Moral hazard

January 29th, 2013 at 9:11 am by David Farrar

Marc Greenhill at Stuff reports:

Canterbury Recovery Minister has rejected suggestions he ignored officials’ advice in making reduced offers to uninsured red-zoners.

The Press reported yesterday the Canterbury Earthquake Recovery Authority () advised Brownlee last August that property owners in the residential red zone who did not qualify for the initial Crown compensation deal – mainly commercial properties and undeveloped land – should have the same offer extended to them.

A decision was made to offer those in limbo half the rateable value (RV) of their land and avoid the “moral hazard” of a government safety net for the uninsured.

I think it would have been very bad to offer the same price for an uninsured property as for those insured. It would have set an awful precedent and encourage people not to insure.

Labour earthquake recovery spokeswoman said the “low-ball” offers would form part of a formal complaint she had made to the auditor-general about the Government’s handling of the residential red zone.

Labour – campaigning for the rights of the uninsured to get the same payouts as the insured. That’s true equality for you comrades!

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20 Responses to “Moral hazard”

  1. scrubone (3,104 comments) says:

    Labour – campaigning for the rights of {people who qualify under the criteria} to get the same {rights} as {those who don’t meet the criteria}.

    Yea, there’s a lot of that going around.

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  2. hmmokrightitis (1,595 comments) says:

    Whilst the mad dalziel doesn’t actually say what you are implying DPF, I’m almost certain that’s what the intent will be – but you have to ask why. Where does labour stop creating beneficiaries of taxpayer largesse? Where does labour draw the line in terms of personal risk and responsibility? Car insurance? Life insurance? Health insurance?

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  3. Paulus (2,661 comments) says:

    I am unable to find what sort of compensation and how many uninsured dwellings there are in Christchurch.
    The fact that they have stopped bitching to the media as unfair suggests that taxpayers have stumped up for these people.
    Can anybody help as once again I believe that the taxpayer is being screwed in Christchurch.

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  4. Auberon (873 comments) says:

    Good luck to Dalziel with her complaint. I’d have thought the Auditor General was more likely to be critical of the Crown for offering them anything!

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  5. dc (144 comments) says:

    Government’s views on “moral hazard” have apparently changed since they bailed out AMI for hundreds of millions (final price tag still unknown), creating an implicit government guarantee for insurance companies. The moral hazard is that insurance companies can really skimp on the reinsurance just as AMI did, knowing the government will bail them out in a major event.

    The issue with uninsured properties in the red zone is that the government is effectively compulsorily purchasing them (in another stupid move), so they should be compensated for this purchase regardless of their insurance status. I would have thought free market proponents would not be in favour of the government forcing people off their land without paying them for it.

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  6. BeaB (2,145 comments) says:

    I liked what Brownlee said at the outset. That no-one was uninsured. If you chose not to insure with a company, you had made the decision to carry the risk yourself.

    Of course this is a perfectly legitimate choice but you can’t come whining when the worst does happen. It makes me mad to see uninsured people after fires etc expecting help from all those of us who fork out premiums for years. I believe the taxpayer is being extraordinarily generous to Christchurch.

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  7. coolas (115 comments) says:

    What does Lianne Dalzeil mean?

    “The land couldn’t be insured, so how on earth are [the Government] putting them in the same category as those people who are uninsured.”

    Is she saying owners offered 50% of RV couldn’t insure their land before the earthquake? How come?

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  8. KevinH (1,236 comments) says:

    This government had no problems bailing out SCF and assorted crooked financial houses and caught short insurance companies, so where is the moral dilemma here. It is a matter of prioritising where the governments responsibilities are with regard to the devastated citizens of Christchurch.
    A more attractive deal would be to negotiate a land swap/house swap deal with existing Crown properties with cash adjustments up or down depending on location.

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  9. Rich Prick (1,722 comments) says:

    The “uninsured” were actually self-insured. And that’s how this taxpayer believes it should remain. (Although I am pleased that the bitching and moaning from the self-insured largely goes unreported these days, being berated for our generosity was beginning to really annoy me.)

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  10. dc (144 comments) says:

    @coolas, private insurance companies don’t cover bare land for earthquakes because EQC covers it, but you can’t get EQC cover on a property that doesn’t have a house on it because EQC cover is tied to house insurance. So effectively the government makes it impossible for people to get insurance on their land, then takes their land for half the value and calls them feckless idiots for not being insured. Does that sound fair?

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  11. coolas (115 comments) says:

    thanks dc, in that case the issue is about compensation to land land owners who could not insure their land, rather than owners who chose not to insure.

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  12. YesWeDid (1,050 comments) says:

    Thanks dc for making the situation clear, I’m sure DPF also understands that but is happy to tell 1/2 the story and have a sad little dig at Labour rather than give the facts and have a proper discussion.

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  13. Rick Rowling (815 comments) says:

    KevinH (853) Says: This government had no problems bailing out SCF

    Because in the SCF situation they were following the law (enacted by the Clark/Cullen government).

    But don’t let facts get in the way of a good slogan.

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  14. Graeme Edgeler (3,290 comments) says:

    So the Government is compulsorily acquiring the land of a bunch of people? And it is not using money from insurance premiums to do this? Then why on Earth is insurance relevant?

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  15. AG (1,831 comments) says:

    So the Government is compulsorily acquiring the land of a bunch of people? And it is not using money from insurance premiums to do this? Then why on Earth is insurance relevant?

    Because under the offers, the Government takes over any insurance claims that an owner may have. Consequently, when it buys an insured property, it can expect to recoup some of that outlay in the future. But if the property is uninsured, it can’t. (See http://cera.govt.nz/residential-red-zone/crown-offers#overview).

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  16. kiwi in america (2,508 comments) says:

    dc and YesWeDid
    The fact that EQC does not (and never did) insure bare land was not a state secret and so any owner of an unimproved section who felt that they needed to be covered for earthquake risk was welcome to arrange said cover from the private insurance market. The finance company I once worked for also owned a fire and general insurer that offered this type of cover and they sold very few policies because people never comtemplated that their land might be deemed too damaged by an earthquake for any insurance company to ever insure a new dwelling erected on it. Why is it the tax payers job to fill in this deliberately chosen gap in cover? Brownlee’s decision was correct and generous and Dalziel shows that she and Labour don’t live in the real world.

    To answer Paulus the numbers of CBD and residential red zone unimproved sections that were covered by this offer was less than 300 if memory serves me correctly.

    After 2 weeks in Christchurch over Christmas I have to say that I was appalled at the attitude of some people who whinged and whined like Dalziel. When I pointed out that there is NO GOVERNMENT ANYWHERE that has been even as remotely generous as the NZ government has been in Christchurch after such devasating earthquakes they just don’t believe you. They all know that schools have to close because 4500 students have left the city but they’re only happy for it to happen to someone ELSE’S school. Whilst the insurance situation is taxing for many, I said that at least you have the luxury of having a fight over insurance – in Japan very little in the way of private sector earthquake cover is available and California only 30% of home owners have cover (usually the wealthiest 30%) and even then not full replacement like is the case for 97% of Chch homeowners. For the rest of the world if you get struck by an earthquake you are entirely at the mercy of the world’s aid agencies for help and that is limited usually to life saving essentials and not property replacement. I sensed a real tiredness from others I met outside of Chch at the ingratitude of some in Chch and the tendency of the media like The Press to publish any sob story however isolated it might be. The earthquakes and the rebuild are an incredibly massive, complex, costly and time consuming operation consuming fully 10% of NZ’s GDP (Katrina’s $200 billion rebuild was a miniscule 0.2% of the US GDP and the Kobe earthquake in Japan was barely 2% of Japan’s).

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  17. Nookin (3,462 comments) says:

    “This government had no problems bailing out SCF …”

    SCF entered into the government guarantee scheme for which it paid a very hefty premium. Sort of like insurance. The government got the raw end of the deal because, it alleges, that it was duped into accepting SCF’s qualifications to participate. The SCF application contained material falsehoods — according to SFO.

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  18. questions (208 comments) says:

    Almost everyone posting here (notable exception Graeme Edgeler) is wrong.

    Graeme Edgeler Says: “So the Government is compulsorily acquiring the land of a bunch of people? And it is not using money from insurance premiums to do this? Then why on Earth is insurance relevant?”

    Exactly! Despite Gerry Brownlee’s glib claim that those without insurance were self insuring, the simple fact of the matter is prior to the setting up of this scheme, no one was insuring (“self” or otherwise) against the government compulsorily acquiring their land, through no existing legal mechanism, this is the problem.

    And the buy out of the properties of the insured residents certainly isn’t for the benefit of the residents effected, it is for the benefit of the insurance companies. This program is about relieving them of massive risk and uncertainty which they failed to price into their models when insuring houses in these (and no doubt many other) areas.

    Out of interest David, I assume you have some kind of insurance on your business, does it cover uncompensated nationalisation?… didn’t think so!

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  19. dc (144 comments) says:

    @questions, exactly what I said. If people were being left alone to suffer the consequences of being uninsured then fair enough, but they aren’t.

    And even if people had land insurance, assuming they were able to get it for a fair price in the distorted market created by the EQC system, I guarantee the insurers would be pulling the same stunt they pulled with the red zone homeowners: “Sure, we will pay $50k to fix your land. Oh, the government is buying it? Too bad, we would really have liked to fix it, seeya!”

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  20. kiwi in america (2,508 comments) says:

    dc
    You actually hit the nail on the head with the term “market distortion”. Unwittingly the EQC scheme has created a massive market distortion and its interface with the private sector insurance market was never really tested until Christchurch. EQC has acted as a huge excess for earthquake cover taking away the first and highest risk. The trouble is that, for the global insurance market that also reinsures EQC, the total risk was always still there. EQC allowed private insurers to offer in NZ what could not be offered by other insurers in any other market – that of comprehensive full replacement cover for residential dwellings that was affordable enough that almost all homeowners took it up.

    The size of the Christchurch rebuild versus the absolutely miniscule premium take that global insurers receive from the entire NZ insurance market let alone just Christchurch, created an underwriting crisis and a claims management nightmare. The crisis was that until global insurers could rule a line under the size of the claims, it was next to impossible for them to underwrite even normal insurance cover across NZ. As a new major event (as defined by EQC) was occuring every 3 – 6 months (Feb 22/June 13/Dec 23) it was uncertain as to when the sesmic event would end and the damage stop. Why pay for massive repairs/rebuilds only to have to redo it all again – from an underwriting perspective that was a fast track to bankrutcy even for major re-insurers. EQC’s cupboard was now bare and unless IT could get re-insurance then the whole NZ insurance market was on the verge of collapse because major global re-insurers were not interested in renewing their cover (their clients being NZ’s major retail fire and general insurers). The government’s role in this process was crucial and it had to demonstrate commercial fiscal discipline in the manner of its offers. The seismic event had to end (which it eventually did at least in terms of destructive aftershocks) and the repair job had to be more adequately quantified for the private insurers to move forward with bigger claims. Cosmetic repairs under the $100k EQC cap were the easy part and were poorly managed IMO leading to thousands of people in Chch getting a nice redecoration job done courtesy of the rest of NZ’s tax payers. That is why all the pressure is over TC 3 – the residential red zone was the easy part – the numbers of homes involved were more quickly quantified and able to be dealt with. The cost of rebuilds of TC 3 properties easily dwarfs the red zone settlements and all are now the sole preserve of the EQC and private insurers. Knowing how deep foundations need to be to ensure a durable rebuild is a time consuming task necessitating the land core sample tests and unfortunately these experts that can do the drilling soil tests dont grow on trees hence the delays. The interface between EQC and private insurers is a frustrating moveable feast that was never tested and now must be sorted out on the hop in the midst of all the pressure that all parties are under due to the rising anger of Chch residents. THese issues are being sorted out but it is painstakingly slow but unless you understand the big picture and appreciate that Chch residents are extremely fortunate to have the cover they have because they have what even Hollywood moguls in Malibu dont have – full replacement cover for earthquake!

    In point of fact the 50% offer for bare land by the government is another market distortion but one done for altruistic reasons – something lost on people who have a ‘take take’ mentality and think that the government can magically wave a financial wand and make all problems go away. The wand they wave is the taxes of ordinary NZers – folk whose generosity with regards to Chch is reaching its logical limits.

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