Managing the Natural Disaster Fund

Origins

The Natural Disaster Fund has its origins in the Earthquake and War Damage Fund, which was set up when the Earthquake and War Damage Commission was established in 1945.

In 1993, the Earthquake Commission Act replaced the Earthquake and War Damage Commission with the Earthquake Commission; and replaced the Earthquake and War Damage Fund with the Natural Disaster Fund.

Another fund administered by the Earthquake and War Damage Commission, the Disaster and Landslip Fund, was incorporated into the Natural Disaster Fund.

War damage was no longer covered, and to reduce the scope of potential liability, disaster insurance of commercial property was no longer covered.

Investment of the Fund

The Earthquake and War Damage Fund, and then the Natural Disaster Fund, were invested mainly in New Zealand fixed interest securities until 2001. These were made up of mainly Government stock, and also bank securities.

In 2001 it was decided by the Government that part of the Fund should be invested in international equities. The goal was to ensure there were tradeable financial assets outside New Zealand that wouldn’t be affected by a major natural disaster here: if EQC needed to draw down on the Fund to meet significant claims, international equities could be sold first – keeping the requirement for cash away from the Government initially.

Another advantage of investing part of the Fund in global equities was that the Fund could potentially grow faster than it might otherwise.  A new performance benchmark was established: that the Fund would exceed the return on the NZ Government Bond Index, plus 1% per annum, measured on a rolling 10-year basis.

Effect of the Canterbury earthquakes

Until the Canterbury earthquakes in 2010 and 2011, there had not been any major claims on the Natural Disaster Fund. Hundreds of millions of dollars had been paid out on claims for smaller events – but despite this, under careful management, the Fund had accumulated to a value of $5.9 billion at the beginning of the 2010-11 financial year.

The Earthquake Commission has been drawing down on the Fund to meet claims since the first Canterbury earthquake in September 2010.

  • Read about the number of claims and funds paid out on the Scorecard page.

In the process of meeting claims, the Fund’s global equities were entirely liquidated by May 2012. A portion of Government stock holdings was also sold. Since then, the Fund has been made up of only New Zealand Government stock and bank securities.

During the first half of 2012, EQC received its first payments from reinsurers. These payments continue until the reinsurers’ contractual obligations to EQC have been reached. At that time, the remaining earthquake claims will again be met by the Fund.

If the Fund is fully exhausted, the Crown Guarantee will be activated – ie, the Government will meet further claims.

Reinsurance

The Earthquake Commission has a comprehensive catastrophe reinsurance programme in place, to help ensure we are able to pay out on claims.

In a major disaster (a ‘reinsurance event’), EQC is responsible for meeting a defined initial dollar value of total claims (the ‘deductible’). Reinsurers are responsible for further ‘layers’ of total claim costs, up to a contractual limit. 

With three reinsurance events having occurred in Canterbury, the program comes into effect three times in succession. The EQC Fund, the reinsurers, and finally the Crown Guarantee, all play their roles in meeting earthquake claims.

Renegotiation

The Earthquake Commission’s reinsurance programme is renegotiated annually. The most recent renegotiation took place in April 2014 and the Commission increased its cover by ~$600 million for the same premium paid the previous year. In the event of a major earthquake, EQC currently has access to ~$3.8 billion of reinsurance protection, with reinstatement of protection should a second event occur within the policy year.

Boosting the Fund

In October 2011 the Minister of Finance, Hon Bill English, announced that EQC levies would rise in February 2012. Homeowners had been paying 5 cents per $100 of insurance cover. The levy increased to 15 cents per $100 of insurance cover, up to a maximum of $207 (including GST) per annum. This included contents cover.

Looking ahead

Current projections are that Canterbury claims will eventually exhaust the Natural Disaster Fund. If this occurs, the Crown Guarantee will meet ongoing claims.

The Earthquake Commission and the Government have started working on a full review of all aspects of the Fund.

In the event of another major natural disaster in New Zealand in the near future, the Crown Guarantee would meet the required ‘deductible’ and reinsurance would contribute to the remainder, subject to contractual limits.

Page last updated: 3 Feb 2015

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