Is it $5b or $15b?

September 7th, 2010 at 8:09 am by David Farrar

said on Q+A:

JOHN Yes in the case of , so the Earthquake Commission has enormous funds, 15 billion dollars, largely invested offshore very logically, because of course if there is an earthquake you don’t want those funds invested in the country that’s affected. They have about six billion in cash. So this is well and truly affordable from that perspective.

But if one goes to the EQC latest annual report they say:

EQC has custody of the Natural Disaster Fund, around $5.6 billion of public money.

The EQC balance sheet and statement of equity also use the $5.6 billion figure. I can’t see another $9 to $10 billion hiding in the accounts. Possibly it is a reference to their reinsurance, which is treated as an expense. But I can’t find out the total value of any reinsurance. In the notes to the accounts, they mention:

Legislation recognises that EQC’s premiums may be inadequate to meet its liabilities in any one year by enabling it to set aside any annual surplus free of tax in the Natural Disaster Fund and, in the case of a very severe catastrophe (that exceeds both the Fund and reinsurance recoveries) by providing for a Crown Guarantee. The Commission currently has the capability to cover a 1‑in‑1000-year event with an estimated value of up to $8.1 billion before having to call on the Crown Guarantee.

That is still some way off $15 billion.

Now it is possible the PM was given the wrong figure. But it is also possible the $15b is correct, and I am just missing something.

If anyone can clarify, that would be useful.

UPDATE: A government official has e-mailed to say that the EQC report is correct – reinsurance kicks in after the first $1.5b of costs, and if you take that into account the total value of the fund is a bit over $8 billion. They also say that at this stage the best estimate of the call on the fund is $1 billion.

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13 Responses to “Is it $5b or $15b?”

  1. SeaJay (20 comments) says:

    clarification? sure -
    our p.m makes shit up.
    end of story, aw shucks, slurp

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  2. KiwiGreg (3,169 comments) says:

    I’m guessing Key mispoke.

    If nothing else the earthquake has shown how completely redundant the EQC is.

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  3. Monty (962 comments) says:

    There was debate about this last night on Red Alert – I am sure Phil Lyth will be able to provide a lucid explanation with a couple of other snippets of information.

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  4. ben (2,396 comments) says:

    Good post David.

    Yes, what is the earthquake commission for? What is it doing that private insurance doesn’t do? You only get EQC coverage if you have private insurance. You don’t get to opt out of it. And I’ll bet good money without any competitive pressure on them and without a high profile the EQC is a horribly inefficient body. I think they run those ads with the Shortland Street bloke. But then since private insurance internalises the costs of earthquakes, they face the correct incentives to educate about prevention, whereas the EQC, whose masters are political, does not.

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  5. Jimbob (640 comments) says:

    Let’s hope the $5.6 billion is avaliable in cash and not in overseas share markets. How long can the Government keep adding it on to the tab?

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  6. Nigel (506 comments) says:

    My recollection was Key said on TV3, 5b in assets & 10b available ( reinsurances presumably ).

    Would you trust EQC being replaced by AIG ???, seriously the EQC is not expensive & global insurance hardly the most stable business. Seems to me we should leave it the way it is ( EQCover costs five cents for every $100 insured (0.05%). The maximum is $50.00 + GST for cover of $100,000 on the dwelling and $10 + GST for cover of $20,000 on personal belongings. )

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  7. Phil Lyth (12 comments) says:

    Thank you Monty.

    This debate has been going for 48 hours, initially at Public Address. Did the government official say Key was wrong re $15b? Or just about reinsurances?

    I am still waiting to hear from Kevin Taylor.

    EQC had assets making up the Natural Disaster Fund at 30 June 2009 of $5.6b (rounded to nearest $100m, I love doing that). At 31 May 2010, Financial Statements of Govt showed EQC at $6.1b – presumably ongoing recovery of global equities which are around 1/3 of assets.

    The ‘$8.1b capacity’ figure above implies reinsurance cover of $2.5b, backed up by Key at post-Cabinet pres conf yesterday.

    Must run, things to do.

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  8. wreck1080 (3,719 comments) says:

    Whats 9 billion bucks between friends?

    The extra 2 billion that alan hubbard just received would have helped too.

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  9. scrubone (3,044 comments) says:

    The extra 2 billion that alan hubbard just received would have helped too.

    That comment is stupid on so many levels.

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  10. scrubone (3,044 comments) says:

    The EQC covers disasters so large and widespread that it’s not realistic for private insurance to cover them.

    As a nation that is subject to a lot of the things, it’s prudent to ensure someone is making sure that a large disaster like this one is anticipated and planned for financially.

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  11. trout (898 comments) says:

    The EQC may have been established to cover ‘acts of god’ (and war – it used to be ‘the earthquake and war damage commission’) because such events used not to be insurable with private companies.

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  12. wreck1080 (3,719 comments) says:

    @scrubone – perhaps you are the stupid one. Must be hard living in a world where everyone else except for yourself is wrong.

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  13. mavxp (493 comments) says:

    I recently attended a conference with a presentation by EQC. It is a very small organisation – only 22 full time staff. They can mobilise many more on a contract basis to deal with claims – and will do so for the mammoth task of processing all these claims.

    It is there to ensure private insurance companies do not fall over in the event of a major event. Their gambit is wider than earthquakes and they do cover storm damage, landslides etc. For the insurance they provide the premiums are very low and they invest around 10% in research into improvements in engineering design and support the engineering profession in New Zealand.

    If you want to understand the reason why we have so few deaths in this event – it is because of our engineering and design standards -plain and simple. This is developed by researchers at our leading engineering universities (Canterbury and Auckland) who are among the world leaders particularly in structural engineering design for earthquakes. Much of the funding for this research comes from EQC. You wont get that from any private company.

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