their policy-holders.

Really Waymad? I've had my house and contents insured with FMG for years and never seen any return. No claims and steadily climbing premiums though.

" Because we’re a mutual, our members are our owners and profits go straight back into the business, keeping your premium fair and affordable."

Pays to actually click the links......

FMG is the front of shop brand but a high ppn of its risk is carried by reinsurers.

Nzdan. So under your model there would need to be enough multi billion dollar seed capital to cover all liabilities, which comes at a cost being either interest on borrowing or through taxation. I infer that you think the initial provision and ongoing holding cost of this capital would be cheaper than the shareholder/dividend model that insurers and reinsurers currently operate, so would be interested in why you think this is so.

The Government cannot underwrite all insurance policies while retaining premium payments?

Why not?

What do you think they are doing now, giving money to the masses to protect an even bigger claim.

Problem with insurance is ownership is so centralised, there is very little competition available. A model like ACC, which ensures profits stay local and they have enough funds for a rainy day is a much better solution. Premiums would reflect an appropriate collect for a rainy day, rather than private insurance companies (which are likely to be alot bigger in scale than our government) taking the profits out in good years and dictating customers payouts and governments in the bad years. Christchurch being a case in point.

Warren Buffett has made most of his money through insurance company ownership, which is a very good reason why insurance should be socialized. It use to be in this way, until we got Rogered by Douglas.

There was a question mark at the end of my comment. Imagine if we had a public insurance scheme alongside a public super scheme running since the 1980's. How much capital would be locked up in those that we could tap into in the event of a financial crisis? Well, none of it because if we were that prudent we wouldn't need to tap into anything.

I also like the idea that we have one huge public insurer of all homes in NZ. As the Chch earthquake showed, even insurance companies weren't really prepared for a relatively minor earthquake (from a geological timescale perspective), let alone a big one. Then EQC wasn't prepared afterwards because they didn't have the staff to manage the work load and the NDF was a paltry 6.4b. Having a much larger EQC with a massive fund of savings and re-insurance behind it makes a lot more sense.

The only issue with this is that EQC seems to be poorly run. As such, it has the oppourtunity to be a massive bureaucratic sh*t show, low outputs with huge inputs. It's an organisation which sits in the background festering away until a major even occurs and it finds itself with a lot of work it cannot handle because it's staff having been cruising. Any plan to expand EQC should come with the proviso that it's operations have to be streamlined and bought into the 21st century. It should run a number of tests every year (much like in Japan) where it imitates a major event and figures out how to respond. With a continual need to report it's performance and improve itself, it could be a good organisation. I mean how many claims are still outstanding from Chch 9 years on?

"I mean how many claims are still outstanding from Chch 9 years on?"
Two here...

"how many claims are still outstanding from Chch 9 years on?"

The really, really hard ones to solve quickly. Multi-unit dwellings and bodies corporates will feature largely here. Take a 6-string of units as a made-up but close-to-reality example:

  1. Has little damage but is dependent on #2's work on the adjoining firewall to make it safe to re-enter and repair
  2. Owner has died intestate and descendants are at loggerheads over the inheritance.
  3. Is OK with whatever the others can jointly come up with, has suffered moderate damage, but of course as yet there is no general agreement...
  4. Owner lives offshore, is hard to contact, and is only intermittently reachable via their lawyers.
  5. Won't talk to any other unit owners, has suffered the most damage, and keeps changing lawyers to get 'a better deal'.
  6. Has significant damage and was amenable to a joint agreement but now has dementia, is unable to contract, and no letters of attorney are yet concluded.

So there's little wonder that, nine years on, there are still claims unresolved......

EQC during the Canterbury EQ sequences were problematic, you could write a book on it. If EQC had been allowed to be compliant with their statutory responsibility under the Act those problems would not have rapidly evolved to the same great extent, after the February 2011 major event. Up until then their handling of the situation post September 2010 had been reasonably proficient and friendly. Post June 2011 things lurched to even worse. The situation might have been a bit easier if previous governments had not siphoned out supposed excess of the funds that we the public had provided over the years, for other purposes (still trying to find the link.)The irony is that EQC let the insurers off the hook firstly by paying them out for cap in multiples for different events (which some insurers have subsequently successfully batted away in court themselves) and secondly the extreme cost of botched repairs landed back on them once a property had been on sold and the original insurance thus lapsed. On the face of it EQC is now hardly relevant, they were just a deflated political football and caused great psychological and financial harm to thousands of claimants that they were actually meant by law to protect. Insured would be far better off in future dealing with just one organisation rather than what became something of a two headed monster to some.

As always FoxG, I enjoy your take. One point on your EQC multiples thoughts; they had no option. The EQC act defines what an 'event' is and the time frames applicable to said event. Once that time window has passed any subsequent events are by statute declared a new event. Insurers are bound by similar conditions in their policies and also in their reinsurance contracts. The dreaded 'difference in conditions' ( between reinsurance policies and retail customer policies ) time frame misalignment risk exercised more than a few industry brains.

tks MM for clarification. Have come to realise over time, you would have forgotten more about the technicalities involved than I would actually know. One thing that I do agree with from the Insurers perspective if that the existing EQC model is now well and truly broken and the claims process needs to be both modified and simplified. A hard learned lesson afraid to say as you could argue that EQC achieved more harm than good. Firstly the plight of the claimants and secondly the uncontrolled liability of their actions inflicted on the tax payers in general. My feeling is they should have simply paid out the caps where it was obviously necessary there and then. By holding claims under the cap and then attempting cost ceiling repairs themselves they simply created a juggernaut of disastrous consequences which is still percolating to this very day.

'where it was obviously necessary there and then' .... in their defence it was often not obvious until extensive investigation had been made. And the issue of what part land deformation and elevation change played in determining the cost of repairs was not determined until very late in the piece. But don't take this as a defence of EQCs claims function which I think was atrocious more often than not. The lack of an established claims infrastructure was a major cause of their dysfunction, which is a weakness in the Cartwright proposal that EQC is the bottom to top insurer.

There were several 'events' as defined in the Christchurch sequence - major quakes timeline here. This added to the already-complex response, because they occurred while earlier-event responses - repairs, stabilising, etc - were ongoing.

Talking of ongoing....here's Geonet's forecast: 40-odd percent chance of a 5-5.9 quake over the next year....

Low interest rates environment is going to kill the insurance model. No point skirting around the issue, insurance as we have known it is finished. Either we get used to having little or no insurance or banks and govt step up to the plate.

Another victim of the destructive policies of central banks worldwide. I'm willing to bet a box of ice cold Tuis that banks won't be having a bar of it, and taxpayers will be forced to open up the pocketbook yet again.

AJ. Your implied proposition that banks or the govt could supply disaster response capital at a lower cost than insurers doesn't stand up to examination. Govt 'insurer' EQC failed miserably in provisioning sufficiently for CHCH and operationally at claims time was dismal, banks would need to run a similar model to insurers ie be heavily dependent on reinsurer capital given the cost of maintaining sufficient idle capital would render the cost of cover prohibitive and that's before the cost of maintaining disaster claims response capability that would be unused most of the time. And to your point on interest; NZ insurers have been operating successfully with low interest rates for some time.

His implied proposition is that insurers will refuse to supply policy entirely, not that the govt can supply it cheaper.

OK, maybe I misread. But expanding on AJs belief that low interest rates will kill the conventional insurance model; insurers appear to be in rude good health judging by their current results. There is a common belief based on the US environment that insurers are heavily dependent on interest income earned from their claims reserves for a large chunk of their profit. Two things; in NZ the incidence of long tail claims such as personal injury is low due to ACC so the incentive to deny/delay on our short tail claims is not there and also when interest rates are low insurers look to compensate by lowering their claims to premium ratios through better underwriting, more cost effective claims handling and premium increases.The idea the the insurer model is doomed because one part of their income stream is reduced is a bit far fetched.

It has nothing to do with incomes, it has everything to do with the net present value of their assets and liabilities.

NZ insurers have been operating successfully with low interest rates for some time.

Yes, premiums have risen exorbitantly because more capital has to be employed to get a return on the float. New Zealand official interest rates have been cut in half five times since 2008. Hence securities and asset markets have visibly capitalised the significantly higher present values of discounted future liability and income cashflows and that includes insurance companies.

It's past time for government to take responsibility for it's actions since the majority of citizens have no securities or sufficient assets to offset the rampant cost increases of their future liability payments.

Too many of the commentors here have been focusing on the micro problems and possibly solutions.

This is a macro problem, and heres the answer to current and pending insurance problems.

If a company/individual wants to provide mortgages as security, the same company/individual has to provide the insurance too.

Banks can't operate without insurance. They have just conveniently separated companies, to privatise profits and socialise losses.

If the banks are unwilling to do this, the government will have no choice but to set up in opposition to them, and force their hand. The government (and taxpayer) would be no worst off, as they are paying for the losses already. In fact it would be better because the profits would stay local, rather than just the losses now.

These large overseas companies otherwise just reflex their muscle and market dominance when they dont get their way.

Banks should never have been allowed to be sold off overseas, as they only operate in the best interests of their shareholders; rather than the community they operate in. The donations they hand out locally are but token for the beggars they leave in their wake.

Those politicians which allowed them to be sold off to overseas interests committed treason.

I was actually thinking that for many of us insurance will just simply be too expensive. So we will have to look at options or take a lot more risk ourselves.

ACC is showing us the way
https://www.stuff.co.nz/business/116076185/acc-records-massive-87b-defic...

Yes, it's instructive to look at how much people pay for catastrophe insurance in other disaster prone parts of the world. High levels of self insurance are common. While we justifiably bag EQC for its operational failings, the current joint insurer/EQC model delivers good cover at impressively low cost - compared to many other pacific rim of fire residents. The government should tread very carefully with the Cartwright reports recommendations. The impulse to socialise insurance is reflexive in the face of increasing cost of cover and reducing availability but missteps could take us to a much worse place than where we are.

Here we go: The rest of the country underwrites risk for certain areas (namely one) being built on an 'any day now' fault network. This was enormously predictable. Heaven forbid Wellington pay its own way in any actual form.

Yes, a great read and accurate account of what happened but also an ominous warning about setting up disaster response funds that are accessible by short term thinking politicians, which is the model Cartwright appears to support.

'Insurers' as a group are simply a retailer. They design policies, attract customers, and act as a conduit for claims. But the real nexus is the wholesalers: the major re-insurers like Swiss Re, Munich Re, and so on. Any discussion about 'a public coverage' needs to recognise that any Gubmint SOE will simply act as the one (monopoly.....) retailer. But it cannot possibly actually hold sufficient funds (like EQC which essentially insured land only) to cover, say, the inevitable Wellington 7.9 which will fairly much trash the CBD. The heavy lifting, the distributed risks, and the investment strategy to provide coverage for the assessed risk pools, will as always be done by the wholesalers. By way of illustration, the EQC pool for $6-odd billion was exhausted in the Christchurch earthquake series (which, btw, is still going on, with a 4.3 this very morn...), and the total cost covered by insurance was estimated at somewhere between 20 and 40 billion on top of that. There's Buckley's chance that a 'public full-coverage model' could accumulate that sort of dosh from us....

While EQC buys a significant reinsurance program, a stand alone approach would leave us fully exposed to the supply of RI capital. EG Munich RI recently indicated they may walk from NZ due to its high EQ risk. We could find ourselves in a very lonely place if there were more severe EQ sequences and we had followed EQC's urgings to move from under the RI umbrella of the big Aussie insurers, the power of whose RI buying muscle dwarfs EQC's and is little understood or appreciated in NZ.

The likes of Buffet are hardly going to risk the returns on the float - he would be nothing without it.

True. The float was the key reason he identified insurers as an undervalued investment opportunity. But in NZ the float makes a much lower contribution to the bottom line than in the US.

What are the other income sources bolstering the bottom line? The NZSF reported heroic returns until they didn't - the old story - the more you pay today the less you get back in the future.

'EQC has told me that, based on current models, the risk (and hence additional cost and liability) of moving from a $400,000 cap to an unlimited cap is likely to be insignificant," Cartwright said'
So EQC is effectively claiming it has greater reinsurance buying power than the Australian insurer giants who purchase some of the worlds largest RI programs. I fear the good dame has been sold a line of spin by the wellington shiny suits at EQC.

Heh. Always good to hear from folk who actually understand the inner workings of a given industry....

Thanks waymad. I enjoy sparring with you.

"The country’s state insurer should take on much more, if not all, the risk of insuring residential buildings against natural disasters, according to the findings of a year-and-a-half long Public Inquiry into the Earthquake Commission (EQC).:

I have been saying this for years - Private enterprise simply does not have the ability to insure a mass event such as a natural disaster.

Once you remove the impact of Natural Disasters, the question becomes what do you really need house insurance for? Fire?

With the stellar performance of EQC in CHCH being the standout example of a government fund having ' the ability to insure a mass event'. Significant underestimation of maximum probable loss, insufficient reserves requiring a taxpayer bailout, woeful at claims administration.

If the state provided insurance, perhaps we'd see better funded fire departments?

Emergency services are funded by a levy collected by insurers on their behalf. Who the insurer is, state or private, wouldn't change the amount collected.

Interesting, thanks.

It's about time the fire service were fully tax payer funded. 90% of their role these days is drunken idiots crashing their cars.

IMO they are the most underappreciated of the three main emergency services (Fire, Police, Ambulance)

As I said at the top, this is about private insurers siphoning off premium income not paid out in claims, as profit each year. Any insurer needs to retain all earnings so cover those major events. That would leave some significant pools of funds available for careful investment, but stuff all profits for the sharks!

Sigh. Premium income funds three broad categories

  1. Cost of sales and administration of the entity
  2. Purchasing reinsurance (which is the real 'coverage')
  3. Retained within the business

No insurance company ever expects to "retain all earnings so cover those major events".....

NZ is what is known as a non recovery market by reinsurers ie it's to small to recover over a reasonable period what they will pay out in large disasters. Unlike highly industrialised countries with concentrated assets. This issue renders complete self funding unviable for insurers, they , and EQC, will always be heavily dependent on reinsurers.

In today's world I accept that, as no insurance company will have built the reserves to deal with a major event. But if they had not raked off their profit so easily, their reserves would have been much more substantial than they are now.

Not entirely accurate according to a guy I know who works as a risk assessor for insurance companies. Yes the reinsurance is purchased for the major events, but it is where the profit comes from.....

Apparently, fires nearly always destory individual houses before the fire brigade arrives on the scene - but they do stop it from spreading to adjacent buildings.

And putting out fires and securing wind damage to roofs etc free of charge for the uninsured.

The latter will become an increasing number in the not too distant future.

It is common sense IMO. But even 400k seems low to build a new house.

60 % increase on house insurance in December not happy insurance is definitely in need of change .

One problem seems to be a lack of competition.

Another way to burden young, asset poor, taxpayers with the risks/costs of property investment. Brilliant! If you want the taxpayer to payout in a loss event, how about paying tax on capital gains to fund it?

They should at least be levying it through rates - there's no moral reason to spread this across the entire country. If that means moving the captital....I hear Nelson is nice.

Better than sending it to Aussie via insurance premiums.

Not much differ than the path NZ chooses as neo-liberal.. socialising the lost. here's another neo-liberal item from US, for comparisons (bit political, rather than insurance centric article),.. may be US should follow NZ neo-liberal actions? - it's one way traffic here.
https://www.aljazeera.com/indepth/opinion/surprise-bernie-sanders-200409...

As house prices have gone through the roof, the $100k EQC cap makes about as much sense as folks donating 4% of their equity to the open home host / hostess when they sell their house!

NZ public & current govt, would love to watch this - during the lock-down period:
https://www.youtube.com/watch?v=MGrBCtOt4Qs

https://www.scoop.co.nz/stories/HL1507/S00101/the-fire-economy-new-zeala...

Two things have had very little debate in these comments.
Firstly the unlimited cap. It is arguable that this may be unfair to the homeowner when the insurance is compulsory. A homeowner may simply want to insure via EQC for a lower statutory amount and accept a smaller home. Assuming the compulsory amount is sufficient for a complete, but smaller house. The original $100,000 cap was derived from the Modal Home at 1,000 sq ft times the 'standard' building cost of $100 a square foot. But the Govt never kept that figure on all fours with the inflation factors. Perhaps the suggested $400,000 plus GST will reset that properly.
Secondly the suggestion that everyone seems to prefer the private insurers handling the claims, i.e. writing the cheques. This may have faults. You get an argument as to whether cracks in a wall are earthquake related or pre-existing shrinkage. If the homeowner is important enough and makes enough fuss there is a temptation for the insurer to give in and agree with what the owner demands because it is not there money. And they want to keep 'their' client happy. How do you control this?

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