Earthquake Commission

Publications

Annual Report
2008-2009

Statement of Service Performance

Output Class 1: Claims handling and the Catastrophe Response Programme

This output class comprises the maintenance of EQC’s state of readiness to meet the requirements of the Crown for the compensation of residential property owners following a natural disaster and the incorporation of this readiness, so far as is possible, into normal daily operations.

It contributes to the impact of Having a catastrophe response programme that delivers adequate claims handling capacity and through that to the Government’s outcome of Safer communities and rapid recovery from natural disasters.

Performance targets and results

1. The programme’s plans and schedules to maintain its currency are adhered to (e.g. schedules for document maintenance, testing and training).
   

   Achieved. Plans and schedules adhered to and all training and exercises undertaken.

2. Surveys of claimants show that settlement times and standards remain acceptable to a majority of claimants.

   Achieved. Satisfaction with settlement time – 68% and overall satisfaction with the service – 80%.

3. An external review of the Catastrophe Response Programme is completed and any recommendations for meeting best world practice are considered and implemented where appropriate.

   Achieved. Review completed in May. Recommendations being worked through, with regular progress reports made to the Board.

4. EQC has responded to its risks and challenges as described in the following table.

EQC’s challenges and risks Asset class	EQC's Response	Results
An ability to assess rapidly the requirements of an EQC response to a natural disaster occurance.	Maintain computer applications that provide the analysis and insights to enable the necessary assessments and decisions to be made (EQC has an earthquake hazard and analysis model, a systems dynamics model and a web-based claims management system).	Achieved. Computer applications maintained and enhanced. Models used as basis for calculating event responses. Claims system operational as at March 2008.
Limited numbers of loss adjusters, engineers, valuers and other specialists required to process claims.	Secure agreements with loss adjusting firms and other service providers, in Australia and New Zealand, for the provision of specified numbers of people in a disaster. Retain a cadre of loss adjusters on a guaranteed minimum income.	Achieved. Agreements in place with New Zealand and Australian loss adjusting firms for the provision of specified numbers of people in a disaster. Training of other specialists undertaken. Achieved. Eighteen loss adjusters and estimators on contract. New entrant scheme under development.
EQC’s ability to quantify the amount needed to repair damage could be hampered by the effect on construction costs of post-event demand surge.	Fund research into the likelihood and extent of post-event demand surge and its possible effect on EQC’s claims costs.	Achieved. A study of post-event demand surge has been commissioned, with a report due in late 2009.

Output Class 2: Research

This output class includes research in fields relevant to natural disaster damage, methods of reducing or preventing natural disaster damage, and the insurance provided under the Earthquake Commission Act.

Through its advocacy of, and investment in, science and engineering research, EQC contributes to natural hazard risk assessment and disaster reduction in New Zealand. The Commission’s research activities contribute to the impact of Sustaining capability and completing research in order to reduce the risk of the hazards EQC insures against. By contributing to a reduction in hazard risk, the research helps to reduce the Crown’s liabilities and protect its assets and helps to make New Zealand communities safer from natural disasters. Research into construction and engineering methods can also have economic spinoffs and contribute to a knowledge-driven economy.

Performance targets and results

1. The planned programme of investment in research for the year is accomplished, with each project either meeting agreed targets and milestones or obtaining a peer review of at least “satisfactory”.

   Achieved. Twenty-two research projects were completed during the year, all within agreed budgets and timeframes. Peer reviews received to date are all satisfactoryor above.

   or above.
2. Results of research funded by EQC are disseminated to the research, planning, construction and recovery sectors within two months of completion of satisfactory peer review, and there is evidence of a satisfactory rate of transfer into practice.

   Achieved. Results of completed research have been disseminated and the rate of application by recipients appears satisfactory.

3. EQC supports the Hazards Risk Management Standard project led by Standards New Zealand.

   Partially achieved. Discussions have been held with key stakeholder groups to develop the scope and intended application framework for a natural hazard risk management standard.

4. The university funding programmes meet contracted requirements for teaching, research and public activities.

   Achieved. EQC’s university-based teaching and scholarship programmes have contractual arrangements specifying EQC’s requirements and these have been fulfilled.

5. The GeoNet project meets contracted requirements intended to keep it up-to-date and providing a high level of service in data provision and hazard warning.

   Achieved. The development and roll-out of GeoNet continues on time and on target. The workplan for 2009/10 has been received and approved. All service level requirements for GeoNet’s operation have been fulfilled.

6. GeoNet review completed by 30 June, with recommendations about future funding.

   Achieved. The GeoNet strategic review was completed with international input. The dominant conclusions of the review are that the current scope and performance under the GeoNet contract are excellent. A strategic plan for the future direction of GeoNet has been received.

Output Class 3: Public education

This output class has two elements:

• Public education about seismic hazards and methods of reducing or preventing seismic disaster damage,
• Public education about EQC’s role and the importance of having adequate insurance on residential and personal property.

These outputs reflect EQC’s functions under Section 5(1)(e) of the Earthquake Commission Act: “Facilitate research and education about matters relevant to natural disaster damage, methods of reducing or preventing natural disaster damage, and the insurance provided under this Act.” They contribute to the impact of Improving levels of knowledge and activity of New Zealanders to make their homes safer from natural perils, understand EQC’s role and take out adequate insurance.

In turn, this impact contributes directly to the Government’s outcome of Safer Communities and indirectly to the outcome of Efficient management of the Crown’s assets and liabilities, because the Crown’s fiscal risk is reduced as more households take precautions against damage from seismic events.

Performance targets and results

1. The percentage of New Zealand households that have taken preventive steps to mitigate natural disaster damage has increased in the year to 30 June.

   Achieved. The independent Nielsen quarterly surveys show that disaster mitigation activity (as indicated by levels of secured hotwater cylinders, tall furniture and foundations) has increased by 2.2 percentage points from 45.3% to 47.5% over the course of the year.

2. The percentage of New Zealanders who understand EQC’s role has increased in the year to 30 June.

   Achieved. The Nielsen surveys show that the percentage of New Zealanders who understand EQC’s role has increased by 1.4 percentage points during the year, moving from 64.2% to 65.6%.

3. Public understanding of the insurance under the Act has increased in the year to 30 June as shown by evaluation of social marketing efforts.

   The Nielsen surveys show that awareness of EQC’s insurance role has decreased by 8 percentage points to 56% over the past year.

4. EQC has responded to its risks and challenges as described in the following table.

EQC's challenges and risks	EQC's response	Results
Experience in New Zealand and overseas is that public expectations, including expectations of EQC are developing rapidly.	EQC’s communications will be cognisant of public expectations and will endeavour to influence them where appropriate.	Achieved. All form letters in EQC’s claims system revised to improve clarity and tone so that claimants have realistic expectations of EQC and its claims handling process.
Communications methods and habits are changing rapidly.	EQC will use modern ways of communicating its public education messages, including use of new media such as the internet and innovative use of old media such as its exhibitions at Te Papa and Auckland Museum.	Achieved. EQC employed a range of methods with which to communicate its messages, including the internet, press advertising, newsletters, museum exhibitions, feature articles and a reality television programme.
The public tends to downplay the risk of disasters affecting them and fails to take proper action to prepare.	EQC designs its social marketing efforts with due consideration of the research that has been done into achieving behavioural change in society.	Achieved. Reflecting research that indicates EQC must engage more actively and closely with communities to achieve its goals, a regional public education programme is to be run in Kapiti in early 2009/10.
The public is swamped with advertising and social marketing messages and EQC’s message may not attract attention.	EQC has identified “trigger points” at which its own mitigation message will be particularly apposite to New Zealand families, and “strike while the iron is hot”. EQC also seeks to align its message content and timing with that of other agencies tasked with delivering similar home safety advice.	Achieved. Ongoing availability of “Quakesafe Starter Packs” for homebuyers in Masterton. Alignment with Civil Defence on the "Aftershock" reality television programme and also in the development of the Kapiti pilot programme.
The opportunity for grabbing the public’s attention provided by the news of a disaster occurrence at home or overseas should be recognised and prepared for.	EQC’s decision and funding systems will remain sufficiently robust and flexible to respond to urgent needs.	Achieved. Mitigation advertising carried out following the Sichuan earthquake, the Australian bushfires and the Italian earthquake.

Output Class 4: Policy advice

This output class includes the provision of policy advice to the Government on issues related to EQC’s statutory functions, including:

• Natural disaster damage,
• Methods of reducing or preventing natural disaster damage,
• Government response to disasters,
• Relevant risk management issues,
• Management of the Natural Disaster Fund and protection of its value,
• Terms and conditions of the insurance.

It contributes to all of EQC’s impacts, and through them to the Government’s outcomes of Safer Communities and rapid recovery from natural disasters and Efficient management of the Crown’s assets and liabilities.

Performance target and result

All requests for participation in policy preparation are met to the satisfaction of the Minister or departments concerned and are within agreed timelines.

Achieved. All Ministerial enquiries during the year were responded to within agreed timelines.

Output Class 5: Management of the Natural Disaster Fund

This output class involves administration of the Fund, including collection of the premiums payable, and, so far as reasonably practicable, protection of the Fund’s value through the investment of money held in the Fund and reinsurance in respect of the whole, or part of the insurance provided under the Act. It reflects EQC’s functions as set out in section 5(1)(b), (c) and (d) of the Act and contributes directly to the Government’s outcome of Efficient management of the Crown’s assets and liabilities.

Performance targets and results

1. The reinsurance programme reduces the net risk to the Natural Disaster Fund and the Crown.

   Achieved. Computer modelling shows the reinsurance programme for the 2009/10 year reduces the risk of the Fund falling to zero in any year by 79.5% and of falling below $2 billion in any one year by 53%, compared to having no insurance in place.

2. Investment performance achieves targets set in the Statement of Investment Policies, Standards and Procedures.

   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%

   * The target return for the total portfolio is 1% plus the NZGS index return, over a rolling 10-year period. The structure has not been in place long enough to compare 10-year returns. For the five years to 30 June 2009, the actual portfolio return was 5.0% versus the target of 7.7%.

3. EQC has complied with its asset allocation strategy and investment managers have complied with their agreements.

   Achieved. This included investing in approved asset classes only, maintaining asset classes within specified ranges, ensuring cash was invested in banks with high credit ratings, receiving compliance and audit reports from custodians and fund managers, and reporting on the Fund to the Board and investment committee.

4. EQC’s investment management costs are in line with international peers.

   Achieved. An international investment benchmarking company employed by EQC shows that EQC’s investment management costs are below the median of its international peers.

5. EQC has managed and administered the Fund in a manner consistent with best practice portfolio management, maximising return without undue risk to the Fund as a whole.

   Achieved. While the Fund’s global equity returns were adversely affected by the severe volatility on global markets, best practice portfolio management was maintained and the Fund realised a positive return for the year.

6. EQC has acted in accordance with its Responsible Investment Policy Standards and Procedures and includes in its annual report comment on the extent to which social, ethical and environmental issues have been considered in EQC’s investment process and EQC’s proxy voting policy.

   Achieved. EQC has met its responsible investment obligations and the annual report meets these requirements.

7. EQC has validated the premiums paid to it by insurance companies by completion of the programmes of records checking and external audit, with any qualifications reported in the latter having been investigated and resolved.

   Achieved. The programmes of records checking and external audit were completed. Eight external audit opinions were received and none were qualified.

8. EQC has responded to its risks and challenges as described in the following table.

EQC's challenges and risks	EQC's response	Results
Investment of the Fund to protect its value and maintain standards of international best practice (including with regard to responsible investing), is a complex task requiring specialised knowledge, wideranging expertise and constant vigilance.	Employ the necessary expertise on staff to be able to manage and control, with assistance from professional advisers, the custodians, investment managers and other specialists who can ensure required standards are achieved and maintained.	Achieved. EQC employed an additional professional so that the investment team has a full complement of staff with the necessary expertise to carry out its functions.
Building costs may continue to increase, resulting in higher payouts for EQC, and increased risk to the Fund. The maximum sums insured under the Act have not been adjusted since the Act’s inception in 1993, compromising their original purpose.	Press for the maximum sums insured (the “caps”) on EQC’s cover to be adjusted to account for these inflationary trends and stabilise EQC’s liability.	Achieved. The briefing to the incoming Minister included a recommendation to increase the maximum sums insured.
Reinsurance costs and the financial security of EQC’s reinsurers are influenced by external factors like major disasters overseas and the performance of the financial markets.	Manage potential volatility of reinsurance pricing by forward purchasing and, if competitive, alternative risk transfer products. Manage counterparty credit risk by applying a minimum claims paying ability rating of A (Standard and Poors) over the entire programme, limiting capacity provided by companies rated A-, market surveillance and analysis by EQC’s reinsurance brokers, and maintaining the ability under the reinsurance agreements to replace reinsurers on downgrading in some circumstances.	Achieved. The 2009/10 reinsurance programme continues the three-year tranching arrangement used to manage the volatility of the reinsurance premium levels. No alternative risk transfer products have yet been found to be as effective as current arrangements at achieving EQC’s objectives for its reinsurance programme. Achieved. At renewal (2009/10), the weighted counterparty risk rating of the reinsurance programme was A+. Capacity of companies rated A- was 5.8%. The 2009/10 treaties retain the clause that allows cancellation by EQC of reinsurers that are downgraded.

Output Class	Revenue	Expenditure	Revenue Budget	Expenditure Budget
Claims handling and the Catastrophe Response Programme	Nil	$58.3 million	Nil	$9.6 million
Research	Nil	$10.4 million	Nil	$10.7 million
Public education	Nil	$2.7 million	Nil	$4.1 million
Policy advice	Nil	Nil	Nil	Nil
Management of the Natural Disaster Fund	$163.2 million	$56.2 million	$476.2 million	$57.5 million

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