Friday, 10 September 2010

The disaster that is the Earthquake Commission

There’s been debates on this already at both Public Address and Kiwiblog, and probably elsewhere too, but there’s a lot of bullshit being talked about the government department that is the Earthquake Commission (EQC)—mostly about its liabilities after the Christchurch quake and what it calls its assets. Speaking frankly, there’s some numbers that don’t quite stack up, and a real question about why this particular government department even exists.

Christchurch itself has a big bill.  JP Morgan reckons there’ll be around a $4.3 billion bill to put New Zealand’s second-largest city back on its feet, or at least pull it up off its knees, of which Treasury Secretary John Whitehead calculates the government’s Earthquake Commission will have to stump up nearly half—even with their liability amounting to no more than $112,000 ($100k+GST) per house—with reinsurers and taxpayers picking up the balance.  (Nice of the taxpayer, don’t you think?)

Now, the EQC was set up after the war to socialise losses in time of earthquake or war damage. It’s like an ACC for houses: taking risk away from insurance companies and placing it squarely onto this government department. (Nice of the government to assume this liability on your behalf, don’t you think?)  Paid for by a compulsory levy on home insurance. (Nice of the government to take away your choice in the matter, don’t you think?)

So just to summarise: the government decided to assume the risk of earthquake damage, giving you (in your capacity as home-owner and insuree) no choice at all about joining their scheme, and (in your capacity as taxpayer) no choice at all about assuming the risk should the government department’s investments fail to pick up its tab. So, since the scheme is a sunk cost, you really have to hope their appointed bureaucrats would have the smarts to do the job required, wouldn’t you. Wouldn’t you? (Stop laughing at the back.)

Well, you can see just by that $100,000 figure that those bureaucrats are not exactly on top of their game; while there was a time when $100,000 would build you a replacement home (which is what the figure was supposed to cover) that time is very long ago. The grey ones at the EQC haven’t quite caught up with the inflation of the last few decades.

Since it’s had no major payouts since its inception, however, there’s been no major questions about its operations. Until now.  Cometh the disaster, cometh the questions.  Because while the drop in its liability per home means EQC is less exposed than it would be, leaving reinsurers and taxpayers to pick up the tab for which you’re paying your compulsory levies, the EQC will supposedly have built up for itself a large lump to pay for The Big One that everyone and his favourite geologist knew would be coming some time. A lump large enough to pay for this one and the one that might come soon after that, without putting the taxpayer (i.e., you and I) at risk.

So has it?

Well, “not so much.”

John Key told Q+A, and I quote,

_Quotethe Earthquake Commission has enormous funds, 15 billion dollars, largely invested offshore… [including] about six billion in cash.

So it all looks good, then. The taxpayer won’t be called on. Phew.

Except it hasn’t got $15 billion at all.  Or anything like six billion in cash.  This is is just (what’s the word I’m looking for here?) flat-out bullshit. Because as the EQC’s on Annual Report reveals,

_QuoteEQC has custody of the Natural Disaster Fund, around $5.6 billion of public money…[and because reinsurance kicks in after the first $1.5b of costs, this gives] an estimated value of up to $8.1 billion before having to call on the Crown Guarantee.


Still, that should still cover things, shouldn’t it? We taxpayers are safe?

Except when you read more closely you discover that

_Quote approximately 67 percent of EQC’s portfolio is invested in NZ Government Stock and NZ Government inflation-indexed bonds.

And as you’re probably aware, this is where the word “invested” is something of a misnomer. Because NZ Government Stock and NZ Government bonds are nothing more than little bits of fancy printed paper backed by nothing more than … the NZ Government’s ability to tax you and me.

So much for those “enormous funds.” Because when all’s said and done, on the first occasion when it’s drawn on, we discover that the Earthquake Commission has—not $15 billion—not $8 billion—not even $5 billion—but little more than $1.5 billion of actual investments to draw on, the rest of their “assets” consisting only of a promise to make you and I pay.

Nice, huh.

So while the government quietly goes about starting the printing presses to avoid us working out how we’re being fleeced (producing fancy bits of government paper they call cash to back those other fancy bits of paper they call bonds to pay a bill with which you and I should never have been faced), can we please, just as quietly, get rid of this bureaucratic encumbrance (i.e., the EQC) and leave risk and insurance where it belongs—with the insurance industry. Because once they’ve made this pay-out, the EQC is an organisation with no funds, no backing, and no reason to exist. Let the people who do know what they’re doing do it. And stop the grey ones adding an avoidable man-made disaster to an unavoidable natural one.


  1. "Let the people who do know what they’re doing do it"

    Something I've been wondering about. The said experts, ie those who charge us inflation-proofed plus rapacious premiums year-on-year for private insurance, have been assessing the risk of such an event occurring.

    And should have squirreled away a huge wad of wedge ready for payout. On this event and the next event and the next.

    So after this single, but not so major event, why are they so eager to raise premiums? Imho, they too are not ready to back their risk.

  2. The curious thing about the EQ and War Damage fund is that the only ones insured by it are those who have taken out private insurance - they are levied.

    So it insures the insured but this allows us to take out insurance that excludes acts of war and acts of God.

    So when an earthquake strikes those who have no insurance have no earthquake insurance either and you get people like Wendel Nissan saying "But why should we punish the uninsured?" !!

  3. “It is just as well for us to turn around and have a look at ourselves sometimes. What is not good enough for me is not good enough for the fellow I am representing in this House, whether it is a house or an income. There is enough of the best for all of us, and I want to bring about security for everyone during illness, whether it be temporary incapacity due to accident, or anything else. I should think it was the inalienable right of every person to be secured against distress of any form. That is only commonsense. I so not know whether I would call it ’sound economics’ or not … I do not think it is any use talking about national wealth unless we can use it for national purposes … In a word or two, I would say that is APPLIED CHRISTIANITY.”

    - Michael Joseph Savage

  4. It is just as well for us to turn around and have a look at ourselves sometimes. What is not good enough for me is not good enough for the fellow I am representing in this House, whether it is a house or an income. There is enough of the best for all of us, and I want to bring about security for everyone during illness, whether it be temporary incapacity due to accident, or anything else. I should think it was the inalienable right of every person to be secured against distress of any form. That is only commonsense. I so not know whether I would call it ’sound economics’ or not … I do not think it is any use talking about national wealth unless we can use it for national purposes … In a word or two, I would say that is APPLIED CHRISTIANITY.”

    - Michael Joseph Savage

    Dear Mr Savage...

    Take your altruistic,bleeding hearted, bludging billshit and shove it up you arse pipe.


    The pissed off NZ Taxpayer

  5. That about sums up why I'm not a libertarian, James.

  6. no tags for this, can an Earthquake category be added?

  7. Owen - as the post points out, that isn't true. EQC cover only goes up to $100k. People with home insurance do have Earthquake cover.

  8. "That about sums up why I'm not a libertarian, James."

    Good....who wants you?

    That you are incapable of understanding the principles involved disqualifys you anyway....

  9. I understand the principles involved just fine, James. To understand something is not necessarily to agree with it.

    Actually I was referring more to your tone, which is why I'm not the least bit surprised by your response.

  10. Peter, I'd stick too playing with building blocks if I were you.

    Clearly you know little of insurance and less about Gummint stock and bonds.

  11. the drunken watchman10 Sep 2010, 17:45:00

    Frankie Lee

    Are you saying you are not a libertarian because some libertarians use swear words?

    Please let me know what political options are left to you.

  12. Owen

    "act of God"... Is there an opt out clause if you don't believe in God?

    And shame on you for quoting Wendyttle...ever... That's a $100 fine payable to the VRWC to retain your membership.

  13. DW,

    Perhaps I shouldn't have bothered posting...But since you ask:

    1) I understand libertarianism, I just don't subscribe to it. THAT is why I'm not a libertarian. I just find comments like the one I initially replied to particulary annoying. Like I said, I probably shouldn't have bothered....

    2) I'm increasingly apolitical these days.

  14. An elegant take-down, Pete, well done.

  15. Wow. If a private insurance company were found to be structured like this
    people would be wanting the CEOs hung by their balls on One Tree Hill with seagulls picking at their entrails.

    Not to worry though, the EQC means well & has given folk a nice secure feeling over the years. Bless 'em. Bless the taxpayer too. Kumbayaaaargh.

  16. James - the point where 'fervent political belief' reaches 'righteous anger' and then becomes 'self-righteous insulting guy' is where you tend to start losing audience amongst the 99.9% of humanity that don't share your particular zeal for tribal politics.

    I know this confounds you and Redbaiter and KG and everyone else who reduces complex issues down to 'I'm right, so you're a ***insert favourite epithet here***' but the best way to convince people is through argument dude.


    (Sorry for off-topic, just another post in support of my campaign for levity in online debate!)

  17. @Adolf
    why is the concept that a government bond not anything more than another govt debt mechanism untrue?
    How much does the EQC take in on a yearly basis? What has happened to the compound interest from the scheme's inception?if we assume there were 800000 households in NZ in 1950 and that 80% of them had insurance, and the EQC levy was the equivalent of $5.
    for our compunded interest sum we apply the following formula
    M = P( 1 + i )n
    M is the final amount including the principal.
    P is the principal amount.
    i is the rate of interest per year.
    n is the number of years invested.

    so we have 640000 households stump up $5 the amount that should be available if we estimate a lowly average of 7.5%
    we get $245277569 today. That is only 1 year to draw down upon. Where has the money gone?

    Even if we halve the premium, and decrease the bond rate to 5%, we should still have close to $30m, which when extrapolated to include the increase in population and therefore the number of houses, there should be in excess of $20b.

    are there any fugures available to effectively perfom an audit trail since EQC's inception to see what payouts there have been in the past 65 years, and the rate of return the commission has beeen getting? It looks like various govts have been using the fund as a slush fund for years, effectively thieving from insurance policy holders.

  18. What on earth is the EQC doing investing anywhere in New Zealand? Surely they understand the concept of diversification and how essential that is in a small country like this? I simple cannot believe that off all place to invest their funds they chose... New Zealand. Awful, awful, awful strategy. In fact indefensible. The one organisation that absolutely must diversify off shore and they are putting all their eggs into, of all places, the insurer f last resort. Whoever made that decision ought to be in prison for that decision.

    Sigh. Governments. Fucking useless.

  19. Robert Winefield11 Sep 2010, 05:44:00

    So in other words, the NZ government has been raiding the 'lock-box' to pay for welfare schemes.

    How else could you describe a government department taking in a levy and then giving it to another government department to spend with the only 'security' being an IOU.

    NZers have been had.

    As for the bloke wondering why this money was invested only in NZ: I have to ask anyone with a brain - if they were in the earthquake insurance business - would invest any money at all in the Earthquake zone you were insuring...

    Isn't that like like storing your flammable valuables (papers and such) in the chimney?

  20. Adolph, you said "Clearly you know little of insurance and less about Gummint stock and bonds."

    Very well, since you obviously do know about Gummint stock and bonds, perhaps you can complete this sentence for me: "New Zealand government bonds are backed with ... "

    Points off if your answer doesn't include words like "taxpayer," "IOU" and "6 billion worthless promises."

    And maybe you could complete this one too, written expecially for you: "John Boy is my hero because, even though he thinks 8 billion looks like 15, 1.5 looks like 6, and 6 billion promises to pay ourselves are anything like a real asset, he is ... "

    Points off here if your sentence includes the words "he might be innumerate, incompetent and a fool, but at least he's better than Helen Clark. And he has a nice smile."

  21. Adolph: PS: Did you see the yields of those bonds last year, as indicated in EQC report?

    So as a further exercise, perhaps you could complete these sentences as well:

    "Most of the money pulled in from the EQC has gone ... "

    Using phrases like "down the toilet," "into the black hole of government," or "spent on election bribes" would probably be appropriate. Using words like "put away for a rainy day" or "carefully invested and providing a hefty annual return" clearly wouldn't be, otherwise they wouldn't have had to be given these printed bits of govt paper in exchange for the actual cash they collected.

    Here's another sentence for you to complete, since this is a subject on which you're so knowledgable:

    "When EQC tries to hock off its govt bonds to pay the EQC's liabilities, those yields will ... "

    And maybe give some thought who ultimately pays for that change in the cost of govt borrowing. Words like "taxpayers" and "you and I" would seem to be in order.

  22. perhaps this is the very reason that the EQC cover hasn't been inflation adjusted in the past 20-30 years, because the buggers knew it was all a ruse, and that there wasn't any money in the coffers, and to have increased the liability to EQC would bancrupt the country in the event of a CHC like level event.


  23. I wonder if the bleeding altruist actually donated any significant sum of his own money? Usually the proponents of wealth distribution really desire to distribute your wealth and mine...

  24. Some EQC history here might be of interest. Prior to the early 90's the EQC covered the whole EQ risk in NZ. Both domestic and commercial up to the full sum insured. At this time the beureaucrats realised their exposure was huge and exited commercial and only took a first loss position on domestic.

    EQC have only relatively recently (late 90's early 2000's) been able to invest their premiums. Prior to this it was those wonderful individuals at treasury who invested the annual premiums on behalf of EQC.

    Whilst your sentiments are correct - gummint shouldn't be involved in this stuff as their interests are not aligned with ours, the target is misplaced. For civil servants EQC do a good job - within their limitations (their act etc.).

    An issue not picked up is that whilst the government realised their aggregate exposure and changed to a first loss scenario to reduce that aggregate exposure (ie. they intentionally insure the first part of a loss with private companies picking up the excess over the EQC limit), the annual premium is not adjusted for the ever increasing exposure of the first loss layer. As house building prices increase the first loss layer is leveraged to a greater extent.



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