Natural Hazards Insurance Bill

Members, we come now to the Natural Hazards Insurance Bill. Members, when we were last debating this bill, we were debating Parts 1 to 6, Schedules 1 to 3, and clauses 1 and 2. The question is that Parts 1 to 6, Schedules 1 to 3, and clauses 1 and 2 stand part.

Thank you very much, Madam Chair. This call seems to be unexpected by various of us, but we’re now on board. I hope I’ve got something worth turning on the microphone for, but we’ll soon see!

Obviously, at the committee stage, going through in some detail, in terms of the different provisions, it seems to me, though, helpful in the usual way for initial contributions to set the scene a little bit, albeit within the context of the parts that we’re examining first of all, obviously starting with Part 1 and moving forward from there. So perhaps in the absence of the Minister having done so—or not the “absence” of the Minister; without the Minister having done so—I might make a couple of reflections, in reasonably broad terms, to set the scene for the debate that will no doubt continue this afternoon for at least a little while.

It’s worth noting, of course, such an important context to these changes, and, obviously, “natural hazards” is a pretty innocuous-sounding phenomenon—obviously, we shouldn’t characterise this situation lightly at all, bearing in mind, of course, that we’re talking about no less a situation than earthquakes. In this country, we are, sadly, all too well aware of the damage that they can cause, and therefore the regime that’s needed to ensure that properties are properly insured, obviously, is of great importance. So the extent to which we are retaining the current arrangements—the EQC, or Earthquake Commission—obviously represents a certain amount of continuity, but, of course, proposals are being made and, of course, it’s in the nature of the amendments that this bill is making that we need to consider the extent to which these will help meet the objectives of the Government.

National has made its position clear that we support not only the intent but also the bill itself. No doubt, as we go through this committee stage, there will be opportunity to discuss the particular aspects that we think are most favourable to improving the regime and, obviously, any on which there are perhaps some questions—and, obviously, questions designed to just test the Government’s thinking about the way that the regime is put together. I think, nevertheless, it’s helpful if we have, in this House, as much as possible, a considered view that is going to represent good continuity for the system going forward. I don’t imagine anyone would regard it as helpful to have, as a political football, arrangements that are designed, by their very nature, to provide certainty in uncertain situations. What could be less certain, of course, than a “seismic event”? And, of course, that very phrase indicates, in our lexicon, generally, something unexpected but of considerable magnitude, which we face from time to time in these, the Shaky Isles.

So, with that, we’ll see whether other colleagues have particular points that are more specific than that to make, otherwise I’ll get to my feet gladly and do so myself.

I just have to place on the record my ongoing admiration for my colleague Chris Penk and his ability to get up and speak incomparably well on a bill that I suspect he may not have even heard of or read until such time as right now!

CHAIRPERSON (Greg O’Connor): That’s called giving your mate up, Ms Grigg.

NICOLA GRIGG: Look, to the Minister, thank you. It will be good to flesh this out. I think we’ve made it clear that we do support this bill. I, more than anyone, having lived through the Canterbury earthquakes of 2010 and 2011, am all for anything that will streamline and reduce inconsistencies within this kind of insurance law.

We do agree that the Earthquake Commission (EQC) needs to be updated and upgraded, and to take into consideration the public inquiry and, I would also add to that, the various commissions of inquiry that occurred after those quakes, particularly in regard to the response.

I’ve seen firsthand, as a journalist, actually, working in Canterbury at the time, the divisions that were created, particularly with respect to people who would have been deeply impacted by the long arm of Government reaching into their lives. I would acknowledge those that lived in what we now know as the red zone—out in the eastern parts of Christchurch—who were deeply impacted by the sheer complexity and stress of the nature of making insurance claims, particularly through having to deal with both EQC and with private insurers at the same time, on shared driveways and in multiple complexes and multi-dwelling complexes and bodies corporate, etc., etc., etc. So we do support a bill that looks to streamline that.

But there are just a couple of questions that we have, Minister, where we did have some concern—and I can’t even find them at the moment; they’re so few and far between. We do think that there are some unintended consequences, some unintended equities, because of the nature of the insurance market and the tools that the industry uses to assess risk, and we’re talking about highly prone areas, those that are highly prone to earthquakes—for example, Canterbury; for example, parts of the West Coast, anywhere in and around the Southern Alps and the Alpine Fault. That group of people who live in those sorts of areas are obviously at the most risk, and therefore will result in higher excesses, and just the disparity to those living in areas where they are less likely to be affected by a natural disaster, somewhere possibly like Auckland, and, as a result of that, the offset of the premiums could mean that some people who are less likely to be affected could be paying up to $200 a household more for a scheme that they may not necessarily ever have to use or cash in. So I just wondered if the Minister’s put any thought to that, and is there any way that can be mitigated in future?

I thank the member for that question. I think the question is a valuable and good one. Essentially, what we have is a social insurance scheme of a sort, and when the Earthquake Commission scheme itself was originally founded, the $100,000 that was covered was roughly the cost of building a whole new house. We haven’t gone quite that far in terms of rebalancing, but we have gone a good deal further than where we were.

Obviously, the costs of building these days are more expensive and, by setting that new cap around $300,000—obviously this has already been implemented, but this putting through into law is kind of cementing that on the law books and the process, how it will be funded from here.

Look, I think the reality is that people from Christchurch and Canterbury and Kaikōura and surrounds will know that we don’t always know earthquakes are going to strike, so there is real merit in having a social insurance scheme that covers, more broadly, the country. We are on the Shaky Isles and we know that, in those circumstances where we have unexpected events, the Government can end up picking up the tab—as we saw with AMI.

I’m looking forward to Mr Brownlee’s contribution—he’s got a good deal of experience in this area—but I do want to put on the record my thanks for the bipartisan way in which this bill has been approached, the constructive debate on the select committee. There were improvements that came through to this House, which I commented on in my initial contributions. It is appreciated.

As the two previous speakers from this side of the House have said, we are supporting this bill, but we do have one or two things that we’d like to make comment on as we progress through it.

So the first point I’d make is that insurance per se is probably the best collision you’d ever see between a social outcome and a capitalist objective. It has served New Zealand pretty well up to this point, and I hope it does so for some time to come. So, while there will be and there are—and I’m very aware that there are—people who have had less than pleasant experiences, there are also tens of thousands who have got through all of this process in a state that has at least returned them to where they were prior to the natural disaster that can never be totally mitigated by any Government.

I’ve got a couple of concerns here and that is the bullish attitude that is starting to be developed by insurers. Now, let me make it very clear that, during the whole time of both the Canterbury and Kaikōura earthquakes, there was good discussion, good communication between the Government’s agent, the Earthquake Commission (EQC), which was subject to Government contribution through Treasury, and the insurers. A number of common positions were reached in order that things could move forward and a lot of the 89 different—what’s it called, reinstatement? Let me say that again. A lot of the 89 different reinstatement insurance covers that were in place were in fact able to be categorised into smaller numbers in order to get a good result, and always in the favour of the policyholder. Insurers chose to do that and work with the Government on that; that’s good.

But when I say that they’re getting a little bit bullish, I’m also aware of at least two claims. So I’m very aware of two claims here in Wellington that have resulted from weather activities both last year and this year, where EQC has a cover, and dealing with those claims is now contracted out to the private insurers. In neither case has the performance of the private insurers been, in my view, acceptable. Nor, it would seem, have the agents of those companies who are dealing with it had a proper understanding of the current Act and the obligations that it confers upon them. I think they’ve got into a mode where a lot of the information that might be available to claimants through the Official Information Act process, because they were dealing with EQC, is now remote from them because they’re dealing with the private insurer. And I think that puts them in a worse position than would have been intended when the arrangements between EQC and the private insurers—for the private insurers to be the first assessors—were put in place. I’m happy at some point to discuss that with anybody who wants to take that any further.

I’m also a little concerned by some of the statements that have been made publicly about this new change, by people in the insurance industry. One chief executive made the comment that, while this was a beautiful country, we have a severity of natural disasters that present themselves as kind of a smorgasbord of which one you’d like according to where you live. I think that’s all absolutely true. But he was suggesting that we move much more swiftly to risk-based pricing on almost a property by property basis. And there are elements of that included in this bill where we’re looking at people, perhaps in areas where there’s considered to be lower risk, ending up paying higher premiums than they do at the moment, and those in other areas seeing some reduction.

I think if we were to go to a totally risk-based pricing system, we would be denying the social benefit that can come from the collective approach that’s taken by EQC. Remember that the Government of New Zealand—in other words, the taxpayers’ representative body—has decided that it would be good to take the first $300,000 worth of loss, but the expenditure of that is, essentially, left in the hands of the private insurers. So I just think there is a natural tension there for virtually no property to go over cap—or to be a real, you would say, threshold; a very, very high bar set on a threshold for going over the cap—because as soon as an insurer does that, they are into their own retentions and expenditure, and that bothers me a bit as well.

It was, interestingly, one of the reasons that initially Treasury suggested not going to the higher cap levels when the first tranche of this reform was put in place a couple of years ago. Just so it’s understood what I mean by that: if, in fact, the cap as it was at $100,000 or is now at $150,000—we know that in the current market, it’s pretty easy to get to $150,000, and beyond that—it’s the private insurer’s responsibility to meet the obligations of the policy. If you go to $300,000, it gives a lot more room for the people who are making the assessment to perhaps not make as good an assessment as they should have. And one of the ongoing problems that still exists out of Christchurch is the number of cases where first assessments were not as good as they probably should have been.

That raises, also, the issue of: at what point does legislation in this country, for this type of thing, start to close off the opportunity for second, third, and fourth claims when there’s been a sale of the property—perhaps two or three times? The Government opened up a thing called the “as is, where is” fund. It’s still open and it seems to me that, if someone has bought a property as is, where is, the person selling it has taken a cash sum, not applied it to the repair of the property, not transferred it in the sale—as they can choose not to do—then the person buying recognises they’re buying something that is damaged and they will have to fix it. The idea that they simply then put their hand up, saying, “EQC, come back and pay us again.”, I think, is a little bit tough on the rest of the population who have reasonably contributed their payments for their insurance and should have some expectation that there’ll be a degree of high diligence used in the application of it.

So those are just a couple of points that I want to make. I hope the Minister is able to make some comment on it. I am particularly hot, I’ve got to say, on that performance from the private insurers who are now the guardians of EQC’s reputation. And no matter what we want to say about what happened in Canterbury or Kaikōura or anywhere else where there’s been a disaster and EQC have been involved, it has served people well. There’ll be others who’ll want to contest that, but the numbers speak for themselves. So to have that potential reputation in the hands of others who have a vested interest in protecting their own interests ahead of the State, I think could well be a bit of a problem.

To address a few of the points raised by Mr Brownlee, which I think are really good and important things to be considering: some of them are within the bill, but it’s a wider discussion, actually, that I think is important to have about the model. Can I just, from the outset, note that the Official Information Act does apply to the private insurers and their dealings, in so far as they are agents of the Crown. So they are still captured; they are not off the hook. If they’re suggesting that they are, they’re in for a surprise. So we’ll see how that plays out—

Hon Gerry Brownlee: Can I respond to the Minister, as we’re able to do in these things? I know, I only—

Hon Dr DAVID CLARK: Certainly, well, I’m very happy—this is good conversation.

Well, the Minister’s now resumed his seat, so, Mr Brownlee.

Thank you, very much. This was supposed to be how this new committee structure worked, and I know that you used this yourself that way, Mr Chair.

CHAIRPERSON (Greg O’Connor): Well, not so much by interrupting, Mr Brownlee, but just flowing, shall we say.

Hon GERRY BROWNLEE: Well, look, when someone’s heading down a track to fall over the end of a cliff, you just want to make sure you stop them. All I’m saying is that I raised that like that because I have four claimants’ emails from a private insurer saying they do not need to release that information. And I think that’s the problem we’ve got, that they are able to—as my initial contribution said, I think they don’t understand the full implications of the Act that they’re now required to administer.

I thank the member for his contribution. That flow backwards and forwards—eight minutes one way, 30 seconds the other—we’ll get the balance. But I am delighted to have the conversation, and I’m happy to talk to the member about that in particular, because I do want this model to work well. I think there’s real merit in having all of those insurers available and part of the process. The private sector has a lot of offices across the country, and the ability to make it easier for people who are in a time of need to access help. They’ve got the existing relationship, we’ve got more offices on the ground, and we avoid that constriction point that we had when the Canterbury earthquake happened, and the Earthquake Commission (EQC) was a very small agency at that time. So I think the model itself, whilst new, will have some teething issues, and I’m keen to work through them with the member. I’m happy to take that offline, as well, in particular cases.

The member also spoke of the, perhaps, natural cap at the $300,000 level. The comment I’d make is that there is an assurance programme in place for all claims managed through that process, and there are joint assessments for the EQC portion and the insurer portion done under that model. So there is a collaborative working arrangement, if you like, behind the scenes. Again, all of this is relatively new, and, having said that, we’ve had some examples already where we’ve had this new model in action and we can observe it working. So I think it is a really good model—a good step forward—but there will be things that will need to be worked through.

Another of the member’s points was talking about the more general shift to a more granular risk-based pricing—letterbox-based pricing—for insurance policies. It’s something that the Government is very aware of. Well, the ability that some of the smaller companies have developed technologies for sooner than some of the bigger ones—it’s certainly something that was being talked about when I was a new MP nearly 12 years ago. I can remember having conversations in Opposition about the potential to move to a much more granular risk-based pricing model. Other things have intervened, including the COVID period—I think that’s, kind of, kept those insurance companies busy doing other things. But there is a global movement in this direction, and I think we are, as a Parliament, going to have to think about the responsibility.

I like the member’s characterisation of insurance being a collision between a social outcome and a capitalist objective—I wrote it down; I’m going to take it away. I think it’s a nice turn of phrase. It’s the challenge we’re trying to deal with here, with the fact that New Zealand, historically, has had a very high insurance coverage. That’s been in our national interest; it helps us come back from economic shocks or situations or natural disasters in a way that we want to continue into the future. And yet, we’ve seen global markets get jittery at times around the provision of insurance. We’ve got good cover here right now. The reinsurers like the kind of diversity that New Zealand risk represents in the global picture. So while things might be good there, we don’t want to take them for granted. We want to ensure high insurance uptake, and that means we need to look closely at the settings, at the way in which more granular risk-based pricing is coming into the market—whether there’s a role for Government there in ensuring that the social outcomes we want to achieve are achieved, all the while mindful that markets are very efficient ways of solving problems if the right regulatory structure is around them.

Minister, I thought we’d lost you there. It’s good that you’re back in the chair. Obviously, we’ll get to the Supplementary Order Paper, but I just wanted to make sure that you’re taking it through Cabinet, and the Prime Minister read it and it was all kosher.

Hon Andrew Little: Now, now, Damien.

DAMIEN SMITH: That’s a fair question after this week.

CHAIRPERSON (Greg O’Connor): We are looking for a relevant point and question, Mr Smith.

DAMIEN SMITH: Yeah, it’s related.

One of the things that really kind of follows on from Mr Brownlee’s contribution—it is good to see that the Minister will have that conversation—is that between the Minister and his advisers, this is a hugely important bill. We wanted to make sure that you’re confident that everything’s been done by yourself to ensure stakeholders are happy with the bill and there won’t be any significant unintended consequences, because it’s a very complex bill. Some of the legalese in here is probably more parliamentarian than insurance-based. So there have been concerns throughout this process and I just wanted to seek the Minister’s assurance that he feels this is the best that can come out.

I won’t repeat the kind of 10-minute introduction I made to this this committee stage late at night, because I will assume that members have worked through that. But I’ll repeat some of the assurances out of it, because I think it’s worth the committee hearing that this bill has come out of a process led by Dame Silvia Cartwright—an inquiry that made 70 recommendations. Most of those recommendations, or a good chunk of them, are being put into play through passing this bill through the Parliament. The other significant thing that’s changing as well, in response to those recommendations, are the fundamental changes to the Earthquake Commission’s operating model through the development of that natural disaster response model that Mr Brownlee and I have been discussing. So those are the two big areas where we see the workings of those 70 recommendations coming into effect.

I’m very confident in the thorough work of the Finance and Expenditure Committee, who went through this. I think they did make some useful suggestions on the way through. It’s been a good process; it’s been quite a long process. It’s not a process that sought to do a first-principles review. We’ve accepted that the broad foundations of the original legislation were right—the direction was right—but they needed clarity in a number of places, as Dame Silvia highlighted. Even in the drafting, more challenges came to light, or the need, desire, and—what’s the word?—desirability of cementing in current practice, to make sure that what has been established through convention now has a legal footing, because it’s the sensible way of dealing with things. So I am confident that we’re passing a very good bill through this committee, and I want to thank members across the Chamber for their contributions to making it so.

Now, in the select committee consideration, there was a mention made of hailstorm damage in Sydney earlier in the century, where uninsured people ended up getting higher payments for their damage than those who were insured, because they got their claim or their costs settled through some kind of benevolent fund or mayoral fund or some other such. It raised the issue of the moral hazard of under-insurance. And if you look at the situation of AMI and Ansvar—two sizable sort of insurers, particularly AMI; 40 percent of the market in Canterbury—it failed. It failed because it didn’t have sufficient funds in its retention fund to meet initial costs and it didn’t have sufficient reinsurance to cover the cost of the policies that had actually been sold.

So that raises the question of the role of the insurance regulator, and there’s nothing actually in this bill that deals with that. I’m wondering if the Minister can indicate whether or not, outside of this bill, there might be some work being done to consider or reconsider or to boot up the role of the insurance regulator. Because, I think, as much as we require certain capital ratios for banks, there is a case to be said that if you want to offer insurance—whether such a huge contribution potentially from the State and ultimately a liability being accepted by the State where there is failure—then there should be some pretty clear ratios of cover available relative to the potential costs of all of those claims coming home to roost at one time.

That’s obviously outside of the scope of this bill, but a very valid question. My understanding—and I’ve just checked that with officials—is that the Reserve Bank capital requirements are now a one-in-1,000-year event. So that is a change that’s happened. It’s important that those companies do have sufficient capital behind them, and obviously the Financial Markets Authority has another role, as well, in overseeing those markets.

Yeah, thank you very much, Mr Chair. Just following on from the Hon Gerry Brownlee, I wanted to move into a section of the bill in Part 5, Subpart 3, clause 138. This is in regards to some new and extended provisions in regards to information sharing, information collection. While we are, obviously, supportive of this bill overall—wherever there are aspects of legislation which are looking to extend the ability of the State to be able to gather information from those constituents who are impacted by this legislation—one does need to have assurance that those powers are reasonable and appropriate in regards to the mechanisms which will result.

So my questions for the Minister are as follows: why does the Minister believe that the information-gathering powers that are in the bill are necessary, and who, in terms of the extent of the individuals or groups or entities, does the Minister believe that these powers are going to extend to? The second question in regards to the information gathering is: what assurance, if any, has the Minister received from officials in terms of the scope and ability to gather such information? I think, on assessment of what is here—and I was a member of the Finance and Expenditure Committee, which, obviously, did review this bill. But I think it’s worthwhile revisiting this, because it is important in terms of there is some assessment that, actually, the powers included within this bill could be seen or deemed by some as being reasonably unfettered, and there are risks and concerns around that regard.

The last question I have in regards to this area is in regards to the guidance that the Minister’s received in terms of, again, the appropriateness of those provisions, but probably more importantly in this context are the implications on other aspects or other ministries or other unintended consequences as a result of this information. We’ve had a number of instances, again, even in the last 10 days, in terms of cyber-security issues around access of private information. So the concern always will remain from the public: “Do I really need to be providing this information through the Government? What is it going to be used for? How is it going to be used, and is that appropriate in regards to being a threshold of what is necessary in order for the Government organisations to undertake their job, and not over and above what is actually required in order to fulfil that purpose?” So I’d appreciate a little bit of context in regards to that aspect.

While I’ve got a little bit of time, the other aspect is in regards to clause 24(1)(b)(i), and this is in regards to the definitions around imminent damage. So clause 24(1)(b)(i), in regards to some clarity from the Ministers, is around when assessment is undertaken and the assessment that it’s, and I quote, “more likely than not to occur in the next 12 months.” This is, obviously, a change. I know it was discussed at some length in the select committee process, but, again, a little bit of substantiation, I guess, in terms of how that 12-month aspect was determined and on what basis or what precedent does the Minister believe that period is appropriate? I mean, any forecast into the future, even tomorrow, is a challenging one. So having a window of 12 months, in terms of being able to make an assessment of whether it’s more likely than not for damage or imminent damage to occur, does place the decision-making power quite squarely on, no doubt, technical specialists and experts. But there does come with that quite a significant degree of latitude, which would, depending on the decision, result in the fiscal implication to the Crown. So I’m looking for confidence around why we deem that to be appropriate.

I will respond to the first of the member’s questions; I’m just seeking clarification on the second so that I can absolutely make sure I’m getting it right, for the sake of the committee. The information-sharing provisions, indeed, reflect the current powers in the current Act. So I want to give the committee that assurance. They do reflect the current powers. They do provide for the ability for information to be requested in certain formats and in certain timing so that it can be useful information, and, obviously, members can see—those following the debate at home might not be able to—that also in that section is a codification of the appropriate ways to handle information, the responsibilities that surround it, and the authorisations, which are also really important to have outlined in the law.

Primarily, those powers will be used for information-sharing between the Earthquake Commission and the insurers, and the same powers are in place where it concerns providing information publicly.

Just one brief question. I’ve been reading through some of the notes provided to analyse the bill. There’s a line that sort of talks about the insurer’s contractual obligation in the case of a full reinstatement, and it is only to rebuild to a former state, without mitigation measures. Now, I can understand if that meant putting in a bund or putting in some sort of other protection—that would be fair enough. But does it mean that under this bill, the requirement for a reinstatement to be reinstated at today’s building codes is still in place, or has it been set aside?

Can I just get the member to clarify: is the question—could I get the member to repeat the question, please? Sorry.

Yes. So, currently, as I understand it, if someone makes a claim for natural hazard damage and it requires a dwelling, for example—well, in the case of the Earthquake Commission, it will always be a dwelling—to be fully reinstated, or, in other words, it’s written off, it’s going to be demolished, and it’s going to be replaced, and the insurers had covered the balance of the $300,000 through their replacement policy or their sum insured, does it mean that if the insurer is taking over that job, the new house has to be built to current code, or simply to the code that existed at the time that the original property was built?

Sorry, I apologise. I didn’t quite understand the member’s question originally. Yes—to the current code.

Thank you, Mr Chair. Minister, just a technical point on page 15 for the advisers: do you think this definition of “mixed-use building” is overly complicated? Secondly, obtaining this information would be extremely hard, and is there a simpler formula to be applied to this type of mixed-use building?

I would just comment that it’s as complicated as it would need to be.

Thank you very much, Minister, for the feedback in regards to questions previously. Two further questions, if I may.

The bill includes changes of removing the commissioner’s discretion discount levies, payable to the commission by private insurers, and my question in regards to that aspect is around the implication or removal of that commissioner discretion and what is likely to be the implication, potentially, in regards to that aspect. Because, obviously, the ability for the commissioner to have some scope in terms of making such assessments, I think, is deemed appropriate—but a little bit of context around that.

The last aspect is—because, obviously, conscious of time and we’re getting near to the end of my list—the introduction of the new offence for insurers who fail to comply with their obligations to pay a levy to the commission is a new implication within the bill.

Obviously while there is a recognition in regards to an offence regime, I’m wanting to get some assurance from the Minister in regards to making sure that that new ability to be able to, in effect, apply an offence is going to be appropriately measured in the context that we’re going to be aware that there may be people that are going to try and push the limits a little bit. But, again, how do we get those checks and balances to make sure that that new offence is fair and reasonable in the context of what will be applied? Thank you.

I’ll answer the first of the member’s questions. I’m not sure—he might need to point me to the part in the bill in respect of the second.

But the discretion to discount levies, that commissioner discretion, is an unusual thing—it doesn’t exist in other sectors; it’s an unusual practice. Obviously, there’ll be greater information-sharing over time; I think there’ll be appropriate arrangements in place.

The question is that the Minister’s amendments, set out on Supplementary Order Paper 297, be agreed to.

Amendments agreed to.

Parts 1 to 6, Schedules 1 to 3, and clauses 1 and 2, as amended, agreed to.

Bill to be reported with amendment.