EQC: Taxpayers won't be too exposed once coverage cap doubles

The doubling of the EQC cap is unlikely to see the state-backed insurer lumped with materially higher claims. Photo / Mark Mitchell

The amount of cover the Earthquake Commission (EQC) provides homeowners in the event of a natural disaster is due to double.

The Government last year announced that from October 1 this year, EQC will cover the first $300,000 of damage to a residential building, leaving the property owner's private insurer to cover the cost of damage above this level.

The change will transfer risk from private insurers to the state-backed insurer, at a time private insurers are pricing policies more accurately according to risk and building costs are rising.

However, EQC's modelling suggests the change is unlikely to see it lumped with materially larger claims.

EQC's chief financial officer Fraser Gardiner told the Herald only around 9 per cent of EQC claims are likely to surpass the existing $150,000 cap in the event of a magnitude 7.5 "Wellington fault" event.

Accordingly, EQC is only increasing its reinsurance cover by an initial 7 per cent, to $7.2 billion.

EQC's agreements with its reinsurers require it to cover the first $1.75b of damage, before it draws on reinsurance cover.

So, in the event of a massive earthquake that caused $10b of damage to residential buildings, EQC would cover the first $1.75b, reinsurers would cover the next $7.2b, and the Crown would step in to cover the remaining $1.05b.

But, because EQC's funds were depleted following the 2010/11 Canterbury Earthquakes, it would also need the Crown's help to cover the initial $1.75b.

EQC's Natural Disaster Fund, which is funded by levies imposed on homeowners with private insurance, currently has $250 million in it.

The levies, collected by private insurers on behalf of EQC, are due to rise from the current maximum of $345 per year per dwelling, to $552, to account for EQC taking on more risk.

The change will occur over a year from October 1, as homeowners come to renew their policies.

The transfer of risk should in theory see private insurers cut some, particularly higher risk, policyholders' premiums, although savings might get lost in the wash with high levels of inflation.

Asked whether EQC would likely increase its reinsurance cover again next year, once the change is more bedded in, Gardiner recognised EQC's potential liabilities will increase as the new EQC cap is applied to new or renewed insurance policies.

He said EQC continues to assess its reinsurance needs, taking a number of factors into account, including the availability of well-priced cover.

"We are also continuing to investigate opportunities to diversify our risk transfer programme in other products that support the EQC scheme and represent good value for homeowners," Gardiner said.

He said these products could include "alternative capital markets products", like insurance-linked securities, such as catastrophe bonds.