Debate on Crown Entities, Public Organisations, and State Enterprises — Earthquake Commission

For the first time in a very long period of time, the performance of the Earthquake Commission has been tested with the various Christchurch earthquakes. Of course, Kiwis have been paying their earthquake levies for all of that very long time and, obviously, have a right to expect excellent performance by the commission. I am afraid to say that many people in Christchurch, and I mean especially those who are actually affected by the earthquake, are not, in fact, satisfied with the performance of the commission, and I am one of them. Firstly, this is because, I think, one of the problems is the definition of the liability for which the Earthquake Commission is liable. Secondly, I think it is because of an initial lack of experience with earthquakes and how to deal with them, although that has improved since. Thirdly, it is because of the way the commission has addressed these claims, and, fourthly, because of the concern over some of the commission’s internal practices.

On the first of those issues, the scope of liability, the Earthquake Commission did attend to claims for contents within the first year quite adequately, I feel. So the question really is: should the Earthquake Commission actually have to deal with claims for contents, or should it be liable only for property? I think that is something that needs to be addressed in the relatively near future, in case such an event happens again. I do not think that the commission should have to deal with contents claims. They are mostly covered by insurance. The contents damage causes inconvenience, but not the loss of a place to live. It causes delays in the reinstatement of houses, because the commission’s time and effort has to be taken up with contents claims, and of course it has got the capacity to exhaust, or certainly reduce, the size of the resources that the commission has. So that is an issue for the future.

But on the second issue, the lack of initial experience, I did feel that the Earthquake Commission was not properly prepared for the event that happened, at the magnitude it happened. The commission did not have the people it needed, it did not act fast enough, it was very bureaucratic in its procedures, and it constantly inspected things and did not do very much on the ground. So hopefully the commission learnt from that and will improve in the future.

On the third issue I mentioned, it has taken in fact far too long for the commission to attend to the repair or replacement of damaged homes. There have been multiple inspections, as I said, and too little action. Well after a year since the February earthquake, thousands of people still live in seriously damaged homes and unrepaired homes. Many live elsewhere, and cannot afford to do so. These are properties in the green zone. Many need to be replaced, and many still have to be demolished.

I realise that the numbers of claims are extremely high, and that tens of thousands have in fact been attended to. But that is no comfort to the thousands whose claims have not yet been actioned this long—almost 1½ years—after the February earthquake. So the question really is: why is that? I feel that one problem has been the employment only of Fletcher’s as the sole provider. I think perhaps it would have been better to consider others as well. I think a monopoly may have created something of a lack of competition for good results, and of course more resources should mean speedier attention. Overall, progress has been too slow and it really needs to be better. So that is another lesson for the future.

The fourth and final issue I raised was some concerns that people have expressed, and I think with justification, over some of the internal practices. Initially, it did appear that there were conflicts of interest between some of the staff of the commission and the commission itself. I do note that the commission imposed a self-imposed review of that, and this went some way to solve some of the problems. However, suspicion still exists out there about some of the internal practices like that. So the conclusion that I am afraid I have to draw is that the performance of the Earthquake Commission was not as good as it should have been, and of course it has never been tested, as I said at the beginning. In trying to meet that test, I do not feel it reached the standard we would require, but I do not want to say that it has been a complete failure, because it has not. The commission has done a lot of good work, and I want to pay particular regard and acknowledgment to the people who have been employed by it.

It is my pleasure to talk about the Earthquake Commission—EQC—in this Crown entities debate. The people of Christchurch and Canterbury have got to know the Earthquake Commission well over the last 16 months, and the commission is the organisation that we love to hate. We love to hate it, but, actually, just a little bit of reflection would tell us how very fortunate we are that it exists.

New Zealanders are heavily insured. Possibly about 99 percent of them have their homes insured, and this is a unique situation. Across the world, particularly in earthquake-prone regions, due to cost most people are uninsured. We look at places like the US, which is a country very similar to us, but in those areas like San Francisco that are earthquake-prone, only about 15 percent of people have their homes insured—only about 15 percent. It is similar in Japan. It is because of the Earthquake Commission, this Crown entity, that virtually all New Zealanders have insurance. Let me explain a little bit about that.

The Earthquake Commission was set up in 1933, after the Napier earthquake, and it was set up to protect homeowners. It was set up to insure homes, contents, and land. “And land” is particularly interesting, because we are one of the very few countries in the world that insures land.

💬 Hon Gerry Brownlee: The only one.

We are the only country in the world that insures land. Really, what it was was a Government safety net for insurance at a low cost. That low-cost insurance continues today. It is actually what the commission has activated by a levy on your main insurance premium. The Earthquake Commission takes the first $100,000 risk. This keeps the major premiums down. This means that insurance in New Zealand is cheaper and available to all, and hence we have that great cover.

What this means is that Christchurch and Canterbury have a real opportunity to rebuild safer, better, high-quality housing, and mostly out of insurance. There may be a little bit of a gap, but this is an exceptional situation, simply because of the Earthquake Commission. In comparison with recovery scenarios in other countries, we are incredibly fortunate. There have been about 600,000 claims to the commission over the last 11,000 earthquakes. Those claim expenses totalled $11.4 billion in 2010-11, and that left the commission with a net deficit of $7.1 billion for the year ended June 2011. The Natural Disaster Fund was at $5.9 billion pre-earthquake, with another $2.5 billion available for global reinsurance. That fund has now closed, with a deficit of $1.2 billion. So what we are seeing here is that the Earthquake Commission’s liabilities exceeded its assets in 2011. But that is the way the commission is organised, and the Crown has committed to meet that shortfall. The Crown has committed to meet it under section 16 of the Earthquake Commission Act 1993. So because of the Earthquake Commission, people who have insurance have no need to worry that they will not be paid out.

We all know that 2010-11 was an exceptional year for the commission. Both the September and February earthquakes came in the top five insurance claim situations in the globe. They are enormous claims. The Earthquake Commission is expecting to remediate land and to repair and cover contents for over 100,000 homes. I believe that it has made significant progress. It has paid out $3 billion already, and that is 10 percent of Canterbury’s GDP. So it has been a big shot in the arm, and it has kept our economy going. It is averaging $37 million a week. It has repaired 15,000 homes, and to give you an idea about what that looks like, that is the number of houses that are in Timaru. The commission has repaired the equivalent of Timaru, and we have got about 35,000 houses still coming through the process. We have got a long way to go, and many people are tired and frustrated. But I think it is because of the Earthquake Commission that New Zealanders are insured. Because the commission takes that first $100,000 risk we know that our houses will be repaired. We know that in the long term—

I just want to make a couple of comments mainly in response to some of the offerings this evening from Denis O’Rourke, a new member of Parliament for New Zealand First. I appreciate that he wanted to say that EQC, the Earthquake Commission, had sort of done OK but he could not give it a full pass mark. I think one of the interesting things is that since its modern inception in 1994, where it followed on from the Earthquake and War Damage Commission, the Earthquake Commission has come up for review repeatedly in the House, and MPs from all sides of the House have quietly let it slide through without too much attention. It is not until you have a big disaster like this that an organisation like that becomes tested.

As the previous speaker, Nicky Wagner, said, it is dealing with some 680,000 claims. Those are each individual exposure across the land damage, the built-property damage, and the contents. When you aggregate those per household, it is still over 400,000 household claims. It is huge. There is no other insurance company in the world that has ever dealt with anything quite so big from one event. The only one that comes close is State Farm, an insurer in the United States that dealt with the very big claims that came out of the Hurricane Katrina event some years ago. The difference, though, between the Earthquake Commission and State Farm in the United States was that the Earthquake Commission had a staff of 21 people on the day of the 4 September earthquake in Christchurch; State Farm had a standing staff of over 77,000 when it dealt with its big hurricane event in the United States. So from 21 people dealing with the huge number of rolling claims coming through, it has gone up to, I think, round about 1,200 people now. So it is still a pretty lean machine. It has tried to do as much by contract as it can, because we do not expect to have these events occur with the sort of regularity that would justify a staff of some 77,000 as was the case with its counterpart in the United States. So I think it has done a pretty good job.

It is often forgotten that we have had a series of earthquakes there. There have been over 11,000 shakes in total, over 2,000 shakes that have been of a very substantial nature, and five events that have been of such a magnitude that they have triggered a series of Earthquake Commission claims from those events. As the previous speaker said, it has repaired, through the project management office, 16,000 homes now, and at any one time there are 2,000 homes in Christchurch under repair.

I noted the comment from Mr O’Rourke where he said that there were some homes that needed to be demolished and rebuilt. The Earthquake Commission does none of those. Once you go over the $100,000 cap, it is in the hands of the private insurers. So the Earthquake Commission is dealing with those repairs under $100,000 and over $10,000. The idea is simply that we will be able to put a brand on those repairs that will see the value of the real estate that is repaired maintained through the years ahead. Had we been in a situation where the Earthquake Commission simply cashed up those who have got damage, firstly, you are relying very much on the Earthquake Commission assessor getting it right first time—there is no second opinion. But under the project management office arrangement, when the builder turns up to do the work, he does the work. I think that is a very important distinction.

The other thing is that the Earthquake Commission does cover land damage, and that is totally unique in the world. I think it is a great thing that we have got it, and we must do whatever we can to preserve it, because it has allowed us to put together a programme to do the proper geological survey that is required of many, many parts of Canterbury to determine where the best areas are—or the appropriate areas are—for residential occupation. It is that process that allowed us to be able to say, sadly, to about 9,000 households: “You need to move on, because where you are living is no longer suitable for residential occupation. The crust under your house has thinned. The depth to bearing is now a long way below you. You may have slumped. The land may have moved’’—in some areas in Christchurch it has dropped by up to 1.8 metres—“and it is ideal that you do look for some other opportunity for your residential occupation.” We came up with the two offers that have gone out to people, and people can choose one of those: either deal with your private insurer or sell the land to the Government, and the Government will then negotiate with the Earthquake Commission about what the repair payment might be. There will be a very large net cost in this whole thing to the Crown; there is no question about that.

But to go back to my key point, without the Earthquake Commission we would have had no basis to start a land assessment, and no basis, in fact, to engage with the private insurers about where the liability stopped and started. There is a bit of concern out there at the moment over apportionment and continuity of assessment methods for damage. They are being worked through in a constructive way. None of this is easy. If it was, it would have all been fixed quite some time ago. But anyone who comes to Christchurch will see the huge amount of effort that is going in down there. I am not going to stand here and say that everything is perfect with the Earthquake Commission, but by the same token I cannot accept that we should determine in this process that it has come anywhere near a position that would say it has done less than its best. I think it has done very, very well in difficult circumstances.

The payments that are being made into the local economy through the Earthquake Commission are no doubt contributing to some of the very good and positive figures that we are seeing around population stability, and around the local economic growth as well. That will continue for a few years to come. We are just seeing the thin end of the wedge of what will eventually be invested in Canterbury in the rebuild. That simply puts an onus on all of us to ensure that there is sufficient economic activity coming in behind that big rebuild over the next decade to ensure that the prosperity in that province continues, and that is certainly a commitment that I make.

There was mention made of the Natural Disaster Fund and how it is somewhat depleted at the present time. Some people have proposed a levy on people’s earnings to try to top it up. The reality is that it takes many, many years to build up a fund of $5 billion. A Government, of course, is always in the sovereign position of being able to strike a levy or strike a tax if it thinks that is appropriate. Our strong view is that it is not required at the present time, and that we can stand as guarantor behind the scheme. One of the positive things I can report is that when the Earthquake Commission went into the reinsurance market recently to buy cover for the exposures that it has to prepare for going forward, it was able to get that cover, and the terms were reasonable, given the circumstances.

I want to conclude by just saying that as a major player in the home insurance industry in New Zealand, the Earthquake Commission performs an exceptional service. If the $100,000 cap is too low, it is because this House has allowed it to stay at that level for the last 18 or 19 years. At some point we will need to look at it. I want to acknowledge that Mr O’Rourke has raised the good issue about whether the Earthquake Commission should continue to cover contents. Well, I think that in the difficult insurance market at the present time, you would not want to be mandating from this House a lack of cover, or a withdrawal of cover, for the whole of New Zealand. So there is going to be a transition period that will come after we have had the review of the Earthquake Commission, which should commence later this year.

I think that in very difficult circumstances this organisation has served the country well. I know that there will be people who listen to this who perhaps want to scoff at it, but, really, I think the question is: how could it have been done better? There was no way that you could have had a standing army of 10,000, 15,000, or 20,000 people hanging around, waiting for the day that there was the big one somewhere in New Zealand to go in there and fix it. When you are dealing with the sorts of volumes that it is dealing with, there will always be ups and downs. There is no question about that. But, overall, it has done a very, very good job. I think it does deserve a commendation from the House. Also, just a little note that all of us as members of Parliament—particularly those of us from Canterbury, who are also, I might say, in most cases claimants—will be watching that progress over the next however long it takes to get the job done, with the intention of ensuring that it is done to the very highest quality.

Report noted.

Accident Compensation Corporation