EQC set to need bailout

The Press - - Front Page - MICHAEL WRIGHT

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.

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