EQC set to need bailout

The Earthquake Commission (EQC) may need a Crown bailout as its funds are exhausted by the November 2016 earthquake and an $800 million shortfall looms.

A briefing to new EQC Minister Megan Woods, released by the Government yesterday, noted the commission’s accounts were close to empty following the magnitude-7.1 quake and may run into the red.

An EQC spokesman said the commission’s bank deposits and investments totalled $827 million at June 30. Its outstanding claims liabilities were $1.61 billion.

By law, the Crown is obliged to meet any liabilities EQC cannot cover itself.

‘‘Following the November 2016 Kaiko¯ ura earthquake, modelling of the expected liabilities suggested that the Crown’s guarantee under section 16 of the [EQC] Act might be triggered for the first time since EQC was created in 1945,’’ the report said.

‘‘While a drawdown on the Crown guarantee seems unlikely (in the absence of another significant event), EQC and Treasury agree there is benefit in agreeing the trigger and mechanism for calling on the Crown guarantee ahead of it being required.’’

Woods said the Government was committed to ensuring EQC’s premiums reflected expected longterm costs, including for reinsurance and scheme administration, of the natural hazards covered by the act.

The November 1 premium increase from 15 cents per $100 insured to 20 cents per $100 insured would ‘‘assist EQC in meeting its long-term costs’’, she said.

Also, as long as there were no substantial disaster events ‘‘over the near term, it would help in rebuilding the Natural Disaster Fund (NDF)’’, which covered EQC’s liabilities.

Woods was seeking ‘‘further clarity’’ about EQC’s projected liability from remedial repairs. By the end of the 2015-16 financial year, EQC had fielded 10,492 calls to investigate supposed defective repairs.

The report said EQC and Treasury had started planning for how a Crown guarantee would be made, including drawing up a funding deed.

The EQC spokesman said details were being finalised and it was not yet known how much money the Crown may have to provide. EQC was required to inform the Government if its deposits and investments fell below $200m. Its accounts were audited every six months by independent actuaries to provide liability estimates, the spokesman said, ‘‘as is normal practice when insurers cannot be certain of the final cost of claims from events which have occurred’’.

The commission’s NDF was financed by investing government stock, bonds and global equities and by buying reinsurance overseas. It has long been accepted that New Zealand’s succession of natural disasters, starting from the September 2010 earthquake, would exhaust its reserves. In 2011, the Government trebled the EQC levy paid through homeowners’ insurance premiums, to help replenish the fund.

The report to Woods noted it could take 30 years to rebuild the NDF to the current reinsurance deductible – essentially its excess on any claim to reinsurers – of

$1.75b. Any costs under that (the November 2016 earthquake is expected to cost EQC $500m to

$600m) must be paid out of the fund itself.