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Govt accepts Public Inquiry recommendation to consider increasing the EQC cap so more risk falls with the state insurer rather than private insurers in the event of a disaster

Govt accepts Public Inquiry recommendation to consider increasing the EQC cap so more risk falls with the state insurer rather than private insurers in the event of a disaster

The Government is considering getting taxpayers to take on more of the risk of insuring residential buildings against natural disasters.

Cabinet has accepted a recommendation, made as a part of a Public Inquiry into the Earthquake Commission (EQC), for the EQC cap on residential building cover to be reviewed to “reflect at least the current building costs”.

The Inquiry, published in March and led by former governor general, Silvia Cartwright, noted the average cost of building a house in New Zealand was about $400,000.

Accordingly, it suggested the cap on cover be lifted from $150,000 (excluding GST) to $400,000.

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

The recommendations reflect a seismic shift in risk exposure from private insurers to the EQC. In other words, instead of EQC covering the first $150,000 of earthquake damage to a property, it suggested it cover the first $400,000, leaving the rest to the property owner’s private insurer.

The Government said it accepted the “intent” of the recommendation, and would get Treasury to consider it as a part of a new piece of work following the Inquiry to modernise the EQC Act.

It has directed a number of agencies to work together over the year, with the aim of introducing legislation to amend the Act in mid-2021 at the earliest.

Government ministers are still considering the scope of the review.

In terms of the EQC cap, the Government noted: “Some consideration has already been given to lifting the EQC cap on residential building cover by the Treasury as part of its existing work on the affordability and availability of residential property insurance.”

Insurers have since the 2010/11 Canterbury earthquakes been reducing their exposures to high risk customers, either by hiking premiums or by flatly refusing to provide insurance cover.

Wellington apartment owners have been among those particularly affected in recent years.

The recommendation to lift the EQC cap is one of many in the Inquiry’s 240-page report. For more on the other recommendations, and Cabinet’s responses, see this document supplied by the Government. 

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26 Comments

In Canterbury, thousands of EQ claimants were subjected to EQC discrimination directed by The Treasury in the interests of the then National government’s desired surplus. In short the claimants were forcibly and unjustly kept under the then cap, and EQC embarked on an ill conceived and ill fated repair program of residential property that often did more damage than the EQs. EQC funding had been drawn from tariffs on private insurance policies but it had been at times drawn down by previous governments and used for other purposes. It was then restructured by the Lange/Douglas government to place its funds under the control of treasury. If NZ is to persist with the EQC concept, and in an increased scope, then it had better be accompanied by measures that prevent recurrence of the handling of the Canterbury EQs and undertaking that the provision of the relative act, designed to protect citizens, are followed rather than denied. In other words if the taxpayer is made to take on more financial responsibility then the taxpayer should be guaranteed a vastly improved , approach, attitude and performance by the government and its agencies, than was presented in the Canterbury example.

EQC behaviour can't be completely blamed on Nats in government, the cap management and underestimation of the repair costs was a significant failure by EQC. Organisationally they weren't ready for Chch, but the who could have been. Nats didnt run a surplus for 8 years post GFC.
One also can't forget the the failure of AMI due to poor reinsurance practices, and the government of the time stepping in to protect an entire group of insured property owners who would have otherwise been left in the lurch through no fault of their own. I know many weren't happy with Southern Response, but the alternative was unimaginable.

If the rest of the population is going to be expected to underwrite Wellington's insurance costs (which is basically what this is a nod to) then we need to have a mature discussion about whether we want the capital city to be based there.

A faster uptake of flexible working practices in the public sector is a much better proposition to resolve this issue. Already people are starting to look beyond the inner-city into suburbs and the wider region ( as far as Horowhenua and Manawatu ) for more spacious living. Kiwirail's massive upgrade to the region's rail infrastructure couldn't have come at a better time for those only looking to train in and out of the city a couple of times a week.

On the commercial side, a fall in demand for space coupled with more construction currently underway (built to higher EQ standards) should help make the CBD more resilient to natural disasters.

Think what Aj posted a few days ago, the new car park building in Tauranga not being anywhere near EQ specs, also incredibly in Christchurch ditto for a building in High Street, is rather disquieting with concern to the integrity and safety that our construction professionals and regulatory officials are enacting.

And why in the first place was the council itself building a multi-storied car park? It would be interesting to read the legitimization for why public/ratepayer money should have been used for such a project in the first place.

Cartwright justifiably slams EQC's dismal performance in ChCh yet nevertheless recommends they be entrusted with even more claims settling authority. People outside the city are unaware of the desperation of people to escape the clutches of this organisation by getting their claims over the $100K cap. The trauma of dealing with the EQC bureaucracy was extreme and still negatively affects thousands of people to this day. EQC doesn't have the in situ claims setting resources and expertise necessary to administer larger claims up to $400K (plus if there are multiple events) and we'll see the same horror show again but this time with much more at stake. There is a vast difference in complexity between settling claims for a few cracks and the major damage involved in a $400K claim. They will be reliant on outside claims providers such as independent loss adjusting firms who also struggled to deal with volume. Insurers able to draw on extensive existing claims infrastructure fared better, especially those with support from Australian parents. EQC will be an effective monopoly with no competitive forces to regulate their behaviour. We will also be reliant on EQC's ability to buy reinsurance in our catastrophe prone ring of fire country. The post EQ dire warning from one of the worlds largest reinsurers that NZs future insurability for EQ was not guaranteed appears not to have moved the good dame who brightly reports that EQC staff have assured her it won't be a problem. I call bollocks on that one having observed the leverage that Australian insurers have over reinsurers due to them buying some of the worlds biggest RI programs and which EQC doesn't. They also tell her that EQC modelling shows that raising the cap won't hugely increase the EQC's exposure or dramatically increase claim numbers. As a a reminder, this is the same organisation that got its maximum loss calculation modelling dramatically wrong in CHCH. An inherently bureaucratic and inefficient institution such as EQC holding effective monopoly power over wide scale post EQ reinstatement is an ominous proposition. Opt out must be an available option under any rejigging of the EQC scheme.

Bravo! And in the aftermath of the subsequent Kaikoura and surrounds EQ, it appeared to have arrived at a consensus that the insurers were both better versed and equipped to manage damage appraisals from the outset. Would think 4 x the $ cap would not only expand and extend EQC’s involvement, it would entirely exacerbate circumstances that were clearly proven to be deficient, inappropriate and to the detriment of claimants. As you know I am no great admirer of the Insurers but you are much better placed having to deal with only one crowd rather than the claims process being hamstrung by the confusion and contradiction now well exposed, between EQC and insurers. This is a deeply worrying direction, smacks of bureaucratic thick ear, rearing it’s ugly head.

The EQC concept is a good example of a successful disaster insurance pool system - setting aside governments plundering the fund and it's poor operational disaster response capability. Compared with high EQ risk countries overseas NZrs get good levels of cover at reasonable cost. The key problem as Cartwright has identified is how to get it to successfully mesh with top up private insurance. To make this process seamless the cover specified under the act would need to fully align with private insurer wordings to a minimum mandated standard of cover. Claims delivery ( particularly loss assessment processes) and timeliness would have to be comparable and incentives to push lability from one to the other eliminated. It'd be a challenging exercise to achieve all of these, particularly where land degradation has occurred. But it could be done. The soft option is to avoid the hard work by compelling homeowners to insure with one central bureaucratic institution, which is where Cartwright has gone. It seems a simple solution but risks taking us to some dark places. On the other hand the alpine fault may not rupture for another 50 years and we all live happily ever after.

All really good insights/comments. I too like the EQC concept (i.e., disaster pool insurance) but it does make me wonder whether having such a pool system means that we continue to build, live and work in poorly specified buildings in high risk areas. That insurance companies are beginning to assess disaster risk more rigorously and refusing insurance in some cases, should tell us something - and that is that we need to renew building stocks more regularly to upgrade their EQ standard. And we need to avoid building/re-building in high risk areas, in particular those subject to liquefaction (which by the way are also many of those subject to higher risk of coastal erosion and inundation).

I'm coming to the view that we should abolish EQC altogether. Reinsurance is a huge, huge issue going forward. I just don't see it as a sustainable proposition. The other very worrying trend is that now we have certain sections of society calling for a EQC-type 'managed retreat' fund with respect to climate change/coastal hazard mitigation. I really just think that NZers have to be forced into instead locating themselves out of harms way, or paying the necessary insurance premiums to live in these high risk areas, or self-insuring (i.e., not insuring at all).

Perhaps surprisingly I favour retention of the EQC model, having studied countries where EQ insurance is entirely provided by private insurers and the cost of cover is consequently prohibitive. Some countries run pool systems a bit similar to EQC but typically only a proportion of the property is insured for EQ perils, with usually large excesses/deductibles. Our system of combined disaster insurance providers is gold standard except for the inefficient way the private and public systems interact. And the doomed to failure philosophy of EQC physically managing repairs. Your point about risk pricing is valid. The owner of a well located and constructed property heavily subsidises the old dungers and those who choose to live on unstable or hazard exposed sites. It is time for EQC to begin moving towards better risk based pricing as insurers are doing, to mitigate the perverse incentives inherent in EQCs socialise the risk approach.

Our system of combined disaster insurance providers is gold standard...

I agree it could be a gold standard for affected asset owners, but not necessarily for the non-asset owners, and particular not, should the EQC share increase.

It is getting to the stage that fewer and fewer households in NZ are owners of these at risk private assets. As the wealth gap widens in this new era of housing unaffordability and we find ourselves with a dwindling middle class, I'm just not sure that it is as equitable these days to socialise this category of asset-protection costs anymore.

Non asset owners have skin in the game in that the EQC levies paid on properties they rent provide security in respect of the roof over their heads.

Wouldn't it have been the case in Chch, that the majority of tenancies simply ended given so many houses damaged were uninhabitable?

On the option to opt out, I suspect you'd find that defeats the purpose of the scheme, as a significant number would opt out.

By opt out I meant a choice of either EQC or private insurer, not the ability to be uninsured completely for EQ. That would create too much social risk. Where there is a mortgage the lender would in any case mandate full insurance cover.

Just wondering is there some chance of a compromise in some way. For instance EQC engages the expertise of the insurers/assessors to appraise the damage and scope the cost of repair. That would establish if under or over the $400K cap. If under the homeowner is paid out accordingly. If over the insurer takes over and meets the cost less the $400K which will have been paid to the owners put towards it.

FG. Conflict of interest rears its ugly head if one or the other institution determines outcomes. EG, we saw in CHCH widespread manoeuvring by job preserving self interested parties to keep claims under the cap and reinsurers would also likely be cautious about such an approach. Proper alignment of policy wordings and pre agreed agreed repair strategies that could be consistently administered by either EQC's nominated agents or insurers would mitigate some of the risk of perverse incentives. But unless diligently managed the human element would see the resurrection of the same noxious god complex among assessors that negatively impacted many claims in CHCH. We had learned much by the time of the Kaikoura shake where insurers did indeed carry out many damage surveys for over cap claims which EQC had by then become trusting enough to accept. And the process worked much more smoothly for claimants, albeit the scale far smaller. So yes, it could work but if the cap rises to $400K that'll mean in the vast majority of cases homeowners will be at the mercy of the EQC monopoly entity. Not a prospect that thrills me.

Sadly, can only agree. We both witnessed far too much sorry and self serving behaviour on both sides of the coin. As you point out at least with the $100K cap it means the threshold is more quickly calculable and the liability contained therein. Whereas $400K, gifts a lot of elbow room for clipping the ticket and rort. For those of us who started work in the 50/60’s and served our probation in the then existing hierarchy, disciplines and codes, the Official Secrets Act et al, what went on display, politically, commercially and socially, during this EQ episode, was more than disturbing, incomprehensible.

And who's to say we won't have another AMI [or other insurance company] bad asset bail out by government again - and the same despicable treatment repeats itself. And we're going into the next big one with government deficits. It just seems to me to be unable to be resolved by the government sector in NZ again in respect of a major disaster. Awful to admit, but that's the sinking feeling I get.

AMI was as much a consequence of poor executive management as inadequate government oversight. Reinsurance adequacy and its effect on solvency risk were effectively outside the remit of govt regulators back then. Different world today. Done right, this review could deliver a world leading catastrophe response initiative but I fear the ideological urges to centrally control outcomes and socialise risk will deliver us only a rejigged version of the chch debacle when the next big one hits.

Proposals still have to deal with those who decline to insure their property. I don't really agree with going up to $400k but that is a moot point if all properties make a contribution.

"socialising the loss" to those who already paid their share of the premium, and paying out to those who did not is the wrong message. If such a high share of cover is going into EQC, then add it to rates bills, force the local council to collect the EQC insurance component, by which method the EQC payments are collected for every rated property in the region they are based. Rented properties are then also captured by this method.

Then those who don't insure their property can't escape paying for the socialised cost, and if they don't have cover for the rest of their assets that will be their own problem. Everyone else just needs to insure their excess above the EQC limit.

Crusader. I think the proposal is to continue linking EQC cover to only those holding current fire insurance policies, but may have missed something. The only 'paying out' to uninsured people in ChCh was to a small number of owners of land in red zones but that was not really an 'insurance' scenario - those people argued that the loss in value of their sites was due to a government re-zoning decision, not seismic activity.

Does this increase the risk of moral hazard? - ie, bully the local council into letting you build on a cliff top with a view, with zero risk since there is a govt guarantee that you will be bailed out when it falls down the cliff in a flood?

Or am I misreading this?

Nope, you got it. A Bexley subdivision in ChCh built on a reclaimed wetland which the council opposed but developers successfully fought in court to proceed with was as predicted quickly wrecked in the quakes costing EQC and insurers bucket loads. Every homeowner in NZ paying EQC levies ended up subsidising this reckless development. Liquefaction zones in the city were mapped decades before with uncanny accuracy so the risks were well known. There is a statutory ability for EQC to decline to insure specific sites but it is rarely invoked.

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