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EQC's earthquake liability revised upwards

Hon Bill English
Minister of Finance


30 August 2011
Embargoed until 10am

Media Statement
EQC's earthquake liability revised upwards

The Earthquake Commission (EQC) has increased its estimated Canterbury earthquakes liability by about $4 billion to $7.1 billion, Finance Minister Bill English says.

The new estimate follows an actuarial valuation of EQC's liability, based on available field assessments of damage claims. It includes an increase of $2.17 billion from the 22 February earthquake and $1.42 billion from the 13 June earthquakes and other aftershocks, which were not previously included.

"The Government is committed to rebuilding Christchurch and supporting the people of Canterbury," Mr English says. "Today's announcement will not affect homeowners' claims, which EQC will continue to pay in full. And it will not delay rebuilding in Christchurch.

"EQC can meet most of these costs through the Natural Disaster Fund, which held about $6 billion before the first earthquake. The Government, through its guarantee under the Earthquake Commission Act, will meet any shortfall. EQC also has reinsurance in place to help meet the cost of any future events.

"Despite the increased liability, which will have a one-off impact on the Government's operating balance for the 2010/11 year, the Government remains on track to meet Budget forecasts of a return to surplus in 2014/15 and to keep net debt below 30 per cent of GDP," Mr English says.

EQC's initial liability estimates were based on international models for calculating damage from single events. While these hold for the 4 September earthquake, they were not designed to calculate the effects of multiple events.

"Quite clearly the scale of residential damage from the 22 February earthquake has been worse than initially thought, with more claims, more damage on a house-by-house basis and greater land damage than expected.

"For example, it was initially thought 12,000 houses would have more than $100,000 in damage. As EQC has completed more detailed assessments, this number is now estimated to be about 30,000 houses.

"Damage to land was initially estimated at between $300 million and $600 million. This has increased to $1.8 billion."

The increased estimate breaks down as follows:

Budget 2011 – estimated net claims cost$3.05 b
Inclusion of 13 June earthquakes and other aftershocks+$1.42 b
22 February earthquake increase +$2.17 b
Post-earthquakes re-evaluation of ongoing costs+$0.35 b
4 September earthquake increase+$0.02 b
Other+$0.06 b
Mean estimate of net EQC claims cost$7.07 b

The new estimated liability will be reflected in the 2010/11 Crown accounts, which will be published in October. Current indications suggest the higher EQC liability will be partially offset by higher than forecast tax revenue and lower than forecast costs in other areas.

Combined, these factors are likely to push the operating deficit before gains and losses up to about $18 billion - $1.3 billion higher than the Budget forecast. However these figures have not yet been finalised or audited.

"We need to remember these are still estimates and EQC and the Treasury will continue to periodically revise the expected liability as more claims are completed and more information becomes available.

"At the time of the Budget, Treasury put the total earthquake damage bill – to all property owners and insurers - at $15 billion, or about 8 per cent of GDP, making it the worst natural disaster in recent memory to hit a developed nation – relative to the size of its economy.

"The Government has asked Treasury to update this estimate based on new information available since the Budget," Mr English says.

--

Questions & Answers

Q. How much has EQC's liability increased?
EQC’s ultimate net cost of claims (the amount it expects to pay over time) has increased to $7.07 billion from the estimate in Budget 2011 of $3.05 billion. This increase can be broken down into:

Budget 2011 – estimated net claims cost$3.05 b
Inclusion of 13 June earthquakes and other aftershocks+$1.42 b
22 February increase +$2.17 b
Post-earthquakes re-evaluation of ongoing EQC costs+$0.35 b
4 September increase+$0.02 b
Other+$0.06 b
Mean estimate of net EQC claims cost$7.07 b

Q. Will the increased estimate affect EQC's ability to pay its claims?
No. This will not affect homeowners' claims in any way and EQC will continue to pay out claims in full. As at 24 August, EQC had paid out $1.41billion for all claims to date, which is about $4 million per day.

Q. Will this new estimate affect the rebuild?
No. The revised estimate will not delay rebuilding in Christchurch and will not affect homeowners' claims, which EQC will continue to pay in full.

Q. Why was EQC's previous estimate so much lower?
The estimates for the 4 September and 22 February quakes were based
on international models for calculating damage from single events and were not designed to calculate the effects of multiple events As data has become available from actual field assessments, it has become clear residential damage from the 22 February earthquake is worse than initially thought, with more claims, more damage on a house-by-house basis and greater land damage than expected. In addition, the previous estimate did not include the 13 June earthquakes and other aftershocks.

Q. What are the main factors behind the increase?
There are two main reasons for the increase. The first is a $2.17 billion increase in the estimated residential damage of the 22 February earthquake from $3.98 billion to $6.15 billion. Because this increase is above EQC's level of reinsurance for the earthquake, which covers the cost of claims between $1.5 billion and $4 billion, EQC bears all of the increase on its own books.
The second reason is the inclusion of the 13 June 2011 earthquakes and other aftershocks. They were not included in the Budget estimate, published in May. Together they add another $1.42 billion to EQC's estimated liability.

Q. What are the implications for the Crown's finances?
EQC's increased liability will have a one-off impact on the Government's operating balance for the 2010/11 year. Despite the higher EQC liability, the Government still expects to return to surplus in 2014/15 and to keep net debt below 30 per cent of GDP. This is because the higher liability will be fully accounted in the 2010/11 accounts and will not affect operating balances in the years beyond.
The full 2010/11 Crown accounts will be published in October. Current indications suggest the higher EQC liability will be partially offset by higher than forecast tax revenue and lower than forecast costs in other areas. Combined, these factors are likely to push the operating deficit before gains and losses up to about $18 billion - $1.3 billion higher than the Budget forecast. However these figures have not yet been finalised or audited.

Q. Can you rule out the figure changing again?
No. These are still estimates based on available assessments and EQC and the Treasury will continue to periodically re-estimate the expected liability as more claims are completed and more information becomes available. EQC won't know the final cost of all the Canterbury earthquakes until all claims have been assessed and settled. EQC is aiming to complete its assessments of buildings and settle all contents claims by the end of December 2011.

Q. Who pays if the Natural Disaster Fund (NDF) is used up?
The Natural Disaster Fund managed by EQC held about $6 billion before the first earthquake on 4 September 2010. Based on the latest estimate the shortfall is $829 million. However due to the expected timing of claims assessments and payments, the eventual shortfall is not expected to exceed $500 million. Under Section 16 of the Earthquake Commission Act 1993, the Government would honour its guarantee if there is a shortfall, but the final form of this payment, if it is required, has not yet been established. In the meantime, this figure will be reflected in the Crown accounts as a small increase in forecast net Crown debt.

Q. Who pays if there is another event?
EQC has renewed its reinsurance, which means EQC has reinsurance for another two events the size of the 4 September earthquake. If the NDF could not cover EQC’s share of costs from a future event, the Government would honour its guarantee under the Earthquake Commission Act.

Q. What does this mean for the overall earthquake damage bill?
At the time of the Budget, Treasury estimated the total cost of damage – to all property owners and insurers – for the 4 September and 22 February earthquakes at about $15 billion, or about 8 per cent of GDP, including $9 billion for residential property damage. The Government has asked Treasury to update this estimate based on new information available since the Budget.

Q. What does this mean for the Government's share of the earthquake damage bill?
In Budget 2011, a six year $5.5 billion Canterbury Earthquake Recovery Fund (CERF) was established to provide certainty for rebuilding Canterbury.
A further $3.3 billion cost was forecast to meet the Government's share of costs, including EQC and ACC costs (a total of $8.8 billion). With rounding, the increased EQC liability takes the Government's total estimated share of earthquake costs to $12.9 billion.

Q. Will the Canterbury Earthquake Recovery Fund be enough to fund the recovery?

The current Canterbury Earthquake Recovery Fund ($5.5 billion) excludes cost associated with meeting EQC's insurance liabilities. The Government is committed to funding its share of rebuilding Canterbury and the fund is still expected to cover those costs.

Q. What audits/checks have been or will be done on this actuarial estimate?
The actuarial estimate and report has been considered by:
• EQC’s internal risk committee
• External auditors (Deloitte) on behalf of the Office of the Auditor General.

Q. What is the Government doing to allay any concerns reinsurers might have about writing cover in New Zealand?
Canterbury Earthquake Recovery Minister Gerry Brownlee will lead a government delegation to London and to the Rendez-Vous de Septembre in Monte-Carlo, Monaco on 10-15 September. Mr Brownlee will give a presentation on the Canterbury earthquakes and meet several major reinsurers including Swiss Re, Gen Re and Munich Re.

Q. What does the new estimate mean for insurance in Christchurch?
Several major insurers are not currently writing new insurance cover in Christchurch as continued seismic uncertainty makes it difficult for them to accurately price risk. This response follows the pattern seen in other countries following a significant natural disaster. However, as the changes to EQC estimates do not fundamentally affect the risk profile of Christchurch, they are unlikely to significantly affect future insurance.

Q. What is the size of this disaster compared to other disasters?
This is New Zealand’s largest natural disaster. EQC has received more than 388,000 claims for the earthquakes since 4 September. The previous biggest event for EQC was the Gisborne earthquake in 2007 with 6224 claims.
The Canterbury earthquakes are likely to rank as the fourth most costly global event for insurers since 1970 after the Northridge earthquake in California in 1994, the 9.0 earthquake and tsunami disaster in Japan in March this year, and the Kobe earthquake in Japan in 1995.
At the time of Budget 2011, Treasury estimated the combined cost of 4 September and 22 February earthquakes to be equivalent to about 8 per cent of New Zealand’s GDP. Damage from the 1995 Kobe earthquake in Japan was just over 2 per cent of Japan’s GDP. Hurricane Katrina in 2005 cost about 1 per cent of US GDP, and March’s Japanese earthquake and tsunami disaster was an estimated 3-5 per cent of Japan’s GDP.
Q. What progress has been made in the earthquake recovery process? Progress so far includes:

• EQC has paid out $1.41 billion on claims to date and completed about 52,000 full assessments since 22 February. It is on track to complete all its full assessments by December 2011. EQC is working towards completing all contents claims by the same deadline.
• A new government department – the Canterbury Earthquake Recovery Authority - has been set up to lead and co-ordinate the recovery.
• A Royal Commission of Inquiry has been established to find answers to why so many people lost their lives on 22 February and is due to provide an interim report in the next few months.
• More than 23,000 emergency repairs have been completed by contractors employed by Fletcher Construction to make homes damaged by the earthquakes safe, sanitary and weather tight.
• More than 10,000 heat pumps or solid fuel burners have been installed or repaired in homes whose primary heating source were damaged by the earthquakes.
• A total of 363 buildings have been demolished in the CBD since 22 February, with 600 demolition contractors working in the CBD each day to bring down the rest of the 1000 estimated buildings that need to be partially or fully demolished.
• A draft recovery plan for the Christchurch central business district has been developed and released for public consultation, and will be submitted to the Government in December 2011 for consideration and approval.

ENDS

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