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A closer look at the Government's decision to transfer risk from private insurers to the state natural disaster insurer, EQC

Insurance
A closer look at the Government's decision to transfer risk from private insurers to the state natural disaster insurer, EQC

Homeowners shouldn’t bank on their insurance premiums falling, on the back of the Earthquake Commission (EQC) doubling the amount of cover it provides in the event of a natural disaster.

The Government on Thursday announced the building cap on EQC cover will double to $300,000 (plus GST), meaning the state insurer will cover the first $300,000 of building damage caused by a natural disaster, leaving residential property owners’ private insurers to cover anything above this level.

The cover is provided for earthquakes, tsunamis, volcanic eruptions, hydrothermal activity and natural slips.

The move will see private insurers transfer a significant amount of risk to the state insurer. Accordingly, EQC levies will increase from a maximum of $345 per dwelling per year to a maximum of $552 per dwelling per year.

However, insurers won’t necessarily cut their premiums by the equivalent amount, accordingly to Finity Consulting insurance pricing expert, Simon Young.  

He said global reinsurance markets are imperfect, meaning a fall in risk won’t necessarily translate to a corresponding fall in premiums insurers pay the reinsurers that insure them.

What’s more, he noted New Zealand’s main general insurers, IAG and Suncorp, are part of large Australian-owned companies, which buy reinsurance in bulk. The risk posed by these companies’ New Zealand customers is only one element factored into the premiums reinsurers charge insurance companies.

Young said transferring more risk to EQC could see higher-risk property owners in the likes of Wellington pay lower premiums, but Aucklanders should brace for higher premiums, as EQC levies are set to rise.

Private insurers collect these levies on behalf of EQC by tacking them onto the premiums they charge for fire cover. All new insurance contracts will include the new EQC levy from October 1, 2022.

Insurance Council of New Zealand (ICNZ) CEO Tim Grafton said he had “no doubt” insurers will be “fair” and “respond accordingly” to the EQC change.

However, Grafton said it was difficult for him to comment on what individual insurers will do.

“I can’t comment as an industry body because I’ll probably get the Commerce Commission knocking on my door,” he said.

“But clearly, there has been a substantial transmission of risk from private insurers to EQC… I think you can draw your own conclusions.”

Asked whether he expected insurers to lower their premiums, Minister Responsible for EQC David Clark told interest.co.nz, “Yes, in short - overall. Obviously there’ll be a few overs and unders.”

Clark said that as private insurers move towards more risk-based pricing (rather than spreading the cost of risk more evenly across policyholders), some homeowners will struggle to secure affordable cover.

He said this could see people end up in poverty and ultimately burden the Government.

While people might struggle to rebuild a house for $300,000, this at least aligns more closely with the cost of building a house than $150,000 - the level set in 2019.

“It’s probably not quite as much social insurance as when the scheme was conceived in the beginning, when it roughly was the cost of replacing a house, but it moves us closer to that,” Clark said.

He couldn’t provide a ballpark figure around how many homeowners were struggling to get affordable insurance. In other words, he couldn’t define how bad the problem was the Government is trying to fix with a social insurance approach.

He said homeowners “at the margins” in flood or quake-prone areas are the ones battling to get affordable cover.

Clark couldn’t specify how exposed the Crown’s balance sheet would be, by so much risk being shifted from private insurers to the public purse.

Currently, there is only $200 million in EQC’s Natural Disaster Fund. This is the fund levies are paid into. The fund was depleted following the Canterbury and Kaikoura earthquakes.

EQC also has nearly $7 billion of reinsurance cover. However it needs to pay the first $1.75 billion of costs in the event of a disaster before it can tap into this cover.

If there was a major earthquake in Wellington tomorrow for example, the Government would need to make up the difference between the $200 million and the $1.75 billion to access the reinsurance cover.

If the reinsurance cover wasn’t enough, the Government would again need to come to the party.

Neither Clark nor EQC could say how much reinsurance would be required once the building cap is doubled to $300,000, and what the excess would be.

An EQC spokesperson said these details were yet to be worked through ahead of the entity engaging with global reinsurance markets in 2022.

The spokesperson noted, “Losses following a natural hazard event are not linear, so doubling the cap will not require a doubling of the amount of cover we need to purchase.”

Both Clark and Grafton were confident in EQC’s ability to secure reinsurance. Being a government-guaranteed entity, they noted it was attractive to reinsurers.

“Currently we will have reinsurers that are providing cover both to EQC and to private insurers. What they will be seeing will just be a reallocation of who bears that risk,” Grafton said.

“So, for them, the New Zealand risk itself remains unaltered. It’s just that one entity will carry more of that risk than a range of private insurance companies.”

Grafton wasn’t surprised the Government decided to increase the building cap to $300,000.

He said it was a matter of trying to balance a community-based social policy with a risk-based approach.

He feared a cap of say $400,000 would’ve created too much of a moral hazard, as people would’ve made risky investments knowing EQC would have their back in the event of a disaster.

“There isn’t a perfect answer to any of this,” Grafton concluded.

Clark said, “We think we’ve struck a balance here, so there will still be price signals in the market.”

He didn’t buy the argument that increasing the cap would effectively see the typically less wealthy renting class de-risk the wealthier property-owning class.

Clark argued both the rich and poor live in parts of the country prone to natural disasters.  

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21 Comments

The New Zealand government loves parallel schemes doesn't it? We have EQC but also private home insurers, we have NZ Super Fund but we also have KiwiSaver, we have ACC but we also have a regulated private health insurance.

At some point one has to ask if this is the most efficient wat to run such systems.

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The thing which irks me way more than all this is that the completely uninsured seem to very often get bailed out by governments.

And of course by give-a-little (beg-a-lot) and also by "welfare".

Why bother insuring at all?

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EQC cover only applies if you pay the EQC premium. That is usually done through your insurer but you can pay direct to EQC if you can't get insurance cover. So you go uninsured you don't get bailed out (in theory).

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Do any of our poor still own houses??

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One or two. Thats why we need a suitably high land tax to force them out.

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Would love to know exactly how much of the NDF over the years, since it was set up some seventy five years ago, has been siphoned out by various governments and spent elsewhere.

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"He couldn’t provide a ballpark figure around how many homeowners were struggling to get affordable insurance. In other words, he couldn’t define how bad the problem was the Government is trying to fix with a social insurance approach."

Either his officials are clueless or do not have the necessary legislation to get the info from the insurers or Parker doesn't even bother to ask the right questions. My inclination is to the latter. A number of other metrics could be determined to help evaluate the situation.

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Much if what this Government is doing is just ideologically driven. They don't let the facts, nor commonsense, interfere with their aprioristic decision-making. Well, they have no real opposition, do they ? National, in its current state, is a sorry sight.

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Agree about National. I think they are all a sorry site, including ACT

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So after a major destructive event, how does a homeowner make a claim?  Via insurance company only - & they access the EQC cap?  

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Still much lacking in definition. For instance the dilemma surrounding the red zones imposed in the Canterbury EQs whereby if your land was stuffed but your house only slightly damaged, your insurance policy covered only the cost of that slight repair, even though the government had ordered the house to be uninhabitable. That feature just on its own caused massive distress and financial hardship to far too many. But it could happen again.

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Why ACT party is growing as is asking valid question and many thought ACT party is a proxy for national party.

Newshub: Housing crisis: ACT says one-off migrant visa will make house prices 'go crazy'.
https://www.newshub.co.nz/home/politics/2021/10/housing-crisis-act-says…

Green party with compulsion to support Labour party or to dilute the attack are losing ground to please Jacinda Aarden.

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Asking the right questions and having the right policies to fix the situation are not one in the same thing. ACT are not incorrect with the 165,000 influencing housing prices but are disingeous when they would open up the immigration taps resulting in the same pressure on house prices. Seen enough times when  MSM put a microphone in front of one of the opposition in the beehive and ask for a comment. The reply is invariably negative to the govt of the day but never follow up with "We have the policy to fix that"

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Tim Grafton said he had “no doubt” insurers will be “fair” and “respond accordingly” to the EQC change.

Tim is obviously talking himself up for a role as a Comedian.

the only thing Insurers ever do is increase their premiums at any and all occasions of change.

 

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Socialising personal irresponsibilities- the genuine trade mark of every commie.

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The fact that our Government has taken out insurance demonstrates that it is literally clueless when it comes to managing its finances. Do we have insurance for if war breaks out, or if we get hit with a pandemic? Do we think that we are going to actually save money by entering a deal with an insurance company in the medium- to long-term? That somehow our risk assessors will be more cunning than theirs at assessing the risks and the potential gains / losses?!?

We have seen over the last year that Government can create billions of dollars out of thin air whenever it wants (like it did when we built all of those state houses in the 1930s and 40s) - our efforts should be going into working out how we would secure and deploy the real resources (tradies, materials, planners etc) to deal with a huge post-earthquake repair programme. Paying for it is the easy bit for a sovereign Govt.  

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Yes, agree. Why give any money to reinsurers when we are a sovereign currency issuing nation? That is just letting the FIRE sector clip the ticket.

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This is just another transfer from the productive parts of the NZ economy to underwrite the lives of those living in Wellington. 

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Looking at the GV comment at 3.56pm today I assume what he or she may be getting at is the flat levy charge for all homeowners across NZ.  However I recall an ex-CEO of EQC saying some years ago that an earthquake in Wgtn is a problem for all NZ not just a problem for Wgtn.  Therefore apart from administration simplicity that might well justify the flat levy rate for the $150,000 now and $300,000 in the future another relevance to the debate is that apparently some reinsurers regard the EQC programme as being one of the better ones as there is no anti-selection.  Most residential properties are in it and no insured home-owner can pick and choose the earthquake peril so reinsurers are not just reinsuring Wgtn properties they are reinsuring Whangarei and Invercargill ones as well.  If the insurers of say Whangarei and Invercargill are now giving 'top-up' earthquake insurance now for less than the new EQC levy will be it might simply mean they have not been charging enough and subsidising with the non-earthquake part of the risk so not enough premium to adjust by reducing the earthquake exposure, not the government's fault.  Balanced perhaps that from the two articles we can assume that this risk-based pricing referred might mean that owners in Petone - which recent research says could be underwater after the next big earthquake - might be getting additional EQC cover with 100% security for less than they might be paying now for their 'top-up'?

       

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My view is that the figure of $300,000 is a red herring the Politicians want to increase premiums to increase the fund in case there is another disaster. They have spent the money on other projects

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Auckland apartment owners will bear the cost of this, massive subsidy for Wellington.

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