Compulsory Earthquake Commission levy to treble from February in move to rebuild National Disaster Fund after Christchurch quakes

The compulsory Earthquake Commission levy is to treble to 15 cents per NZ$100 of insured value from February next year, as the first step in a 30 year plan to rebuild the National Disaster Fund, which was wiped out by the Canterbury earthquakes.

Finance Minister Bill English announced the change this morning at a media lock-up for release of the Crown accounts to June 30, which showed a massive blow-out in the Budget deficit as a result of costs that the government is bearing because of the quakes.

The increase is estimated to cost the average insured homeowner some NZ$137.80 a year, or NZ$2.65 a week, with the cap on total EQC charges rising from NZ$69 a year to NZ$207 a year.

The move will also immediately reduce the up-front cash shortfall to the government from earthquake costs from NZ$1.2 billion to NZ$490 million.

The cash shortfall had previously been estimated at NZ$500 million, but a High Court decision requiring the EQC to make payments on multiple disasters in one year had increased that sum by an estimated NZ$380 million. An allowance for future non-Canterbury claims had also added NZ$330 million, which had not previously been calculated, said English.

The impact of this immediate change will be visible when the Pre-election Fiscal Update is released on Oct. 25, as required by the Fiscal Responsibility Act.

The EQC Natural Disaster Fund cannot fail, even if it has insufficient funds, because it is guaranteed by the government, but the NZ$6 billion collected in the fund was more than wiped out by total claims estimated at NZ$11.7 billion.

While reinsurance payments of NZ$4.2 billion and earnings in the EQC fund reduced the gap between claims and the size of the fund, some NZ$1.1 billion of insurance costs remain unfunded.

English said the new levies were fair because insured homeowners gained the benefit of EQC cover and should not be subsidised by non-home-owning taxpayers.

The Green Party has advocated a temporary quake levy to meet the extraordinary costs of the quakes. They would enable EQC to “rebuild the National Disaster Fund to its pre-earthquake level of NZ$6 billion in about 30 years” and would also allow the EQC to cover its running costs, which have normally been subsidised out of the fund’s earnings.

However, the levy increase is not the last word on future preparation for earthquakes, with English due to take a paper to Cabinet for a complete review of the EQC in coming months, with the exact timing depending on “getting more issues resolved on the ground in Canterbury,” English said.

'No more hikes until review complete'

Speaking to media in Parliament later on Tuesday, English said the increase in the EQC levy was an interim step, with the government needing to reflect EQC’s higher operating costs, including higher reinsurance costs. There would be no further change in the levy until the government had undertaken a full review of EQC, which could be a year or two away before being finalised.

“We’ve got to pick up the short-fall in the natural disaster fund and get on with rebuilding that fund,” English said.

The cost of recapitalising the fund should fall on homeowners, who were the beneficiaries of it, he said.

“It’s a relatively small increase per week, but this is just part of the wider community sharing the ongoing costs of the earthquake. So it will put a bit more pressure particularly on some homeowners who are fully stretched on servicing their mortgages, but we think in the circumstances, in order to sure up the EQC’s finances, it’s an extra bit that households will be able to handle.”

The government needed to review the EQC model following the pressure from the Christchurch disaster. The top priority was clarifying EQC’s current coverage so that insurers and homeowners got a fair deal from the legislation.

“We’re spending a lot of time trying to make sure right now that the current legislation is fully understood," English said.

Asked about the aim to get the fund back to NZ$6 billion in 30 years time, given inflation over that period would eat into that sum, English said the government would have choices over time on what to do with the fund. But the review would have to take place first.

“It’s a unique scheme internationally, we’re learning a lot from how it applies in Christchurch, and we want the benefit of that experience to be applied to the future structure of it,” he said.

The current legislation had some uncertainties and anomalies in it which needed to be dealt with, English said.

“It doesn’t cover everything – that’s illustrated by the fact the government is effectively topping up the insurance coverage with hundreds of millions of taxpayers’ dollars. Those are all issues that we would take into account in the future. But what that would look like, I wouldn’t want to pre-judge,” he said.

(Updates with video, comments from press conference, additional reporting by Alex Tarrant)