2009/10 financial review of the Earthquake Commission Report of the Commerce Committee Contents Recommendation 2 Introduction 2 2009/10 performance 2 Canterbury earthquake recovery 3 Natural Disaster Fund 4 Research funding 5 The public s disaster preparedness 5 Insurance coverage 5 Appendix 7
Earthquake Commission Recommendation The Commerce Committee has conducted the financial review of the 2009/10 performance and current operations of the Earthquake Commission, and recommends that the House take note of its report. Introduction The Earthquake Commission (EQC) was established under the Earthquake Commission Act 1993 to help New Zealand homeowners mitigate and recover from the effects of natural disasters. It has three main functions: Insuring residential property against loss or damage caused by earthquakes, volcanic eruptions, hydrothermal activity, tsunamis, and natural landslips. It also provides limited cover for land loss from such hazards. Administering the Natural Disaster Fund, including its investment and reinsurance. Facilitating research and education about natural disaster damage and its mitigation. The commission earns income from premiums and investments. Its expenses include reinsurance, payment of claims, and investment costs. 2009/10 performance In 2009/10 the Earthquake Commission recorded a net surplus of $355.1 million, which increased the value of the Natural Disaster Fund by 6.4 percent to nearly $6 billion. The surplus was considerably higher than that for 2008/09 ($35.6 million), despite global markets remaining volatile. We are satisfied with the commission s performance in 2009/10, which included managing a total of 7,813 claims, 75 percent of which resulted from just two events a magnitude 7.8 earthquake in Fiordland in July 2009, and storms in May and June 2010 which caused widespread flooding and landslips. The remote location of the Fiordland quake resulted in a relatively modest volume and level of claims; payments for the year totalled $20.8 million, compared with $43.8 million the previous year. Audit report The Office of the Auditor-General issued an unqualified audit opinion on the commission s 2009/10 financial statements. It assessed the commission s management controls and financial information systems and controls as very good. The commission s service performance framework was assessed as needing improvement, particularly in establishing a clearer picture of impacts and outcomes, and externally-focused performance targets. 2
Canterbury earthquake recovery The 2009/10 annual report had been signed off for printing when a magnitude 7.1 earthquake hit the Canterbury region on September 4, 2010, followed by numerous aftershocks. The chairman s report noted that the Natural Disaster Fund, supported by the commission s reinsurance contracts, would be up to meeting EQC s share of the rebuilding costs. The commission would also play its part in doing whatever else was needed, as part of a whole-of-government response. 1 The fortunate fact that the earthquake caused no deaths and few serious injuries tends to obscure the scale of the event, and the deep distress it has caused. It will probably rank among the year s top five earthquakes worldwide, and the 190,000 claims registered with EQC (not counting an estimated 50,000 with private insurers) are almost a third as many as resulted from Hurricane Katrina, the biggest natural disaster in recent memory. It is clear that the earthquake represents EQC s greatest challenge to date. Accordingly, our review focused on the commission s response to the disaster, and the issues it raises for the future. Among them are the adequacy of New Zealand s institutional arrangements for natural disaster insurance, EQC s role in those arrangements, and the size and structure of the Natural Disaster Fund. Understandably, addressing these issues will need to wait until the immediate priorities have been dealt with; we note that this is unlikely to be before the second quarter of 2011. We will monitor progress with interest. EQC s progress with claims Normally, EQC is a small organisation with a staff of 22, but it maintains plans for scaling up as needed. It has done so rapidly, and now manages over 1,100 people, most of them on contract. It considers that its catastrophe response plan and systems have generally worked well in the transition. In the three months since the quake, EQC has assessed about 56,000 claims, and is working through the rest at a rate of about 1,200 a day. It has brought in qualified loss adjusters from overseas to supplement those available in New Zealand, and has commissioned geotechnical work on over 25,000 properties so far. It has also introduced a fast-track process for cash payments for repairs under $10,000 in value, where no structural damage is involved. For the repair of the 50,000 to 60,000 homes with an estimated $10,000 to $100,000 of damage, EQC ran an international tender process which resulted in a contract with Fletcher Construction, which EQC will manage. We agree with the rationale that this approach is more likely to guarantee quality, and to provide locally-sourced labour and materials, than simply providing cash compensation. Communications EQC acknowledges that communication with the public could have been managed better in the first few weeks after the initial earthquake. It has learned from the experience. It notes, however, that it may never be possible to gear up call centres in an emergency as 1 Earthquake Commission, 2009 2010 Annual Report, p. 7. 3
quickly as the public would like; nor is it possible to provide detailed, technical answers straight away as to how quickly homes can be repaired. EQC s priority is to meet each homeowner to assess their circumstances, but it is likely to take the first quarter of 2011 to do so for all of the remaining 100,000 claims. We acknowledge that the task facing EQC is massive, with many aspects such as communications involving the wider Government, not just the commission. We consider on the whole that it has done an admirable job, and particularly appreciate the time taken by its senior staff in meeting with the public to answer questions. We note that it has also made use of alternative communications channels, such as talkback radio, the internet, and social media platforms such as Twitter, and has extended its initial generic information to reach ethnic communities. Among the lessons for the future, we stressed the importance of keeping open a channel for information to be fed back from the public, as this could help EQC to identify issues, and priority areas for its engineers to focus on. It should also make use of those people, including Members of Parliament, to whom the public looks for information in such a situation. Using local people and resources We emphasised the importance of using Canterbury tradespeople and apprentices in the rebuilding, given that much of their work was disrupted by the earthquake. We were assured that in the project management arrangements between EQC and Fletcher Construction there was a clear undertaking that it would source labour and supplies from Canterbury first, and will import resources only when they are not available in New Zealand. We made it clear that we will expect EQC to monitor adherence to this undertaking closely to ensure that every opportunity is provided to local people. We note that it has been necessary to bring loss adjusters in from Australia, and suggested that EQC should investigate training programmes to expand New Zealand s capacity in this field. The commission said it would do so when priorities allow. It says it has monitoring and audit systems for maintaining the quality and consistency of claims assessments. EQC s role Given the scale of the Canterbury earthquake, EQC has been required to go beyond its statutory role of simply making cash payments on claims and to engage actively with local and central Government agencies and private insurers in providing a coordinated response. In significant moves beyond its normal brief, it has undertaken hands-on oversight of land remediation work, and is directly managing the repair of homes by Fletcher Construction. This de facto expansion of its role raises a number of issues which we believe the Government should consider, including whether its statutory mandate as an insurer geared to making cash payments remains appropriate. Natural Disaster Fund Claims against EQC are paid out of the Natural Disaster Fund, which has built up from premiums paid in and invested over the past 60 years to almost $6 billion. The fund is supplemented by reinsurance overseas, and is backed by a Government guarantee. EQC 4
has arrangements with global reinsurers to make up to $2.5 billion available once it has paid the first $1.5 billion in claims. Arranging the regular renewal of its global reinsurance is among the commission s priorities for the first quarter of 2011. To enable the reinsurers to assess risks and premiums, it will be required to account carefully for the activities it is undertaking at the Government s request beyond its statutory role. Sustainability of the fund Although the cost to the commission of claims from damage in Canterbury could well exceed $2 billion, the commission is not concerned about its ability to meet claims. About $1.9 billion of the Natural Disaster Fund is in readily accessible cash or international equities, sufficient to meet the $1.5 billion required for access to global reinsurance funds. For the longer term, however, the fund s cash flows will be reduced if it is $1.5 billion smaller, and its sustainability will need to be addressed, including the desirable balance between the fund s size and reinsurance, and between EQC and private insurance. We note that such policy issues have been raised over the years in briefings to incoming Ministers, and we believe they should form a key part of a Government review of arrangements with the commission once immediate priorities allow. Research funding We strongly support the commission s funding for GeoNet, the national hazard monitoring network, and for university research into New Zealand s seismic risks. Not only is such investment clearly worthwhile for the country s disaster-preparedness, but increasing knowledge about the risks reduces the uncertainty premium that reinsurers charge. It is of interest that the New Zealand Institute of Economic Research has found that the reduction in EQC s reinsurance costs as a result of GeoNet s research equates to almost twice the value of its investment in it to date. The public s disaster preparedness The experience in Canterbury has highlighted the desirability of increasing public awareness about what people should do both to prepare for disasters, and to smooth the claims process in their aftermath. For example, as EQC payments are made out to those whose names are on the title, issues can arise where a property remains in joint ownership after marital separation. EQC intends to capitalise on the heightened public awareness by running an information campaign as soon as initial priorities have been dealt with. Insurance coverage Most people appear to be aware that they must have private insurance to be covered by EQC the national average of uninsured properties is estimated to be about 5 percent, with Christchurch better than average. But it is still of concern that about 150 of the Canterbury claims reviewed so far are not covered, and that in some pockets of the country lack of insurance significantly exceeds the national average. (The scale of the problem can only be estimated, as private insurers are not required to disclose their policy lists.) We note that the option of guaranteeing universal coverage by including an EQC levy in local authority rates has been floated in the past, and we believe it would be worth revisiting. 5
The $100,000 maximum amount that can be claimed, and the premiums that EQC levies, are based on the notional cost of building a modal home. We note that this value has remained unchanged since 1993 despite increases in construction costs, and believe it too should be reviewed. EQC s coverage of land also raises issues that could bear examination. Land remediation claims represent the fastest-growing portion of EQC s payouts, yet no separate premium is charged for land coverage. As well as having implications for the sustainability of the Natural Disaster Fund, this appears inequitable, as those with more valuable properties effectively receive far greater coverage. We also note that many people are unaware that they must pay an excess on land claims, and some of us question the appropriateness of such a charge. 6
Appendix Approach to this financial review We met on 9 December 2010 and 10 February 2011 to consider the financial review of the Earthquake Commission. We heard evidence from the Earthquake Commission, and received advice from the Office of the Auditor-General. Committee members Hon Lianne Dalziel (Chairperson) Hilary Calvert David Clendon Clare Curran Te Ururoa Flavell Melissa Lee Peseta Sam Lotu-Iiga Hon Nanaia Mahuta (until 9 February 2011) Hon David Parker (from 9 February 2011) Katrina Shanks Jonathan Young Evidence and advice received Earthquake Commission, 2009 2010 Annual Report. Earthquake Commission, Statement of Intent 1 July 2009 30 June 2012. Office of the Auditor-General, Briefing on Earthquake Commission, dated 9 December 2010. Organisation briefing paper, prepared by committee staff, dated 8 November 2010. 7