Publications
Annual Report
2008-2009
General Manager's Report
The means by which EQC plans to cope with a large and sudden influx of claims following a natural disaster, the Catastrophe Response Programme, has developed and improved over the course of the last decade or more. In March, a panel of experts in relevant fields was convened to review the Catastrophe Response Programme, and the way it has been practised, to provide confidence that the programme will achieve its objectives and to make recommendations for any required improvements.
The panel was able to affirm that the programme will achieve its objectives at least for events up to a moderate size (at least 10 times larger than anything EQC has been required to face to date). The panel made recommendations relevant to the continuous improvement of the programme and these are being worked through.
Following a full tender process, EQC adopted a replacement claims management system in March 2008 that was part of a commercial package providing a full insurance company record system. Because EQC has special requirements, the programme needed extensive customisation by IBM and Eagle Technology this year and their work won an international award for innovative use of the software.
Throughout the year, EQC has carried out extensive training of all system users including external contractors who are now able to access claims records direct through the internet. The new claims management system represents a step up in the quality of the service EQC is able to provide its claimants.
During the year the most comprehensive study of Wellington’s earthquake risk to date was continued by GNS Science and its sub-contractors. The objective of the It’s Our Fault project is to position Wellington as a more resilient city with a deeper understanding of the likelihood, nature and possible impacts of its earthquakes. The major sponsors of the work are ACC, Wellington City Council and EQC. The project has produced an important shift in our understanding.
The timing of any earthquake is a matter of probability – it could happen tomorrow. But the latest results from this research indicate the chance of having a large (greater than magnitude 7.5) Wellington Fault earthquake is significantly lower than previously thought. These are preliminary results which require confirmation by testing and review but they indicate that smaller or more distant earthquakes may be more important to plan for. Whilst still damaging, the smaller area affected means that communities and infrastructure would be able to recover more quickly if proper preparation is in place. The project is programmed to run for another three years.
EQC lays off part of the financial risk of large disasters to the global reinsurance market. International reinsurers have been affected by limitations on access to capital and the result worldwide has been a tendency for increasing prices. Despite this, EQC negotiated favourable renewal terms (no increase on the previous year on a risk adjusted basis), trading on the natural advantage of remoteness from other potential disaster sites in the world. The Commission also benefited from the long-term relationships forged over the past 20 years, familiarity with our account resulting from regular personal contact, and the superior information EQC is able to provide its reinsurers. In the volatile investment markets of the year, EQC’s mix of Government stock, Treasury bills/bank bills and unhedged global equities has served to mitigate the risk inherent in any one market and the Commission has ended the year in surplus.
Claims Handling and Catastrophe Response
The Commission received 4,492 claims during the year. This was fewer than 2007-08 when more than 9,000 claims were lodged, many of them from the December 2007 magnitude 6.8 earthquake centred near Gisborne.
This year a single severe storm swept over the country from the north in late July and there was one significant damage-causing earthquake in August. The storm generated 893 claims for which EQC paid out $20 million. EQC set up support centres in the three places most affected – Auckland, Wellington and Blenheim. The earthquake occurred near Hastings and generated 1,380 claims for a payout of $1.98 million. EQC set up a support centre in Napier for this event.
The success of working through local support centres was a feature of the year and followed from the experience gained from the Gisborne earthquake.
Administration of the Scheme
The Commission has a programme of checking insurance company records and reports from external auditors to ensure the integrity of premium payments from insurance companies. For the 12 months to 30 June 2009 we received eight external audit opinions, none of which was qualified.
Research
The Earthquake Commission fosters research and public education in relevant areas of natural hazards science and engineering. EQC also encourages the transfer of this science into practice, providing a connection between scientific progress and resilience within the community.
Twenty-two projects supported by EQC were completed during the 2008-09 year, ranging from research into factors that govern the size and frequency of earthquakes and volcanic eruptions in New Zealand, to improved methods for earthquake-resistant design and approaches to land-use planning in areas of slope instability.
Other highlights include the It’s Our Fault study mentioned earlier and recent findings from New Zealand’s geological hazard monitoring system, GeoNet, a collaboration between LINZ, GNS Science and EQC.
Before the launch of GeoNet in 2001 we did not know that the collision of tectonic plates beneath New Zealand gives rise not only to earthquakes as we know them, but also “slow earthquakes” in which energy is released without severe shaking over weeks or months. To date eight such slow-slip earthquakes have been identified, with earthquake-equivalent magnitudes of 6.5 to 7. New Zealand scientists are now working with Japanese and North American counterparts at the forefront of this science to understand the implications of these phenomena for earthquake hazard estimates.
The GeoNet project itself was reviewed by an expert panel during the year with the specific purpose of assessing developments to date and current fitness for purpose. The reviewers concluded: “GeoNet has delivered on the original proposal in March 2000, and in some cases exceeded requirements. Its cautious, staged roll-out of equipment has been a wise approach to ensuring the long-term stability of the networks and data collected.”
And further: “EQC has shown unique leadership for GeoNet in providing the backbone for other agencies to extend so that New Zealand has a leading edge, integrated hazard monitoring network.”
The EQC-initiated science review of the Auckland Volcanic Field by GNS Science and the University of Auckland, begun last year, has continued. The overall aim is to improve the basis for long-term planning and management of volcanic risk in New Zealand’s largest city. Very satisfactory progress has been made.
Public Education
An increasing emphasis on targeted public education activities was a feature of the year, with a focus on schools in particular.
A highlight was a new initiative for secondary schools involving modern teaching technology. EQC has employed education material specialists, Heurisko, to create a series of three virtual field trips for secondary schools over three years. The first – to the Auckland Volcanic Field – was carried out late in the year. A qualified teacher visited the location, supporting interaction between classes of students and experts. The programme gives students an understanding of the work of the geosciences community and an awareness of career opportunities within Earth Science. Encouraging more people into the discipline will help build understanding of the forces that have created New Zealand and thereby reduce its vulnerability to the natural disasters that those forces can produce.
EQC also carried out a regional schools exercise – Is Your Place Quake Safe? – the ninth in a series starting in 1999. This time the programme covered primary schools in the Nelson/Tasman area. The exercise not only educates but allows EQC to gather information on actual and likely household earthquake mitigation.
At Te Papa, EQC sponsors a schools programme that brings groups of pupils to the museum. Similarly, EQC supported a schools programme at the Hawke’s Bay Museum and Art Gallery.
A series of press and internet advertisements featuring natural disaster myths and facts was commenced in February. The advertisements examine common beliefs about natural disasters and provide the facts, supported by a relevant expert. They also encourage people to take action to prevent natural disaster damage to their homes.
Te Papa repeated its successful Earth Rocks earthquake awareness weekend in October and EQC again participated and provided support. EQC also supported a travelling road show called Tephra Trouble which visited centres in the North Island and Christchurch to communicate knowledge on volcanic hazards and their potential impact on New Zealand.
The first edition of a new electronic and print newsletter – Research Review – was produced during the year. The focus of the newsletter is on what is new in natural disaster research and extends EQC’s commitment to foster research and education in relevant areas of natural hazards science and engineering.
Other activity included a series of feature articles on recent natural disaster history and EQC’s claims and payouts. Each article was customised to a particular region. EQC also continued its regular activities such as the newsletters Rumblings and Rū Whenua and the display stand programme.
Managing the Natural Disaster Fund
The Natural Disaster Fund grew by $36 million to $5.57 billion during the year, an increase of 0.6 percent over last year’s total at balance date.
A severe fall in international share markets detracted from the value of EQC’s offshore equities, despite the fall in the New Zealand dollar contributing 12.5 percent to the return.
After the deduction of management fees, active equity managers underperformed the MSCI world benchmark by 2.0 percent. The past year was one of severe dislocation in share markets and accordingly most active managers struggled under the conditions. There was no change to the Fund’s structure and asset allocation during the year.
Reflecting the recessionary conditions both locally and overseas, domestic short-term interest rates plunged, reducing EQC’s cash returns. The Reserve Bank’s Official Cash Rate was 8.3 percent at the beginning of the year, and then rapidly fell to an historic low of 2.5 percent. As a consequence, bank deposits (RCDs) and Treasury bills produced declining income, with a combined return of 5.9 percent.
The average yield of New Zealand Government stock (NZGS) fell from 6.4 percent (30 June 2008) to 5.4 percent (30 June 2009), increasing the capital value of the bond portfolio. EQC’s total returns for NZGS and inflationindexed bonds, of an exceptionally high 9.8 percent and 11.9 percent respectively, were in line with the indices.
Approximately 67 percent of EQC’s portfolio is invested in NZGS and inflation-indexed bonds, and as at 30 June EQC held 11 percent of NZGS and 23 percent of inflation-indexed bonds on issue.
| Asset Class | Actual Return | Benchmark/Target Return |
|---|---|---|
| NZ Government Stock | 9.8% | 9.8% |
| NZ Government inflation-indexed bonds | 11.9% | 11.9% |
| Bank bills (registered certificates of deposit)/Treasury bills | 5.9% | 5.9% |
| Passive global equities | -16.6% | -17.2% |
| Active global equities | -19.2% | -17.2% |
| Total Portfolio* | 1.2% | 1.3% |
EQC is responsible for managing and administering the Natural Disaster Fund in a manner that ensures:
- best practice portfolio management,
- maximisation of returns without undue risk to the Fund as a whole, and
- avoidance of prejudice to New Zealand’s reputation as a responsible member of the world community.
As a signatory to the United Nations Principles for Responsible Investment, the Commission acknowledges internationally agreed standards for responsible corporate behaviour and employs the principles to guide its investment decisions.
During the year EQC became part of a formal working relationship with other Crown financial institutions to ensure it has the resources and information necessary to engage effectively with investee companies on responsible investment matters and to fulfill EQC’s obligation to avoid prejudice to New Zealand’s reputation.
The Commission has instructed its investment managers to exclude from its portfolio investments in companies engaged in the manufacture of cluster munitions and nuclear weapons. These exclusions follow the earlier exclusion of companies involved in the manufacture of anti-personnel mines and cigarettes and tobacco.
David Middleton
Chief Executive