EQC levies rise to realistically reflect costs
Hon Bill English
Minister of
Finance
11 October 2011
Media Statement
EQC levies rise to realistically
reflect costs
Earthquake Commission (EQC) levies will rise early next year to help rebuild the commission's Natural Disaster Fund (NDF) and to more realistically reflect EQC's operating costs, Finance Minister Bill English says.
"The Government is committed to rebuilding Christchurch and supporting the people of Canterbury," Mr English says.
"The levy increase is a responsible step to ensure EQC can meet its long-term costs and continue to provide disaster cover around the rest of New Zealand in a sustainable way.
"Strengthening EQC's finances will provide additional confidence to homeowners throughout the country that EQC has the capacity to meet its obligations now and in the future.
"This is particularly important given the Government's tight fiscal position, which is reinforced today by the Crown's financial statements for the year to 30 June 2011."
Insured homeowners currently pay 5c per $100 of insurance cover, up to a maximum of $69 a year (including GST), as part of their insurance premiums. Under the proposed changes, homeowners will pay 15c per $100 of insurance cover, with an annual cap of $207 (including GST).
The increase, which will take effect from 1 February 2012, will:
• Provide revenue to meet EQC's
operating costs, which for many years have been subsidised
by NDF investment income, and to cover higher reinsurance
costs.
• Enable EQC to rebuild the NDF to its
pre-earthquake level of $6 billion in about 30 years.
• Reduce EQC's estimated $1.2 billion cash
shortfall to $490 million, reducing the amount the
Government may have to provide under EQC's Crown guarantee.
It will increase annual levy revenue from about $86 million to about $260 million.
"Raising levies for those who benefit from earthquake insurance cover is the fairest way to ensure EQC can meet its long-term costs," Mr English says. "The levy rise will add about $2.65 a week to most homeowners' insurance bill.
"The increase is not based on a full actuarial forecast of future liabilities, which will be calculated as part of a review of EQC in the future.
"I expect to take terms of reference for a review to Cabinet in coming months, but the exact timing will depend on getting more issues resolved on the ground in Christchurch. The Government and the EQC's first priority has always been progressing the recovery in Canterbury and that remains the case.
"However it is clear the current levy is too low and needs to increase now to pay for EQC's operating costs and to begin rebuilding the NDF," Mr English says.
The full Cabinet paper is available at:
www.treasury.govt.nz/publications/informationreleases/canterburyearthquakes/eqc
ENDS
Questions and Answers
What is being announced
today?
From 1 February 2012 the Earthquake
Commission (EQC) levy that homeowners pay as part of their
insurance premium will rise from 5c per $100 of insurance
cover to 15c per $100. The maximum amount a homeowner can
pay, including GST, will rise from $69 a year to $207 a
year. This change will be made by regulation.
The levy contributes to EQC's earthquake cover, which covers the first $100,000 of house damage, the first $20,000 of contents damage and damage to land, which is not covered by commercial insurers.
How will the levy increase
affect homeowners?
Insured homeowners will pay a
higher levy. This is automatically included in their
insurance bill, so it is not necessary for them to do
anything. The increase will add about $2.65 a week to most
homeowners' insurance premiums.
Why is the levy
being increased?
The current levy, which raises
about $86 million a year, is not enough to pay for EQC's
day-to-day operating costs, which include the cost of
reinsurance, let alone the cost of rebuilding the Natural
Disaster Fund (NDF), which stood at about $6 billion before
the first Canterbury earthquake. Previously this was not a
problem as the NDF was generating large amounts of
investment income. However with the NDF expected to be
exhausted by EQC's updated forecast $7.45 billion Canterbury
earthquake liability and higher reinsurance costs, the
current levy is insufficient to meet EQC's long-term costs.
EQC's Canterbury earthquake liability has been updated to
include the $380 million impact of the recent High Court
decision.
Increasing the levy will generate enough revenue to pay for EQC's operating costs and to rebuild the NDF to pre-earthquake levels in about 30 years.
How will the increase impact on the Government's
fiscal track?
The higher levy will meet some,
but not all of EQC's projected costs over and above the
amount it holds in the NDF. That shortfall is currently
forecast to be about $1.2 billion. The higher levy is
expected to reduce that shortfall to about $490 million,
reducing the impact on the Government's fiscal track. This
cost will show up in the Pre-election Economic and Fiscal
Update.
What is the levy increase based
on?
This increase was deemed a prudent level to
meet EQC's operating costs and replenish the NDF in a
reasonable time. However it is not based on an actuarial
assessment of future liabilities. That will be carried out
as part of a wider review of EQC in the future. It is
possible that after that assessment the levy may need to be
adjusted again. The Government believes the current increase
is a prudent interim step given EQC's increased
costs.
When will the Government review
EQC?
The Government and EQC's first priority has
always been progressing the recovery in Canterbury and that
remains the case. However, the Finance Minister expects to
take terms of reference for a review of EQC to Cabinet in
coming months. The exact timing of the review will depend on
getting more issues resolved on the ground in
Canterbury.
Why has EQC's expected cash shortfall
increased?
On 30 August, EQC's forecast cash
shortfall, which the Government is likely to have to pay
under EQC's Crown guarantee, was estimated at $500 million.
This estimate has now increased to $1.2 billion without a
levy increase. This larger estimated shortfall has been
driven by the impact of the recent High Court decision,
which EQC estimates will increase its liability by about
$380 million, and the addition of an allowance for future
non-Canterbury claims costs, both of which were not
previously included. The levy increase will reduce the
estimated cash shortfall to $490 million.
Is the
increase necessary to meet EQC's earthquake
claims?
EQC's Crown guarantee means it can meet
its earthquake claims regardless of whether the levy is
raised or not. However raising the levy reduces the amount
the Government is likely to have to pay under the guarantee
from about $1.2 billion to about $490 million. The
Government believes it is better for insured homeowners, who
directly benefit from EQC's cover, to pay a levy that
reflects EQC's long-term costs, rather than all taxpayers
effectively subsidising EQC.
Why not put in place
an earthquake tax to pay for these
costs?
Because this would mean that all
taxpayers, regardless of whether they own a house or have
insurance, would be subsidising insured homeowners who
benefit from EQC cover. The Government believes it is better
for insured homeowners, who directly benefit from EQC's
cover, to pay those costs through a levy. In addition,
raising income tax would have a negative effect on economic
growth.