Private insurers have partially succeeded in twisting the Government’s arm to enable them to deal with claims on behalf of the Earthquake Commission (EQC) after a natural disaster.
Announcing the thrust of reforms to the EQC Act, the Government says EQC claimants will be required to lodge their claims with their private insurers, who would pass these on to the government agency.
However the Government hasn’t signalled exactly how much involvement private insurers will have, and whether they will be responsible for assessing and managing claims as well.
This is something that has been trialled under a memorandum of understanding between private insurers and EQC, in the wake of last year’s Kaikoura quakes.
Insurers want to manage the whole process
Insurance Council of New Zealand (ICNZ) chief executive Tim Grafton says: “We believe insurers should be responsible for assessing and settling all house claims as we have largely been doing for the Kaikoura earthquake.
“The worst outcome would be if the law requires all claims to be lodged with insurers, and then that information passed to EQC to assess the damage and manage the settlements for our customers.
“Insurers are wanting to make this simpler and more efficient for their customers, not more complicated.
“So, we would seek clear direction from the Government to EQC that insurers should be responsible for assessing and managing claims broadly based on the Kaikoura model.
“This will ensure we avoid the situation that occurred in Canterbury where insurers are advised by EQC some years later that the building cap has been breached, and that they should now manage the claim.”
All insurers have increased their quake claims provisions years after the Canterbury quakes, and have had to take out more and more emergency reinsurance to pay for new claims.
IAG for example in November bought another $900 million of expensive reinsurance, known as adverse development cover (ADC) to pay for the quakes.
Meanwhile Tower’s chairman Michael Stiassny has gone so far as repeatedly blaming the “broken” EQC model for the putting the insurer under financial pressure. The insurer now looks to be bought out by a rival, with it earlier this year coming within $5 million of breaching the Reserve Bank’s solvency requirements.
Brownlee: 'The first risk sits with the taxpayer'
However dismissing Stiassny’s comments as “complete rubbish”, the Minister Responsible for the Earthquake Commission Gerry Brownlee in February indicated he was hesitant about handing too much responsibility for settling EQC claims over to private insurers.
"Remember, the first risk sits with the taxpayer... We have an obligation and a duty to protect that," he told interest.co.nz.
“I don’t see insurers stepping up and saying, ‘We’ll take full liability for earthquake’. When they do, then that will change the circumstances quite a bit.
"In the meantime, we will just cautiously move forward in the interests of every New Zealand policyholder… to make sure that we do ensure that people are going to be properly treated at the time that they have their claims."
Brownlee and Finance Minister Steven Joyce say more work needs to be done on the details of reforms announced today.
The Government hopes to release a draft EQC reform bill later in the year, or early next year, with the changes anticipated to be implemented in 2020.
Clarity around land damage
Brownlee and Joyce say reforms will also “simplify how land damage is covered by EQC and how land and building damage interact".
“Damage that directly affects the property and/or access to it will continue to be covered by EQC. Land cover is also retained in total loss situations where a site cannot be repaired or rebuilt on.”
Grafton is pleased with this move, saying: “The Government has listened to our concerns that some form of land compensation needs to be kept in addition to the building cover.
“This means that where land damage has occurred separate funding to the building cover is available to fix the land or access to the property, so the house can be repaired or rebuilt.
“Without these two separate sources of funding, there was a real risk in a city like Wellington, where there are many hillside properties that are likely to suffer land damage in a major earthquake, that people would not be able insure themselves adequately.”
Confusion over who pays what for land damage has seen IAG and Tower take EQC to court in an attempt to recoup millions of dollars spent on dealing to land damage in the process of rebuilding or repairing buildings.
Building cover cap pushed out to $150,000
As signalled in 2015, Brownlee and Joyce say they will increase the cap for EQC building cover from $100,000 (plus GST) to $150,000 (plus GST).
The excess on EQC building cover will also be standardised at $1,000. Currently this ranges from $200 to $1,150 depending on the size of the claim
Finally, the reforms will see EQC cover for residential contents insurance done away with.
Grafton says: “The removal of contents insurance makes sense as the focus of the scheme should be on ensuring people can be rehoused after an earthquake, so private insurers will meet all contents claims and having a standard excess helps simplify the claims process.”
Overall, he says: “The high-level decisions announced today are good step toward creating a better scheme for New Zealanders.”
11 Comments
Frying pan & fire for EQ claimants. This government deliberately kept claims under cap to keep their books right. That means they willingly. and with quite some purpose, caused claimants to unnecessarily suffer financial loss and duress, physical & mental hardship, and in so doing they flouted the very legislation in place, passed by another parliament obviously, to prevent, precisely that. This government was aided and abetted in this by the insurers as it suited the latter to have claims kept under cap as it meant they did not have to acknowledge any liability for any claim held as such. Until you have been through it yourself, you have no idea at all of how something as rotten as this could be allowed to occur in a country with a democratically elected government. Going from EQC to an Insurer would be little different , in my opinion of course, than going from a dictator to a despot.
And as for "to make sure that we do ensure that people are going to be properly treated" that is, in my opinion, as reprehensible piece of cynical and specious mouthing as you could ever imagine and could only be uttered by someone who has absolutely no interest in reality.
So much to comment on here. I'll start with what Pharos says. There was absolutely no motivation for government to keep claimants under cap (unless possibly to keep future reinsurance costs for EQC down a bit) with EQC claims being under $100,000 when some/many will actually be $100,00 and who would knowingly do that with the knowledge that eventually the true exact cost must become known.)
I don't see how such an uncertainty of final costs helps insurers all that much either other than them thinking things might be better than they are and, of course, minimising their own reinsurance burden.
But coming to the article the politicians and officials seem to have recognised that EQC should spend EQC's money but we'll need to await the exact detail. The statement by the Minister would seem to indicate likelihood of this being the case and that is how it should be. Third party companies should not make over-generous settlements to keep their own clients happy and preserve their business. But as I say let us await the real detail.
But I don't congratulate the politicians for increasing the cap to $150,000 - and then not for a couple of years. It is hopelessly inadequate, will be more so by 2020, and ignores the basis behind the establishment of the $100,000 in 1993.
Finally for the moment this statement by the author is arguably misleading:
"IAG for example in November bought another $900 million of expensive reinsurance, known as adverse development cover (ADC) to pay for the quakes."
If the true final cost was known the day after the event the insurer might have simply blown their reinsurance; they would not have been able to buy adverse development cover because known costs might increase beyond expectations.
Hi Bruce, I am not sure what you mean by this statement regarding IAG being misleading. The insurer has noted the trickle of over-cap claims it has continued to receive from EQC is one of the factors that has contributed to the uncertainty it has had over its estimated quake costs. If costs didn't keep escalating, partially due to it receiving more and more claims, it wouldn't have needed more reinsurance.
Suggest you have a talk to some people who have actually been involved in this. Sure you can say that Mr Hooker & Mr Webb for instance are not reliable because they are in the business of advocating claims, but a scan through the bare facts of a few dozen of their cases would alter your perception without doubt. As said, and with respect, you have to live through it yourself to appreciate it. The damage to our house was stark staring nakedly obvious, it always was beyond economic repair & duly ended up as being a rebuild.But EQC put us, and held us, under cap and we had to fight tooth & nail to get out of that. How can that be? As Mr Hooker has stated, an assessor can only get it that wrong if they want to get it that wrong. And take my word for it, we are not an isolated case, far from it!
Sorry Jenee for perhaps not being clear enough with this. If when an earthquake happens (say 22 Feb) the insurer has adequate reinsurance for all the claims coming out or which may come out of that shake then adverse development cover is not needed. The original 'adequate' reinsurance will be able to pay OK. The reinsurance applicable to losses in most and conventional cases applies to all the claims arising from the actual event, that is the reinurance in force on the day of the event (22 Feb). Not the reinsurance in force on the day the claim is notified or the day an existing claim has its estimate increased..
Although I don't know at all with the situation you are reporting on I assume that claims kept being notified to IAG in susequent years and IAG did not know about these claims, EQC knew about them but had not told IAG because intitially EQC knew or assumed the claim would be under their $100,000 cap. At some stage as new to IAG over-cap claims kept getting notified to them by EQC then IAG must have reached the point where they thought "when is it going to stop" and perhaps they also thought if it doesn't stop soon we'll have run out of our original reinsurance so we'll buy some extra reinsurance protection for Feb 22 claims we don't yet know about. Obviously you cannot buy at an acceptable price additional reinsurance if you wait until you need it (if the original reinsurance ran out yesterday). So somewhat of a financial gamble on both sides.
So the adverse development cover is not directly a protection because EQC have been slow to pass over-cap claims on (and I assume because EQC did not know earlier they were overcap) but because the insurer did not have enough reinsurance in the first place. Understandably - the sequence of claims was allegedly a one in 2,500 year event probability.
And I suppose you can also say that by delaying notification of claims to insurers because they, EQC, did not know they were overcap EQC unknowingly did the insurers a favour as it did enable some insurers like Tower to buy a bit more backdated, admittedly expensive as you say, reinsurance protection to bolster up the reinsurance they had which they thought might turn out not be enough. Apparently it wasn't.
Thanks for the comment Bruce. I agree with what you're saying in that ADC hasn't been taken out directly because of the EQC situation, but rather because insurers didn't have enough reinsurance to begin with. Your final point about insurers actually benefiting from it taking time for claims to trickle through from EQC is an interesting one. Not sure about this?
Bruce I'm having trouble containing myself here. But for a start, could you please tell us what personal experience you have in dealing with large disaster related claims with EQC? Because, forgive me if I'm wrong, but what you have written reads as if you have no idea what you are talking about. You seem to use the word "assume" quite a lot...
I have had no personal experience dealing with the EQC on large disaster related claims. But I read a lot - this and other media and some court cases and know roughly what has been going on. I am not working in insurance. I have never seen a real live ADC contract but I do know roughly what it is intended to do. I know that in some cases its purpose is simply Balance Sheet smoothing and I knew (the Nov 2016 article) that in the ones under review there were including internal loss reallocations. For a price. Hence Jenee using the word "expensive" and I would think most such contracts must be expensive because of their very nature. I deliberately used the word 'assume' two or three times because I cannot possibly be aware of exact detail.
Exactly. Nothing like having a large belligerent Aussie ex cop barging into your broken family home, kicking your walls and yelling at you (only to be proven completely wrong many years later, at great cost to the country, not to mention completely inappropriate) to heighten your understanding of the situation.
Yes all of that and worse to come from the insurers once you escape the EQC cage. Of course anyone who is well read as to EQC's motives and behaviour would soon realise that it was very appealing, both financially & pyschologically, to hold claims under cap as this allowed the unlawful application of MBIE guidelines to be enforced and the resultant lower standard of repair work. Much, much cheaper than the as when new standard that claimants were entitled to and which EQC finally admitted, but only when virtually on the court steps. And then of course there was, probably still is, an understanding, shall we say, with the insurers to have the repairs that then in the process, went over cap continue on to that lower threshold, and then a nice little mutual mechanism to quid pro quo it afterwards..Amazing how much more you can learn from reading as opposed to experiencing!
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