Publications
Annual Report
2006-2007
General Manager's report
- General Manager's report
- Claims Handling and Catastrophe Response Programme
- Administration of the Scheme
- Research
- Public Education
- Policy Advice
- Management of the Natural Disaster Fund
General Manager's report
Helping New Zealanders recover from natural disasters is at the heart of what EQC does. In addition to the provision of insurance and public education, support for natural disaster research is a fundamental component of our work.
Employing a range of approaches to facilitate recovery and improve resilience is crucial in a country where Nature never lets us forget her power. All too often this year we’ve seen unrelenting rain, landslips and major damage to property. Earthquakes also damaged homes and served as frequent reminders of New Zealand’s vulnerability to seismic hazards.
EQC-funded natural disaster research improves understanding of the hazards and risk we live with, it supports training and capability development, and advances technology to prevent or reduce the impact of natural disasters across a range of disciplines – earth science, civil engineering, architectural design, building technologies, social science and emergency management.
The value of this research was highlighted in June when RMS, the world’s leading provider to the insurance industry of products and services for the quantification and management of catastrophe risks, released a full upgrade of their New Zealand earthquake model, with net reductions in average annual loss ranging from 20-60%.
The model utilises research largely funded by the Foundation for Research, Science and Technology and the Earthquake Commission, and carried out by GNS Science, New Zealand universities and other New Zealand research providers. It is used extensively by insurers to price natural hazard risk and incorporates a decade’s advance in understanding of earthquake hazard and the availability of improved data.
Claims Handling and Catastrophe Response Programme
The first half of 2007 has seen a great deal of work put into the design and development of a new internet-based claims management system which is expected to be operational at the beginning of 2008. The Commission needs a robust, scalable application that we can rely on at our time of greatest challenge – following a catastrophic natural disaster. Whilst we normally have just a couple of thousand claims per year, we could, following a major earthquake or volcanic eruption, suddenly face over 100,000 from a single event. The new system will give us the reliability and ease-of-use required to handle the claims and quickly train the many new contractors we will need to take on at such a time.
In early April we set up a temporary field office in Whangarei to handle the claims generated by the flooding in Northland. This is the fourth time in the past three years that the Commission has established a temporary field office (they were also set up following the Fiordland earthquake in November 2004, the Upper Hutt earthquake of January 2005 and the Bay of Plenty storm of May 2005). Once again the process has enabled us to continuously improve the arrangements that EQC has in place to respond to natural disasters.
Liaison and coordination with other agencies, particularly local authorities, remains important to the claims handling process and has continued throughout the year.
Administration of the Scheme
The Commission uses two key measures to review the administration of its scheme. The first is our programme of regular audits to ensure the integrity of premium payments from insurance companies. Of the 12 external auditors’ opinions received, three identified internal control weaknesses. The necessary upgrades to the insurance companies’ systems were made.
The second measure is maintenance of expenditure within agreed parameters. EQC’s operating expenditure, $27.19 million, came within the budget set for the year.
Research
“It’s Our Fault”, a multi-disciplinary reassessment of Wellington’s seismic hazard and risk, funded by EQC, Wellington City Council and ACC, was launched in December. Led by GNS Science and including researchers from NIWA and Victoria University, the study aims to redefine our understanding of Wellington’s seismic risk and represents an advance in the way EQC partners with other agencies to achieve complementary goals.
EQC invests in the development and maintenance of research capacity in New Zealand and this year a new partnership has been created with the University of Auckland. The partnership supports interdisciplinary research on volcanic hazard and risk, geotechnical engineering and earthquake engineering. The Commission will contribute $1.3m over five years to the partnership, which will improve New Zealand’s capacity to assess and mitigate geological risk.
Earthquake and volcanic activity forecasting are receiving increasing attention internationally. During June the Commission facilitated a workshop to develop a research agenda and plan for the study of these so-called timevarying aspects of volcano and earthquake hazards in New Zealand. Researchers from GNS Science, Massey University and Victoria University attended the workshop as well as several international partners from Europe, USA and Japan. EQC’s support for this initiative reflects the importance of ensuring that New Zealand builds and retains the capacity to develop accurate local hazard forecast models rather than relying on generalised global models.
Sponsorship of technical workshops, scientific conferences and seminars, and creation of a “Science to Practice” programme to improve the application of research funded by EQC, also contributed to a full and encouraging year. One highlight was a study of issues that affect landslip risk management decisions, examining such aspects as technical knowledge, professional practice and changing risk environments.
Public Education
Support for the very popular exhibitions, Volcanoes at the Auckland War Memorial Museum and Awesome Forces at Te Papa, remains a cornerstone of EQC’s public education activity.
In October the Awesome Forces exhibition was complemented by a third successful biennial natural disaster weekend. “Earth Rocks @ Te Papa” drew crowds to the museum with exciting activities designed to raise people’s awareness of what they can do to prepare for natural disasters in general and earthquakes in particular.
The Commission’s second five-year sponsorship of Te Papa will come to an end in December 2007. Te Papa and the Commission have agreed terms for a new sponsorship that will deliver greater benefits to visitors, researchers, the general public and schools over the next five years.
A third museum sponsorship was confirmed in June when the Commission gave its support to the renewal of the 1931 earthquake exhibition at the Hawke’s Bay Museum and Art Gallery. As the most deadly natural disaster in our history, the 1931 earthquake’s role as a powerful reminder of natural disaster risk in New Zealand is compelling. Further, its location in the Hawke’s Bay is consistent with EQC’s plan to increase its profile throughout the country.
The QuakeTrackers programme, designed to educate school students about seismology and to encourage further study, also won EQC support during the year. The revised programme will centre on a network of simple and robust seismographs, the development of educational resources and the development of a new website.
The Commission’s programme of activity to meet the needs of minority ethnic communities continues to ensure our messages reach all New Zealanders in an increasingly ethnically diverse country. This year’s activity concentrated on new-migrant Chinese and Pacific Island communities and included a brochure, feature articles, web-based material and a radio interview.
Policy Advice
The Treasury review of EQC was presented to Cabinet in March as a report titled “Options to improve insurance coverage for all New Zealand households”. EQC does not expect any changes to its Act or Regulations as a consequence of the report.
Management of the Natural Disaster Fund
The Natural Disaster Fund peaked at $5.57 billion in May but the renewed strength of the New Zealand dollar in June saw the Fund close the financial year at $5.43 billion. This is an increase of $16 million or 0.3% over last year’s total at balance date.
The return was affected by the continued rise of domestic interest rates and the strong New Zealand dollar. The high interest rates meant a low return from our large New Zealand Government stock portfolio. The surge in the New Zealand dollar saw the value of our offshore equity investments fall, despite strong underlying global equity returns. (In local currency terms the benchmark index returned 21.54%, but the currency translation meant a return of -2.40%.)
Despite the short-term noise generated by currency movements, our rolling two and three year returns continue to show that diversification into global equities is benefitting the Natural Disaster Fund. Longer term results will always be more relevant than shorter term numbers as short-term market reactions are smoothed out.
EQC does not hedge its foreign currency exposures for a number of reasons, most importantly because we do not intend to repatriate our global equities unless a major natural disaster occurs. Such an event would itself influence the value of the New Zealand dollar. The decision not to hedge was made when the Commission first diversified its investment portfolio in 2001 and is subject to review. A range of factors will be taken into consideration when we look at whether or not to continue with this policy. No change can be made to EQC’s hedging policy without consulting the Minister of Finance.
About 62% of EQC’s portfolio is in New Zealand Government stock (NZGS) and inflation-indexed bonds. EQC manages the bond portfolio passively because it is a significant holder of New Zealand bonds (at 29 June EQC held 12% of NZGS on issue, and 23% of inflationindexed bonds). Our returns of 1.82% for NZGS and 2.58% for inflation-indexed bonds, though well below long run averages, were in line with the respective indices.
Treasury bills and bank bills produced the best yields for the year. We were able to take advantage of rising interest rates and as a result this class of investments returned 7.67%.
| Asset Class | Actual Return | Benchmark/Target Return | |
|---|---|---|---|
| NZ Government Stock | 1.8% | 1.8% | |
| NZ Government Inflation-Indexed Bonds | 2.6% | 2.5% | |
| Bank Bills(registered certificates of deposit)/Treasury Bills | 7.7% | 7.6% | |
| Passive Global Equities | -2.1% | -2.4% | |
| Active Global Equities | -4.0% | -2.4% | |
| Total Portfolio | 0.7% | 2.8%* | |
| *The target total portfolio return is 1% p.a. over the NZGS index return. The return and target return shown are for the financial year only even though the real measure is over a rolling 10-year period. The structure has not been in place long enough to compare 10-year returns. For the three years to 30 June 2007 the actual return was 6.9% versus the target return of 6.0%. | |||
| Global Equity Allocation as at 30 June 2007* (Target Position in Brackets) | |
|---|---|
| Passive investment allocation | 40.6%(40%) |
| Active investment allocation | 59.4%(60%) |
| + Core 39.8%(40%) | |
| + Value 31.5%(30%) | |
| + Growth 28.7%(30%) | |
| *Global equities comprised 30.1% of the total | |
The Commission’s global equity structure, along with our overall strategic asset allocation, is unchanged. EQC continues to consider further diversification of its investment portfolio, and limited use of emerging market equities will be introduced in the coming financial year.
The Commission has three equally important objectives to consider when managing the Fund – to maximise returns without undue risk, to maintain best practice portfolio management and to avoid prejudice to New Zealand’s reputation as a responsible member of the world community.
With over three years’ experience in active global equities, we continue to evolve our thinking on responsible investment and the requirement to avoid prejudice. EQC is currently working on formalising its responsible investment policy. When a clear case could be made for the exclusion of tobacco stocks from EQC’s portfolio as being in contravention of our responsible investing duty and not prejudicing our other objectives, EQC instructed its managers to divest.
Although returns were low for the financial year, EQC is comfortable that its investment strategies, guided by investment advisors and subject to external restrictions, do not expose the Fund to undue risk. EQC keeps abreast of changes in the investment arena and adopts a fairly conservative approach, taking into account EQC’s unique liability profile. As we are unable to predict when a catastrophic natural disaster may occur, and thus when funds may be needed, we don’t invest directly in illiquid securities.
EQC has reinsurance cover in place to protect the Natural Disaster Fund from the full financial impact of a catastrophic disaster. The Commission’s annual reinsurance negotiations in May delivered improved coverage. New Zealand’s distance from other natural disaster zones (such as the United States, Japan and Europe), few major natural disasters around the world during the year and EQC’s reputation in the reinsurance market all contributed to this positive outcome. (The changes to the RMS risk model were announced during the Commission’s annual reinsurance negotiations and may have contributed to the result.)
EQC contracts with financially secure reinsurance entities, as assessed mainly by industry rating agencies. The ratings of several such companies, and of Lloyds, have been upgraded in the past 12 months and this in turn improves the overall security rating of the Commission’s reinsurance programme.
The team at EQC is small but dedicated and loyal – the average length of service for the organisation is more than seven years. We also have our dedicated claims administration staff in Brisbane and those who have worked out of our field office during the year. I would like to thank everyone for their hard work over the past 12 months, their commitment and the empathy they have shown to claimants at times when many faced devastating loss. It is greatly appreciated.
David Middleton.
General Manager
