Insurance after Christchurch

  • October 14, 2012
  • David Middleton

The insurance provided by the Earthquake Commission (EQC) to homeowners is a crucial factor in the Canterbury recovery process. The existence of EQC has meant nearly all homes were insured and the financial benefit to which owners of damaged homes are entitled under the Earthquake Commission Act is guaranteed by the government.

But the EQC coffers are now empty and the focus on the Commission has highlighted the regulatory neglect of the past two decades. The government has announced a review of the Earthquake Commission Act (1993) and the insurance provisions it contains. The position of EQC’s protection in relation to the private sector’s coverage, and the scope of the Commission’s insurance are also to be reviewed.

Changes to the Earthquake Commission will be made partly in response to the situation in the insurance private sector post-Canterbury. Other countries have experienced such market shocks and their governments have reacted in various ways to the insurance crisis. Their actions and the outcomes provide lessons for New Zealand as the government seeks ways to facilitate availability of insurance cover for private or commercial assets so that economic and social progress are not hindered.

Kestrel has produced a report for EQC containing case studies of actions by overseas governments in the face of impending insurance market failure. They range from the consequences of doing nothing, as in UK with insurance against subsidence, to the extensive control of pricing and availability exercised in Florida. The report also covers UK flood insurance, the California Earthquake Authority, the situation with regard to flood insurance in Australia, USA Fair Access to Insurance (FAIR) Plans and the US National Flood Insurance Plan.

Each initiative was in response to affordability or availability problems, a lack of private sector capacity to cover the risk or the confusing variability of terms (sometimes the result of attempts by insurers to “cherry pick” the good risks and leave the bad to others). In several cases there is an attempt to include encouragement to apply prevention or mitigation measures.

As the New Zealand government and citizens grapple with the new insurance scene, with its escalating pricing and stricter terms, looking to other countries’ experiences is a prudent step before decisions are made about repositioning what was once a world-leading insurance mechanism in EQC. The Earthquake Commission provides a sound basis for government support of the economically important insurance industry, as insurer, reinsurer, bond-issuer, a combination of these or some other guise altogether.

The report “Insurance Shocks: Market behaviour and government responses” can be accessed at