Publications
Annual Report
2006-2007
Chairman's Report
Chairman's Report
At the close of the financial year, New Zealand’s Natural Disaster Fund (NDF) stood at $5.43 billion.
In last year’s Annual Report I raised an important public policy question. The Natural Disaster Fund, supported by our reinsurance programme, could now {just about} meet the probable maximum liability which EQC could face after a natural disaster as defined in our Act. This state of affairs is the envy of other countries with institutional arrangements to reduce the financial risk, or fund the cost, of natural disasters. It has come about through the foresight of those who established the original Earthquake and War Damage scheme in 1944, combined with the good fortune that since then no catastrophic natural event has occurred in a New Zealand centre of population, and therefore devastated our built environment.
The question I raised last year was whether the Government or the New Zealand public would find it an acceptable risk that a second catastrophic event, such as an earthquake or tsunami, could occur before the NDF had adequately recovered.
During the year EQC began a programme of work to help, in part, answer this question. The question can be redefined in “lay person’s” terms as:
- What is the maximum liability that EQC is likely to face in the event of a major natural disaster in New Zealand? (In effect this would be a Wellington earthquake of about magnitude 7.5.);
- After meeting this liability, what should be the residual size of the Natural Disaster Fund to enable it to be rebuilt within a reasonable time? The underlying assumption here is that the NDF is not in place for a one-time pay-out, but should be a permanent feature of this country’s armoury for disaster recovery.
These questions, the responses to which require complex probability and financial analysis, do not by themselves lead to an answer on the optimal size or structure of the NDF. Since 1988 EQC has laid off a portion of its risk in the world reinsurance market. The quantum and structure of EQC’s reinsurance programme needs to be factored into the analysis, as does the investment strategy for the NDF.
There are two further considerations. EQC provides cover of up to $100,000 for residential properties, and $20,000 for contents. These limits, or “caps” as they are commonly termed, were set in 1993. The value of this cover has eroded considerably, at the same time as residential building costs have escalated. In effect, the scheme today is not the scheme approved by the Government in 1993. In my view, whether, when, and by what amount the caps should be increased to bring the current scheme closer to its original intent require examination and an explicit Government decision.
The second consideration is one which I have raised before. Although the EQC scheme was designed around the risks to New Zealand’s households of three main natural events, earthquake, volcanic eruption and tsunami, payments for weather-related damage are the most costly of EQC’s month-by-month claims settlements. Our traditional risks remain, but the combination of new patterns of urban and so-called life-style developments, and climate change, raise the question whether the mandate and coverage of the scheme is right for New Zealand in the 21st Century.
These issues are both complex and inter-related. They will form the major part of our policy work programme in 2007/08.
I referred above to EQC’s investment strategy. EQC started to invest in overseas equities in 2001. Last year we began a series of reviews on how this programme was working, and how it might be improved. These included:
- The mix of our investment managers, including their styles and relative weightings in our portfolio;
- The governance arrangements for the portfolio, including the best balance between internal and contracted resources;
- The provisions of EQC’s agreements with our investment managers as they relate to the requirement to avoid “prejudice to New Zealand’s reputation as a responsible member of the world community”.
The latter are, in effect, EQC’s responsible investment guidelines to the investment managers. We have come to the view that, while necessary, they are insufficient to meet the legitimate concerns of the Government and the public that our investment programme should reflect sound international practice and standards for responsible investment. Nor are they as clear as they might be for our investment managers. We have responded by:
- Agreeing to establish a more formal and comprehensive responsible investment policy for EQC. This will be in place by the end of this calendar year;
- Following approval of this policy, considering becoming a signatory to the United Nations Principles for Responsible Investment (UNPRI);
- In advance of both of these, divesting of tobacco stocks. This decision was taken in June, and our investment managers were given a month to put the decision into effect. Although our preferred approach is engagement with companies where we have responsible investment concerns, the nature of this product, the history of behaviour of major tobacco companies, and the bipartisan support in New Zealand for programmes and legislation to limit tobacco use and mitigate its harmful effects, all pointed to divestment as the sensible option;
- Reporting more fully in the Annual Report on the way we give effect to our responsible investment policies. Readers will see the first steps in this direction on page 38.
I am sure that we will continue to refine our approach in this important area over the next year or more.
Finally I acknowledge all on the EQC Board who have served in this capacity during 2006/07, and the staff of EQC. This country is well served by the skill and dedication of these people.
Michael Wintringham
Chairman.
