Publications
Annual Report
2004-2005
Chairman's Report
The Earthquake Commission in its present form came into being in January 1994 with the enactment of the Earthquake Commission Act 1993.
EQC is a Crown agency fully owned by the Government of New Zealand – including its assets and liabilities, both of which are significant.
The Act makes provision for the insurance of residential property against damage caused by some natural disasters where the owners of residential property have entered into a contract for fire insurance. The premium for EQC’s cover is compulsorily levied at the point of payment for the fire insurance cover.
The perils insured against are earthquake, natural landslip, volcanic eruption, hydrothermal activity, tsunami, and what is termed “natural disaster fire”, which is fire following any of those perils.
The scheme also covers residential land. As far as we are aware, it is the only insurance scheme in the world that covers residential land.
The scheme does not cover, except in the case of residential land, losses caused by storm or flood which are the most common form of natural disaster in New Zealand. Also excluded are movements of ground due to below-ground subsidence, soil expansion, soil shrinkage, soil compaction or erosion.
Cover is for replacement value and is capped at $100,000 for dwellings and $20,000 for contents. There is no cap in place for land claims.
The scheme is a pragmatic response to where and how New Zealanders actually live and arises out of the public expectation of collective support when recovering from natural disasters.
Our experience over the past 11 years, since the 1993 Act came into force, indicates that the public increasingly sees EQC as a disaster recovery mechanism rather than just an insurer.
The subsidence that saw one house collapse and others undermined in Waihi during 2001 gave rise to a strongly expressed public view that the victims should be compensated by the Crown. However subsidence is not one of the perils covered by the Earthquake Commission Act. A solution was found whereby the claims were assessed and administered by EQC as if subsidence was a covered peril and the claims were settled by the Crown on that basis. The Crown then requested a dividend from EQC to meet the cost of the claims so settled.
QUESTION: Should EQC’s insurance scheme cover subsidence risks?
The central North Island floods of February 2004 devastated a significant part of rural New Zealand. EQC met claims for landslip and flood damage to residential land, i.e. the land immediately surrounding the dwelling, and paid out $7.1 million. The Crown provided at least $162 million in assistance packages from the consolidated fund.
QUESTION: Should EQC’s cover be extended to storm and flood damage in the event of a catastrophe?
The traditional insurance model has the advantage of being a totally disciplined approach with longstanding assessment and settlement rules. It serves New Zealanders well, up to the point where a disaster threatens the functionality and even the existence of any given community. It is at that point that public expectations of governments’ responsibilities and actions cannot be satisfied by the insurance model.
Most New Zealanders, when they think about EQC, believe that they can claim because they have suffered loss or damage caused by a natural disaster. Insurance practice never satisfies that expectation on a major scale because the right to claim arises not from the fact of the disaster but from the cause of damage and always requires case-by-case assessment.
In a mega disaster the public will expect that they will be compensated or have their homes repaired or rebuilt because they have suffered loss in the event. To the public, the distinctions between perils covered by the insurer and the actual proximate cause of damage are irrelevant when faced with not only major damage to their home, but also the viability of their whole community.
Public expectations of the American government and the agencies responsible for disaster response and recovery in the Katrina disaster came as a major surprise to the administration. The US government is moving very fast and committing huge resources to meet these expectations. Congress has already appropriated in excess of US$60 billion; the prediction is that the US government’s contribution to the long-term recovery effort will exceed US$200 billion. Note: There is no criticism expressed or implied of the US administration; in fact, expectation of support has been increasing worldwide for some time.
The core lesson for EQC and the New Zealand Government, is that public expectations of what the Crown and its agencies will provide in a mega disaster have been deeply under-estimated as a planning factor.
Community recovery from a mega disaster like Katrina involves issues of resource management, civic planning and the rebuilding of the entire infrastructure of a city or a smaller community. This includes road, rail, sea and air links; power, water, gas reticulation; sewerage, places of work, schools, hospitals, communications and more.
It is not possible for dwellings to be regarded as a totally separate matter from the community at large.
Decisions have yet to be made on whether some householders affected by recent New Zealand disasters will be permitted to rebuild on their sites even when their insurance claims have been settled. Project that situation into a mega urban disaster and the extent of the problem becomes clear.
QUESTION: Should the Government and EQC be planning to settle claims from disasters that do not affect communities’ sustainability in the insurance mode but also evolve a different “mega disaster” mode? This mode could have its own set of principles, powers and procedures held in reserve and activated by Order in Council when Cabinet decides that a New Zealand community has suffered a mega disaster event.
EQC has pushed right to the boundaries of its coverage rules to assist householders in Matata and has decided to carry out quite major engineering works to protect the future stability of a group of houses in Tauranga.
Following the Te Anau earthquake EQC conducted an experiment. It offered claimants the option of having their houses repaired on a project management basis by a contractor. The contractor managed the supply of materials and specialist tradesmen and dealt with the local authority consent processes on their behalf rather than simply paying claimants a cheque and leaving them to arrange repairs themselves.
Those who took up the option appear to have been well satisfied with the outcome.
There are strict limits on how far EQC can go in supporting communities rather than simply paying claims under the 1993 Act. However the EQC board considers that EQC’s actions are pointers to what will actually be required to rebuild a community whose viability is threatened.
EQC expends about $6 million per year in maintaining a claims settlement service ready to meet perceived public expectations. This Catastrophe Response Programme provides for settlement of tens of thousands of claims on a timeline of years rather than months.
It is the practical limit of an insurance mode of settlement.
EQC’s Catastrophe Response Programme is capable of settling all possible claims for all possible events but the timelines could be pushed out to around 10 years.
The size of the reinsured and Crown-underwritten fund means that the constraint is not funding claims but administering them.
QUESTION: Are these timelines acceptable to New Zealanders?
If the Catastrophe Response Programme timelines are not acceptable to Parliament as the people’s representative, the mode of settlement will have to be reconsidered by the Government.
This is not the usual form of Chairman’s report and is in response to the apparent increase in seismic and weather events occurring worldwide.
It is time to consider and plan for the worst disasters that New Zealand could suffer in a calm and measured way. Unplanned over-reaction can cause problems of waste of resources and exploitation.
Natural disasters are by definition unpredictable and it is much more difficult to plan response under the stress of post-disaster trauma than in the calm before the storm.
I wish to commend to Parliament the performance of EQC’s executive and staff in the most active period EQC has experienced since it was formed, and particularly David Middleton for his excellent work. David’s report deals with research, GeoNet issues, reinsurance arrangements and investment matters.
Our Minister, the Honourable Dr Michael Cullen, and his staff have supported EQC well above the call of duty and we thank them for that support and interest.
NEVILLE YOUNG
CHAIRMAN
