Inside Money: EQC letter spells out funding, insurance model shake-up

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Despite the nine pages of 'Annex five' redacted under Section 9(2)(f)(iv) of the Official Information Act 1982, the latest Briefing to the Incoming Minister (BIM) from the Earthquake Commission (EQC) is a revealing document.

The BIM includes this hurry-up (within the bounds of airport security regulations) to the Minister responsible for EQC, Gerry Brownlee, to finalise the long-delayed review of the EQC Act, originally due for legislative update mid 2013:

"The review has been underway for just over two years," the BIM says. "There is a risk that as time passes, the insights and lessons learnt from Canterbury become harder to capture and address through legislative change."

Some of those lessons from Canterbury cover what EQC describes as its "operational response". Customer communication issues warrant a mention, as do the technical surprises thrown up by the various forms of ruination visited upon Christchurch in February 2011.

But, as the BIM notes, the Christchurch earthquake also prompted Treasury, in its 2014 'Investment Statement' to call for a more co-ordinated government approach to risk management.

(However, the Treasury report says, in a footnote, any financial "risk pooling" would probably exclude "specialised financial management entities such as the RBNZ or the CFIs [which includes the New Zealand Super Fund and ACC fund]".)

"Changes and improvements to the Crown's broader risk management framework could have implications for the way EQC undertakes its financial risk management activities," the BIM says.

For instance, the EQC may have to alter its reinsurance strategies or even change the "form in which NDF [National Disaster Fund] assets are held". The last point hints at an uncertain future for the NDF, which stood at about $6 billion before the Christchurch quakes.

According to the latest EQC 'Statement of Intent', the NDF held about $2.3 billion as at June 30 this year - mostly in cash (EQC has ceased its more complex funds management activities for now). The NDF will soon be emptied completely as the Christchurch rebuild ramps up.

However, even with the tripling of EQC insurance levy in 2012, which saw annual revenue collected jump from $86 million to the current $260 million, the NDF would take about 30 years to reach its pre-Christchurch level - barring any other major disaster.

The BIM says the government could raise the EQC levy further - a politically-difficult and probably inefficient move - or contribute cash directly to reboot the NDF.

"Direct investment would require a decision by Government to allocate financial resources to rebuilding the NDF now as opposed to spending on other priorities," the BIM says whimsically.

Until the NDF replenishes, the government would be on the hook anyway for the first $1.5 billion of disaster payouts before the current $4.5 billion of EQC reinsurance kicks in.

The BIM highlights further complications in EQC's disaster scenario planning: the recent change from 'full replacement' to 'sum insured' private house insurance could lead to lower EQC revenue, and; no-one has any idea of the exact nature of private house insurance (which is a pre-requisite for EQC cover) in NZ.

On that last point, EQC proposes "the establishment of a national insurance database" while acknowledging there might be concerns about "privacy of information, commercial sensitivity and ownership and management of information".

And while they were at it, the anonymous EQC BIM-creators also put it out there that the fundamental insurance structure of the organisation is up for review, with three choices on the table: the current 'first loss' approach; a 'co-insurance' model, where government and private insurers share losses proportionally, or; a 'reinsurance pool' approach "in which the government helps private insurers bear the aggregate costs associated with their policies after a disaster".

Please refer to 'Annex five' for further information.