Publications
Annual Report
2004-2005
General Manager's Report
The Commission has coped with another very busy claims year. It was the costliest since the Earthquake and War Damage Commission became the Earthquake Commission in 1994, breaking last year’s record (see the comparative table in "Natural Disaster Claims Locations"). At the same time EQC embarked on some important public education and research initiatives during 2004-2005.
Aerial view of Matata in the Bay of Plenty following the deluge of May 2005.
Earthquake and storm events provided real-world tests for the extensive training, exercising and planning regime that EQC calls its Catastrophe Response Programme. On two occasions loss adjusters from Australia, who had completed EQC’s overseas training programme, were brought in to reinforce the local resources. EQC set up temporary local offices with full IT support and employed local people. The agreement with our claims administration partner in Brisbane, Wyatt Gallagher Bassett, worked well with the staffing levels adjusting to the peaks and troughs of the load.
Care has been taken to debrief participants in the Catastrophe Response Programme and to obtain the opinions of claimants on the levels of service achieved.
These events have justified the efforts that EQC has made over the past decade to place itself in the best position possible to meet its responsibilities following a large disaster; efforts that were reflected in the Commission’s significant contribution to the recovery of several communities hit by storms during the year.
Experiences are for learning and EQC has taken lessons from all the events and implemented changes and improvements where necessary. In this way, just as no one disaster is like any other, EQC’s response to each is a little different from the last.
EQC’s recent claims history has featured an increasing proportion of payouts in compensation for loss of land. For example, over 60 percent of the amount payable to residents of the Bay of Plenty following the storm in May, is compensation for land loss. EQC receives no premium for its insurance of land and forecast climate and land value changes are indications that this trend will continue.
What must not be lost sight of is the fact that, whilst devastating to those directly affected, none of these events was large on a scale that encompasses what could happen in New Zealand. 2005 is the 150th anniversary of the magnitude 8.2 earthquake on the Wairarapa Fault. EQC’s computer simulation model estimates that, if that earthquake occurred today, EQC would have 240,000 claims to cope with at a cost of up to $9 billion. Running this scenario through EQC’s systems dynamics model shows that, with the constraints on the expected resources available to EQC to inspect and process claims, it would be five years before 90 percent of the claims were settled. Some claimants would have to wait months for the first visit from an insurance assessor.
The availability of labour, building materials and equipment needed to effect repairs to all these homes is not included in these assessments and could well be the bottleneck that extends the recovery time closer to a decade.
Lambton Quay, Wellington, c.1860s with the sea wall that became unnecessary after uplift in the 1855 earthquake. WJ Harding collection, Alexander Turnbull Library, Wellington.
Policy and Advice
Following the storm events of the year, Cabinet instructed Treasury to review the terms of the Earthquake Commission scheme. This involves examining the feasibility of extending the Commission’s cover to include storm and flood damage as well as the possibility of local authorities collecting EQC’s premiums. Treasury is due to report back to Cabinet by mid 2006.
Treasury has also asked EQC to contribute to its review of the optimum size of the Natural Disaster Fund.
Managing the Natural Disaster Fund
The Natural Disaster Fund grew by $230 million to $4.73 billion during the year.
Two factors were key to this return. Firstly, EQC’s New Zealand Government stock (including inflation-indexed stock) produced strong returns over the year. Second, converting the Fund’s exposure to unhedged global equities back into New Zealand dollars delivered foreign exchange losses. The foreign exchange losses dominated and, as a result, the overall portfolio fell short of its target return**.
The diversification of our passive global equity investments into a combined passive and active structure was largely completed by August 2004, with the transition of further funds from a passive holding to a core active manager.
Global Equity Allocation as at 30 June 2005
(Target position in brackets)
| Passive investment allocation | 40.7% (40%) |
| Active investment allocation | 59.3% (60%)
|
After active management fee deductions, the active managers under-performed the MSCI world benchmark by 0.4 percent in New Zealand dollar terms.
EQC’s returns for New Zealand Government stock and inflation-indexed bonds matched the benchmark returns, with EQC retaining a passive holding.
Bank deposits (RCDs) and Treasury bills provided steady income throughout the year, with yields supported by a tightening of monetary policy by the Reserve Bank of New Zealand.
EQC has investment objectives in order to restrict the risk in the portfolio. It is anticipated that returns below target will occur from time-to-time. EQC remains confident that this year’s underperformance is well within the acceptable risk tolerance levels.
As a supplement to the Natural Disaster Fund, EQC maintains a level of reinsurance cover in the case of a large event. For most of the year under review, the reinsurance attached at $750 million. Negotiations completed in June 2005 saw the attachment point for all layers of the Commission’s reinsurance programme move to $1.3 billion. The negotiations also saw a small drop in the rate EQC pays for its reinsurance, along with improvement in other terms of the cover.
| Asset class | Actual return | Benchmark/target return |
| NZ Government stock | 8.1% | 8.1% |
| NZ Government inflation-indexed stock | 11.5% | 11.5% |
| Bank bills (registered certificates of deposit)/T bills | 6.7% | 6.6% |
| Global equities* | 0.0% | 0.4% |
| Total portfolio | 6.0%** | 9.1%** |
* Transition from passive to active equities was completed in August 2004. This return incorporates full year passive and active returns, with the exception of the core active equity manager, which is from inception.
** The total portfolio return and target are based on an average annual rate of return for rolling 10-year periods. The target is the NZGS index + 1% p.a. EQC has not been operating the structure long enough to allow proper comparisons. Therefore the returns quoted are just for the financial year.
Administration of the Scheme
The Commission has a programme for checking insurance company calculations of its premium. We received 11 opinions from external auditors during the year and three of those were qualified. The necessary upgrades to the insurance companies’ systems were made.
The Commission’s operating expenditure for the year was $21.004 million and within budget.
Research
The GeoNet project is a partnership between the Institute of Geological & Nuclear Sciences (GNS) and the Earthquake Commission to build, operate and maintain a national natural hazards monitoring network. The partnership agreement between EQC and GNS provided for a triennial review of the existing built system and current work plans, the overall needs for a viable national capacity for research and the framework for meeting the cost of GeoNet.
The review panel of international experts presented its report to EQC in November. It concluded that the GeoNet project is a significant contribution to the public good and that GNS has met its obligations to EQC for delivery of the project. The current arrangements of partial central government funding through EQC, with the shortfall of about one third being the responsibility of local government and other interested parties, threatened the capacity of GeoNet because of the failure to secure non-central government funding. The panel recommended that central government should take over full funding of GeoNet and EQC’s oversight of the programme should be strengthened. The report also placed emphasis on the need for research and other outputs and expectations of GeoNet to be precisely defined and agreed among potential users, who included local government, universities, other government departments, emergency services, and public and private utilities.
EQC’s response to the report was to obtain Government approval to move to a full funding arrangement for GeoNet. This amounts to a 50 percent increase in EQC’s funding of the project, to about $75 million over 10 years. EQC has also established the full time position of research manager on its staff to provide a focus and impetus to its oversight of the GeoNet project and EQC’s other research facilitation initiatives.
In March, the Commission commenced its biennial competitive funding round through which approximately $750,000 is made available for public good research. About 100 applications were received and these are being assessed by a panel of experts.
Promotion and Education
Young presenter Gussie Larkin and the "faultline banner" – a device used to indicate earthquake faultlines under the surface – are shown in this still from one of EQC’s new television advertisements.
Towards the end of the year, EQC launched a new public awareness campaign designed to put the reality of earthquake risk into sharp relief and to encourage people to take action to mitigate against earthquake and other natural disaster damage.
The campaign features television commercials with variations for North and South Island audiences. The commercials are airing from the Waikato south and “bring New Zealand’s faultlines to the surface” using a banner that crosses through countryside, towns, sports fields, schools and homes.
The commercials direct viewers to a new website – called EQ-IQ (www.eq-iq.org.nz). The website looks at each of the perils that EQC covers and shows people how they can prepare their households for natural disasters.
The campaign will also include roadside billboards in some areas.
In addition to the TV advertisements and billboards, the Commission will be sending out a brochure and another of its popular fridge magnets to all households in the country during October. The brochures will focus on risk, with additional information on EQC’s roles and mitigation, so that they both reinforce the television campaign and provide information that is useful and relevant for specific regions.
My thanks must go to the hard-working staff at EQC who have risen to the challenges brought by a demanding year. It has been heartening to see their care and professionalism when helping people whose lives have been turned upside down by the forces of nature. The Commission has committed and experienced people on its staff, making EQC an organisation well-equipped to handle the formidable test a major natural disaster would bring.
DAVID MIDDLETON
GENERAL MANAGER
