Earthquake Commission
Encyclopedia
The Earthquake Commission (EQC) provides primary natural disaster insurance
to the owners of residential properties in New Zealand
. The Government-owned Crown entity manages assets of $5.93 billion NZD
. In addition to its insurance role, EQC also undertakes research and provides training and information on disaster recovery
.
Coverage was eventually extended from solely earthquake
and war damage to include other natural disasters such as natural landslip
s, volcanic eruption
s, hydrothermal activity
, and tsunami
s with coverage for war damage later being removed. For residential land, storm and flood damage is covered. Cover extends over fire damage caused by any of these natural disasters.
EQCover entitles the holder to up to $100,000 NZD plus tax (GST
) for each dwelling, with any further amount above that being paid by the policyholder's insurance company. For personal effects, EQC pays out the first $20,000 NZD plus tax. The EQC covers only domestic assets and does not provide cover for businesses.
The EQC levies policyholders to cover a major part of the earthquake risk. The EQC reduces its own risk by taking out cover with a number of large reinsurance
companies, for example Munich Re
. In 2006, the EQC took out reinsurance of $2.5 billion NZD with multiple reinsurance companies, numbering around 30.
There is a $1.5 billion NZD excess for each earthquake event. If the required EQC payout exceeds the total of the excess and reinsurance ($4 billion NZD) the remainder of the payout is met by the EQC up to the limit of the Natural Disaster Fund. If the payout exceeds those assets, a Crown Guarantee requires that the Government pay the remainder.
In the case of a subsequent event, as with the 22 February 2011 aftershock of the 2010 Canterbury Earthquake
, the EQC pays out the first NZ$1 billion in claims, and the reinsurance
companies are liable for all amounts between NZ$1 billion and NZ$3.5 billion. The EQC again covers all amounts above NZ$3.5 billion. The EQC contract relating to the 22 February aftershock was in effect until June 2011.
.
For the 2010 Canterbury earthquake
, total EQC insurance and individual costs were expected to reach as high as NZ$4 billion according to the New Zealand Treasury
. Claims from the 2010 shock were later confirmed at being between $2.75 and $3.5 billion NZD.
A second quake hit Christchurch, the February 2011 Christchurch earthquake. Prior to the 2010 quake, the EQC had a fund of NZ$5.9 billion, with NZ$4.4 billion left prior to the 2011 quake, after taking off the NZ$1.5 billion cost. The EQC does not cover commercial buildings, whose owners have to arrange cover with private insurers.
Costs to insurers including those of the EQC for the 2011 event are estimated at US$12 billion according to investment analysts at J.P. Morgan.
It was estimated that a further NZ$1 billion will be needed from the EQC for the 2011 earthquake, reducing the EQC fund further to NZ$3.4 billion.
Residential claims for 2011 were estimated to be less than that of the 2010 quake, meaning the EQC's exposure was unlikely to be greater than $1 billion. Insurance Council of New Zealand chief executive Chris Ryan said the 2011 quake would not have a major effect on residential property, given the epicentre was in the city's commercial heartland. Commercial properties are not insured by the EQC, but by private insurance companies. These insurers underwrite their commercial losses to reinsurers, who would again bear the brunt of these claims.
Earthquake Recovery Minister Gerry Brownlee
said that less claims were expected through the EQC than for 2010. In the 2010 earthquake, 180,000 claims were processed as opposed to the expected 130,000 claims for the 2011 aftershock. The total number of claims for the two events was expected to be 250,000, as Brownlee explained that many of the claims were "overlapping".
put the claim bill faced by the reinsurers from the 2010 Canterbury earthquake at US$600 million, nearly US$200 million higher than initial estimates. This does not include the EQC exposure of NZ$1.5 billion.
Munich Re board member Dr Ludger Arnoldussen, who was in New Zealand to speak with insurers, praised the efforts of those companies which handled the claims and the stringent building standards that were in place in New Zealand. Arnoldussen said the expected hike in rates was also likely to translate to higher premiums for policy holders, the extent of which would depend on how much risk the individual companies were prepared to carry. Meanwhile figures show the number of catastrophic events in New Zealand quadrupled in the 30 years to 2010, and that 90% of all insured claims during that period were the result of geophysical events. However rates would remain well below those in California, with policy holders there on average paying about 15 times more than in New Zealand, he said.
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
to the owners of residential properties in New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
. The Government-owned Crown entity manages assets of $5.93 billion NZD
New Zealand dollar
The New Zealand dollar is the currency of New Zealand. It also circulates in the Cook Islands , Niue, Tokelau, and the Pitcairn Islands. It is divided into 100 cents....
. In addition to its insurance role, EQC also undertakes research and provides training and information on disaster recovery
Disaster recovery
Disaster recovery is the process, policies and procedures related to preparing for recovery or continuation of technology infrastructure critical to an organization after a natural or human-induced disaster. Disaster recovery is a subset of business continuity...
.
History
EQC was established in 1945 as the Earthquake and War Damage Commission, as part of the New Zealand Government, and was originally intended to provide coverage for earthquakes as well as war damage.Coverage was eventually extended from solely earthquake
Earthquake
An earthquake is the result of a sudden release of energy in the Earth's crust that creates seismic waves. The seismicity, seismism or seismic activity of an area refers to the frequency, type and size of earthquakes experienced over a period of time...
and war damage to include other natural disasters such as natural landslip
Landslide
A landslide or landslip is a geological phenomenon which includes a wide range of ground movement, such as rockfalls, deep failure of slopes and shallow debris flows, which can occur in offshore, coastal and onshore environments...
s, volcanic eruption
Types of volcanic eruptions
During a volcanic eruption, lava, tephra , and various gases are expelled from a volcanic vent or fissure. Several types of volcanic eruptions have been distinguished by volcanologists. These are often named after famous volcanoes where that type of behavior has been observed...
s, hydrothermal activity
Hydrothermal vent
A hydrothermal vent is a fissure in a planet's surface from which geothermally heated water issues. Hydrothermal vents are commonly found near volcanically active places, areas where tectonic plates are moving apart, ocean basins, and hotspots. Hydrothermal vents exist because the earth is both...
, and tsunami
Tsunami
A tsunami is a series of water waves caused by the displacement of a large volume of a body of water, typically an ocean or a large lake...
s with coverage for war damage later being removed. For residential land, storm and flood damage is covered. Cover extends over fire damage caused by any of these natural disasters.
Who pays
The cover is provided at the time the premium is paid to a commercial insurer. A disaster insurance premium is charged to the policyholder, up to a maximum of $67.50 NZD, which provides the holder with EQC's EQCover. This premium is placed into the Natural Disaster Fund.EQCover entitles the holder to up to $100,000 NZD plus tax (GST
Goods and Services Tax (New Zealand)
Goods and Services Tax is a value added tax introduced in New Zealand on 1 October 1986 at 10%. It later increased to 12.5% on 1 July 1989 and was further increased to 15% on 1 October 2010....
) for each dwelling, with any further amount above that being paid by the policyholder's insurance company. For personal effects, EQC pays out the first $20,000 NZD plus tax. The EQC covers only domestic assets and does not provide cover for businesses.
The EQC levies policyholders to cover a major part of the earthquake risk. The EQC reduces its own risk by taking out cover with a number of large reinsurance
Reinsurance
Reinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...
companies, for example Munich Re
Munich Re
Munich Re Group is a reinsurance company based in Munich, Germany. It is one of the world’s leading reinsurers. ERGO, a Munich Re subsidiary, is the Group’s primary insurance arm....
. In 2006, the EQC took out reinsurance of $2.5 billion NZD with multiple reinsurance companies, numbering around 30.
There is a $1.5 billion NZD excess for each earthquake event. If the required EQC payout exceeds the total of the excess and reinsurance ($4 billion NZD) the remainder of the payout is met by the EQC up to the limit of the Natural Disaster Fund. If the payout exceeds those assets, a Crown Guarantee requires that the Government pay the remainder.
In the case of a subsequent event, as with the 22 February 2011 aftershock of the 2010 Canterbury Earthquake
2010 Canterbury earthquake
The 2010 Canterbury earthquake was a 7.1 magnitude earthquake, which struck the South Island of New Zealand at 4:35 am on local time ....
, the EQC pays out the first NZ$1 billion in claims, and the reinsurance
Reinsurance
Reinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...
companies are liable for all amounts between NZ$1 billion and NZ$3.5 billion. The EQC again covers all amounts above NZ$3.5 billion. The EQC contract relating to the 22 February aftershock was in effect until June 2011.
Claims
The EQC paid out for claims made as a result of the 2007 Gisborne earthquake2007 Gisborne earthquake
The 2007 Gisborne earthquake was an earthquake of magnitude 6.8 on the Richter scale which struck in the Pacific Ocean, 50 km off the eastern coast of New Zealand's North Island at 8.55 pm NZDT on 20 December 2007...
.
For the 2010 Canterbury earthquake
2010 Canterbury earthquake
The 2010 Canterbury earthquake was a 7.1 magnitude earthquake, which struck the South Island of New Zealand at 4:35 am on local time ....
, total EQC insurance and individual costs were expected to reach as high as NZ$4 billion according to the New Zealand Treasury
New Zealand Treasury
The New Zealand Treasury is a public sector organisation and the Government’s lead advisor on economic and financial policy. Its role is to help the Government improve economic performance and manage scarce resources...
. Claims from the 2010 shock were later confirmed at being between $2.75 and $3.5 billion NZD.
A second quake hit Christchurch, the February 2011 Christchurch earthquake. Prior to the 2010 quake, the EQC had a fund of NZ$5.9 billion, with NZ$4.4 billion left prior to the 2011 quake, after taking off the NZ$1.5 billion cost. The EQC does not cover commercial buildings, whose owners have to arrange cover with private insurers.
Costs to insurers including those of the EQC for the 2011 event are estimated at US$12 billion according to investment analysts at J.P. Morgan.
It was estimated that a further NZ$1 billion will be needed from the EQC for the 2011 earthquake, reducing the EQC fund further to NZ$3.4 billion.
Residential claims for 2011 were estimated to be less than that of the 2010 quake, meaning the EQC's exposure was unlikely to be greater than $1 billion. Insurance Council of New Zealand chief executive Chris Ryan said the 2011 quake would not have a major effect on residential property, given the epicentre was in the city's commercial heartland. Commercial properties are not insured by the EQC, but by private insurance companies. These insurers underwrite their commercial losses to reinsurers, who would again bear the brunt of these claims.
Earthquake Recovery Minister Gerry Brownlee
Gerry Brownlee
Gerard Anthony "Gerry" Brownlee is a New Zealand politician. He served from 17 November 2003 to 27 November 2006 as deputy-leader of the National Party – during that period the second-largest party in the New Zealand Parliament, and thus forming the core of the Opposition...
said that less claims were expected through the EQC than for 2010. In the 2010 earthquake, 180,000 claims were processed as opposed to the expected 130,000 claims for the 2011 aftershock. The total number of claims for the two events was expected to be 250,000, as Brownlee explained that many of the claims were "overlapping".
Claims affecting reinsurance costs
After the 2010 Canterbury quake, it was expected that New Zealand insurers would face rate increases of more than 10% for the renewal of their insurance during 2011. Estimates from the world's largest reinsurer Munich ReMunich Re
Munich Re Group is a reinsurance company based in Munich, Germany. It is one of the world’s leading reinsurers. ERGO, a Munich Re subsidiary, is the Group’s primary insurance arm....
put the claim bill faced by the reinsurers from the 2010 Canterbury earthquake at US$600 million, nearly US$200 million higher than initial estimates. This does not include the EQC exposure of NZ$1.5 billion.
Munich Re board member Dr Ludger Arnoldussen, who was in New Zealand to speak with insurers, praised the efforts of those companies which handled the claims and the stringent building standards that were in place in New Zealand. Arnoldussen said the expected hike in rates was also likely to translate to higher premiums for policy holders, the extent of which would depend on how much risk the individual companies were prepared to carry. Meanwhile figures show the number of catastrophic events in New Zealand quadrupled in the 30 years to 2010, and that 90% of all insured claims during that period were the result of geophysical events. However rates would remain well below those in California, with policy holders there on average paying about 15 times more than in New Zealand, he said.