Another $1 billion
September 6th, 2011 at 11:00 am by David FarrarThe NZ Herald reports:
The taxpayer’s share of the $29.5 billion bill for rebuilding Christchurch is set to rise yet again – by as much as $1 billion according to Prime Minister John Key – after a High Court decision late last week.
Late on Friday the court issued a declaratory judgment confirming the Earthquake Commission’s maximum cover of $100,000 for properties and $20,000 for contents applied to claims resulting from both the September and February major quakes and associated aftershocks, rather than just the first one.
The decision effectively shifts hundreds of millions of dollars in liability for quake damage from private insurers to the EQC which only last week raised its estimated liability from $3.05 billion to $7.1 billion.
Mr Key said the additional liability for the EQC could be as much as $1 billion.
Again no choice over this one, and the court decision is the right one that they should be treated as two different earthquakes. The ruling may encourage the global reinsurers to remain in the market also.
Tags: earthquake
September 6th, 2011 at 11:06 am
If the Christchurch earthquakes have taught us anything it is that EQC should be abolished. It is unneeded and an unnecessary government intervention in insurance markets.
Vote:September 6th, 2011 at 11:19 am
What is the value added by the EQC? it puts a dividing line through the middle of the insurance market, and creates a large but quite uncertain liability for the NZ government where none would otherwise exist. How does that help exactly?
And EQC doesn’t do anything that private insurers couldn’t do. It’s insurance. You get EQC cover when you buy insurance, and you don’t get it when you don’t. EQC’s existence gives claimants two organisations to deal with, rather than just one, and creates massively expensive arguments over which one is liable where no argument would otherwise be required.
Oh, and a great deal of EQC’s assets are government bonds – claims on the NZ government, which diversifies none of the risk of the residual claimant! Duh.
What an extraordinary waste of time and money and another example of bureaucratic capture and ineptitude.
Vote:September 6th, 2011 at 11:32 am
EQC provides an effective model for insurance against rare but massive events. Through a mixture of premiums paid over decades and reinsurance arrangements, it has been able to provide billions of dollars of cover at very modest cost.
Vote:September 6th, 2011 at 11:36 am
Surely though, people can only claim a second time for damage caused specifically by the second quake, and how is that going to be teased out. I foresee one very satisfied looking lot of lawyers circling around.
Vote:September 6th, 2011 at 11:37 am
mikenmild: nonsense. EQC does nothing that private insurers do not do. They both reinsure. They both claim from the government when it all goes pear shaped. EQC simply duplicates what insurers already do. And it does a really bad job, judging from the decision to hold most of their assets in government bonds!
There is nothing modest about the cost of hiring a lawyer to get EQC or your insurer to pay up when they each point at the other. That is a cost of the EQC’s existence. Ditto ACC.
Vote:September 6th, 2011 at 11:45 am
Developers (the market- business plan) are the one who built substandard dwellings at Bexley in the first place and it seems as though Pegasus would have had liquefaction problems were it not for the environment court.
Vote:Like Sir Robert Jones says: Jones on Property “only one coat of paint not two; you don’t get paid for two”. Olly Newland talks about the “tacky end of the market” in one of his books.
September 6th, 2011 at 11:51 am
My point being that the market is profit driven and loyalty is only to ones own back $cratching buddie$ (who don’t live where the dross live).
Vote:September 6th, 2011 at 12:04 pm
The most depressing part of Christchurch is Linwood which has seen a shambles where nihilistic rent seekers have jammed bits of buildings onto the Kiwi section. All viewed with a backdrop of slumping Avon river.
Vote:September 6th, 2011 at 12:13 pm
Ben, what do you mean by this: “EQC does nothing that private insurers do not do. They both reinsure. They both claim from the government when it all goes pear shaped.”
Are you saying the govt should be there to bail out private insurers who can’t afford it when disaster strikes? The private sector’s dysfunctional if it indulges itself in the good times and goes begging to the public in the bad.
Vote:September 6th, 2011 at 1:00 pm
EQC is munted – it has done of it what was expected when formed in 1945, with a fund built up since then but not corresponding to normal commercial and other inflation over that time.
Consider
a. closing down EQC
b. let the commercial insurance market – almost all of which are part of major overseas groupings eg NZI and State are part of the Australian IAG (Insurance Australia Group). Let them assess properly all the RISKS involved and price up accordingly.
c. Levy these insurers, like the government does to EQC as final resort insurer. Build up a sufficient fund from these insurers to a certain limit to their nett tangible assets, and cover up to a further limit (ie defined Catastrophe Reinsurance by regulation). This must cover all Property classes not just Houses/Contents as EQC.
d. PROPERLY audit the information from insurers. Currently I believe that major International Reinsurers are “not at all happy”, to say the least, with the underwriting information they were given at the time of providing cover. This particularly includes Business Interruption.
Still thinking, but food for thought.
I expect that Mr Brownlee will receive a most polite reception in Europe next week, but underneath Reinsurers are looking at the commercial returns on their Christchurch losses (and still escalating)
Vote:September 6th, 2011 at 1:23 pm
@ Paulus all that is required is “A” and “B”.
EQC currently only insures the firsts $100k of damage and then only for people who take out insurance. Guess what, the market perfeectly capably picks up the excess over $100k. Inflation alone would make the EQC more irrelevant over time but I think the government should just do the right thing now and abolish it (obviously after taking care of its existing liabilties).
Vote:September 6th, 2011 at 1:36 pm
KiwiGreg
Yes, you are quite right, until one insurer cannot pay, then all hell will let loose, and our socialist government (anyone) will be seeking votes, and left wing media, will bitch. The taxpayer has gonna pay – its gummints fault that my insurer (say AMI) is bust.
Vote:September 6th, 2011 at 2:34 pm
EQC stops insurers going bankrupt when there are massive events. AMI almost went to the wall over it’s exposure in CHCH. If we didn’t have EQC then there is the very real possibility that an event like the CHCH earthquakes could destroy 1000′s of homes and the insurance the homeowners were holding could become worthless.
I agree with Ed Snack, I think the second payment of $100K would only apply in very specific circumstances so it is hard to see how this will cost the government an extra $1 billion.
Vote:September 6th, 2011 at 2:45 pm
The other big failure for EQC is that unlike private insurers who maintain their staff of risk analysers, policy writers, Legals, claims adjustors claim managers, fraud protection, reinsurance managers and investment divisions while EQC ran a collection investment management bureaucracy watched by successive governments eyeing the little gold mine and when the excrement hit the rotary were totally illequipped.
They responded by creating a duplicate army that many hard nosed operators saw as little more than a joke with many many cases of over payment, Payment for deferred maintenance and other damage that had no relation to the quake itself. In a word Fraudulent claims.
The big well established operators with the good ratings could rapidly augment their capacity to respond from within their organisation fom other local offices and international.
I know one assessor/claim adjustor employed by EQC who was a very ordinary retired builder who admitted he felt sorry for victims” and sought settlement on that basis for them.
The complication of EQC covering the first $100k and $20k was a major factor in the AMI problem when the EQC factor hid a true picture of AMI’s liability that was impossible to assess until EQC had done their assessment.
BTW we have still had no assessment for damage that was all sustained one year and two days ago.
EQC is a typical bureaucrats wet dream and should be sent to the Crematorium sooner rather than later.
Vote:September 6th, 2011 at 4:54 pm
YesWeDid
Are you sure that AMI can pay all its claims without recourse to the government guarantee ?
It is very early days yet, and shakes have not stopped.
Vote:September 6th, 2011 at 7:56 pm
I posted on Saturday i think a report that someone had worked out that the extra cost was 3.5 billion no the one that Johno is talking about. So what happens if it is 3.5?
Vote:September 6th, 2011 at 9:25 pm
Decanker – no govt should not be bailing out insurers – either EQC or AMI. My point is simply that EQC duplicates everything the private sector already does, up an including getting cash from the government when it all goes wrong. EQC cannot possibly do anything except add cost and risk, which it is doing right now in spades. $1 billion is a lot of extra liability for an already stretched government, and entirely needless. Giving people two insurers to deal with rather than one has massively increased the complexity for many people in Chch.
Vote:September 6th, 2011 at 9:37 pm
YesWeDid – wow, terrible argument. EQC does no such thing. It reduces insurers’ liability but also takes premiums on their behalf that would otherwise go to insurers. At best, insurers are left awash by EQC. At best. Somehow insurers survive in other insurance markets without needless duplication by the gummint. And who says local insurers generally have much or any exposure to local disasters – they are primarily retail outlets for reinsurers. And, sorry, actually EQC has saved nobody from anything: it is way, way out of money, having decided to mostly self-insure. With government bonds. And AMI in fact did need the promise of government bail out, which had nothing to do with EQC anyway. So having done a bad job of the most basic task in insurance, to diversify, EQC has to call on the government. What a fucking wasteful, hopeless shambles. Heads should roll but won’t.
Vote: