The Role of EQC

EQC's role is to help New Zealanders recover from the effects of natural hazard disasters. It does this by securing New Zealand residential property owners against the cost of these disasters and by helping organise repair and replacement after the event.

The main mechanism for this is the provision of natural hazard disaster insurance to property owners who insure against fire.  All residential property owners who buy fire insurance from private insurance companies automatically acquire EQCover, the Commission's disaster insurance cover.

EQCover premiums are added to the cost of the fire insurance and passed on to EQC by the insurance company. EQC's administration of the natural disaster insurance scheme involves:

• Collecting premiums via insurance companies;
• Processing and meeting claims by insured people;
• Administering a disaster fund;
• Investing the fund in accordance with Government directions;
• Organising reinsurance as a potential supplement to the fund;
• Facilitating research and education into natural disaster damage and options to mitigate or prevent natural disaster damage;
• Accounting to its shareholder (the Government).

At the time of the first Canterbury earthquake the Natural Disaster Fund had just over $6 billion in accumulated funds under management. The Natural Disaster Fund is expected to be substantially exhausted as a result of the Canterbury earthquake sequence. Losses arising from the Kaikoura event could result in EQC calling on the Government’s guarantee for the first time since its inception in 1945.

In a time of disaster, EQC works through its Catastrophe Response Plan (CRP).  The CRP sets out how EQC will manage the resources that will be required at such a time to fulfil EQC’s obligations set out in the EQC Act 1993 of managing and settling claims. The plan encompasses a wide range of possible hazard scenarios and includes provision for alternative operations sites and the recruitment, training and deployment of staff and equipment.  Critically, the CRP also focuses on the potential role of EQC in the provision of advice and modelling capacity to mitigate the effects of natural disasters as part of its research and education role in overall risk reduction.

EQC also encourages and funds research about matters relevant to natural disaster damage and it educates and otherwise informs people about what can be done to prevent and mitigate damage caused by natural disasters.

Legislative Framework

The Earthquake Commission Act (1993) came into effect on 1 January 1994 and replaced the Earthquake and War Damage Act (1944). The Commission is a body corporate with perpetual succession and a common seal, and all the rights, powers, privileges, liabilities and obligations of a natural person.

The capital of the Commission is NZ$1.5 billion, subscribed for and fully paid up by the Government as part of the Natural Disaster Fund. The shareholding Minister is the Minister Responsible for the Earthquake Commission. The Commission has a board of five to nine members, appointed by the Government.

Origins

The establishment of the Earthquake and War Damage Commission in 1945 was driven by equity. Until that time, only war insurance was compulsory. Earthquake insurance was voluntary. In practice, few people insured against such events.

In 1942, two years before Parliament passed legislation (the Earthquake and War Damage Act 1944) establishing the Commission, major earthquakes occurred in the Wairarapa region of the North Island. Recovery from these was slow with many wrecked and uninsured buildings still evident several years later.

They were stark reminders of the lack of coverage, the lack of equity. The new regime began operating with the Minister of Finance as its nominal chairperson, its funds controlled by Treasury and invested totally in Government stock, and a staff seconded from the then Government-owned State Insurance Office.

The Earthquake and War Damage Amendment Act 1988 gave the Commission the power to act commercially by changing it from an agency to a statutory corporation, giving it control and responsibility for its fund, requiring it to pay a fee for the Government's guarantee and sums in lieu of tax and dividend if required, ending the role of the State Insurance Office and leaving the Commission responsible for its own staffing.

Regulations were promulgated in 1992 to begin the phase-out of cover for some non-residential property. This was followed by the Earthquake Commission Act 1993. This Act took over from the regulations and the previous Act, and heralded the most significant changes to natural disaster insurance since the original 1944 legislation.

The changes are outlined below:

• The blanket mandatory coverage for all property in New Zealand insured against fire was changed to exclude non-residential property;
• Cover for residential property remains automatic with fire insurance but is subject to maxima, or caps (see the section "Extent of Cover");
• Cover for residential property is offered on a replacement basis instead of the previous indemnity basis, thus offering better and more realistic protection;
• Some types of personal property (e.g. motor vehicles and art) are excluded from cover;
• Cover against war damage for all property was dropped and the name of the Commission since its inception, the Earthquake and War Damage Commission, changed to the Earthquake Commission.

EQCover

EQCover was introduced on 1 January 1994. EQCover is the Commission's insurance scheme for residential property, building on and replacing the previous scheme. The main features of EQCover are listed below.

Property Insured

• Dwellings (self-contained premises used as a home, including apartments);
• Most personal property but excluding some types (e.g. motor vehicles and art);
• The land immediately around the dwelling, main access-ways, and retaining walls, within certain limits.

Types of natural disasters covered

• Earthquake, natural landslip, volcanic eruption, hydrothermal activity, tsunami;
• In the case of residential land, a storm or flood;
• Fire caused by any of these.

Extent of Cover

• Dwellings and personal effects are insured up to a maximum of $100,000 plus goods and services tax (GST) for a dwelling and $20,000 + GST for personal property.
• Dwellings are covered on a replacement value basis. Personal property is insured on the same basis as the household insurance policy covering the same property. Some retaining walls are covered but on an indemnity basis.

The Cost of EQCover

The cost of cover is twenty (20) cents a year for every $100 value of property insured. The maximum premium payable for one year is $276 as set out in the table below.

Dwelling (max $100,000 + GST)	$200.00
Personal Effects (max $20,0000 + GST)	$40.00
Sub-total	$240.00
Goods and Services Tax	$36.00
Total	$276.00

 

In the 2017 Budget, Ministers announced that from 1 November 2017, EQC premium would increase to twenty (20) cents for every $100 of value of property insured (https://www.beehive.govt.nz/release/eqc-levy-increase-prepare-future-disasters).

Automatic with Fire Insurance. If fire insurance is bought through an insurance company, a homeowner will also get EQCover. A homeowner does not deal directly with EQC to obtain EQCover. If an insured’s home or personal possessions are more valuable than the maximum amounts EQC will pay, additional cover may be arranged through the insured’s insurance company.

Excesses. For damage to property other than land, EQC’s excess of $200 for claims under $20,000. For claims over $20,000 the EQC excess is 1 percent of the total claim. For damage to land, EQC’s excess is $500 for claims under $5,000.  For all land claims over $5,000, EQC’s excess is 10 percent of the total claim.

With respect to EQCover pays 99 percent of every claim over $20,000 for damage to property, other than land. Two hundred dollars is deducted from claims of $20,000 or less.  EQCover pays 90 percent of every land claim over $5,000. Five hundred dollars is deducted from land claims of $5,000 or less. A land claim excess will not exceed $5,000.

The Natural Disaster Fund

The Natural Disaster Fund is currently approximately $1.0 billion. EQC draws on this money to pay out claims for damage caused by natural disasters.

The Earthquake Commission Amendment Act 1998 clarifies the powers of the Minister of Finance to direct EQC's discretion in relation to its investment and reinsurance functions. This is to ensure that EQC's exercise of its investment and reinsurance functions is consistent with the management of the Crown's financial position.

From 1 November 2001 a Ministerial Direction allowed the diversification of the fund into international equities up to 35% of the market value of the fund. The diversification occurred progressively over two years.  The remainder of the fund continued to be invested in New Zealand Government Securities and New Zealand bank bills. Over time, the investment objectives of the EQC have been amended to reflect specific circumstances, including the Canterbury Earthquake Sequence.

For further information, the Earthquake Commission has a wide range of publications and other documents available on its website www.eqc.govt.nz

Review of the EQC Act

In 2012 the Government announced it would be reviewing the Earthquake Commission’s legislation. This was to ensure that lessons learnt by EQC over the past 20 years, including the Canterbury earthquake sequence could be incorporated into a new piece of legislation.

In July 2015, Treasury released a Discussion Document setting out a series of proposals for the future direction of EQC. These included:

• EQC to remain a first loss residential insurer
• Land and building cover would be combined within a single cover up to $200,000
• Claims would be lodged with insurers, but claims management and settlement would remain with EQC
• Contents cover would be removed
• Encouraging insurers and EQC to work more closely together

Further information on the Review of the EQC Act can be found at:

http://www.treasury.govt.nz/publications/reviews-consultation/eqc/pdfs/eqc-rev-discussion-doc.pdf

Public submissions closed at the end of 2015. More than 60 were received by Treasury from individuals, companies and industry groups including insurance, banking and legal groups. 

On 26 June 2017, the previous Government announced the first tranche of decisions on the Review of the EQC Act. The reforms announced were:

• Increasing the monetary cap from $100,000 (plus GST) to $150,000 (plus GST) for EQC building cover.
• Clarifying EQC land cover is for natural disaster damage that directly affects the insured residence or access to it.
• Standardising the claims excess on EQC building cover at $1,000. This currently ranges from $200 to $1,150 depending on the size of the claim.
• EQC no longer providing any residential household contents insurance.
• Requiring EQC claimants to lodge claims with their private insurer who would pass the claim on to EQC (if the property is insured).

• EQC Programme Summary