EQC cover increased, taxpayers to foot the bill

Wreckage in Christchurch. Photo: Lynn Grieveson

The Government will raise EQC coverage by 50 percent, but has yet to top up the National Disaster fund. Taxpayers will be footing the bill if there is another disaster within the next decade. Thomas Coughlan reports.

EQC Minister Megan Woods announced much-anticipated amendments to the EQC Act on Tuesday, which will change the level of cover homeowners can expect from the commission. But the proposals won't recapitalise the National Disaster Fund, EQC’s reserve. This means the Commission would rely on the Crown Guarantee, effectively a taxpayer-funded bail-out, to meet the cost of disasters that may arise in the coming decade.

Under the proposals, EQC cover will be raised from $100,000 to $150,000 and contents will no longer by covered by EQC. Both of these reforms were announced by the former Minister, Gerry Brownlee, last June. Woods expects the amendments to pass by the end of the year.

The proposals follow a lengthy period of reform to EQC following the Canterbury Earthquakes in 2010-2011. After the first anniversary of the September 2010 earthquake, Brownlee and then-Finance Minister Bill English announced a review of EQC’s capacity and sustainability. In 2015, Treasury published a discussion paper on proposed changes, which Labour and National’s proposals have grown out of.

Show me the money

Neither of the parties' proposals addressed recommendations made in the discussion document dealing with the recapitalising EQC’s National Disaster Fund, the assets the organisation uses to meet claims.

The matter is even more acute following the Kaikoura Earthquake in 2016, which depleted the fund. A briefing given to Woods when she became minister said that the fund could be entirely depleted as early as the end of next year. It will take ten years to build the fund up to $1.75 billion, the amount needed to cover the “excess” on its current EQC programme.

The NDF is funded by the EQC levy, which is a charge on insurance purchased by homeowners. Last year’s budget raised the levy to $0.20 for every $100 of cover. EQC said this would help it build up the fund to $1.75 billion over ten years. The previous levy of $0.75 would have taken 30 years to replenish the fund. The fund stood at $5.7 billion at the time of the Christchurch earthquakes.

Woods’ briefing as the incoming Minister said the consideration of “EQC’s risk financing framework and indication of Crown appetite for risk transfer to EQC” should begin in the first quarter of 2018.

Woods today said discussions about the fund were “ongoing”.

“It certainly is work that’s begun with the Commission,” she said. “That’s something that the new interim chair is really aware that we need to look at as well”.

Labour and National have both seen it sufficient to ignore the issue of the fund’s financing in their policy announcements, hoping a disaster doesn’t strike in the ten years before the fund is replenished.

They may be right not to be concerned. The Treasury discussion paper even considered whether to get rid of the NDF altogether.

“Finance theory suggests the most efficient approach to financing would be to close the NDF and instead finance natural disaster risk centrally through the Treasury,” it said.

It went on to say, “[t]his is because, for low-probability high-impact risks, it is more efficient to pool resources against a diversified portfolio of risks, rather than create a range of ring-fenced funds for different risks”.

The paper erred on the side of recommending the NDF be retained because it “best reflects industry and community understanding of EQC as a premium-funded insurance scheme” and it “is likely to increase acceptance of EQC premiums reflecting the costs and risks associated with the scheme”.

In other words, the current system helps people to understand what EQC is and what it is for.

The Fund will be retained, but the current rate of replenishment means the Crown Guarantee will be the main source of cover for homeowners should a disaster strike in the next decade. Even when recapitalised, EQC's current $4.8 billion reinsurance programme along with the NDF will rely heavily on the Crown Guarantee to meet payments on future catastrophes.

The Treasury report also recommended that the Government allow EQC to purchase alternative risk finance like catastrophe bonds. Currently EQC can only purchase traditional reinsurance. The Government is unlikely to move on this. Alternative risk finance is unlikely to be competitive with traditional reinsurance in markets as small as New Zealand, as Newsroom found last year.

Natural hazards, and moral ones too...

Over-reliance on the Crown Guarantee raises other questions, including whether or not it is appropriate or equitable for the Government to prop up homeowners with the promise of a bail out in the event of a natural disaster.

Homeowners paying into the NDF through their EQC levy effectively pay for their own insurance. If the Crown Guarantee is activated all taxpayers including the 36.8 percent of New Zealanders who do not own homes will be forced to pick up the tab.

This risks being politically unpalatable in a time when the rate of home ownership is decreasing and questions are being asked about whether the current tax regime unfairly rewards homeowners, as was suggested in a paper from the Tax Working Group last week.

Woods said the scheme did protect homeowners and renters alike.

“One of the things that we saw very much in the Canterbury sequence is that it’s not just people who own their home who can find themselves without a home in the instance of a natural disaster,” she said.