Earthquake Commission needs bailing out

The coffers of the New Zealand Earthquake Commission are bare. After shelling out billions for the Canterbury earthquake 2010, the Christchurch earthquake (technically an aftershock of the former)in 2011 and the Waiau earthquake of 2016, the bank accounts of the Earthquake Commission are in need of Government bail out.

No one should be surprised at this. Prior to the earthquakes of this decade the Earthquake Commission at one point managed nearly N.Z.$6 billion in assets. The combined costs of the three events is around N.Z.$46 billion (around $4 billion for the Canterbury earthquake; $40 billion for Christchurch earthquake and $2 billion for the Kaikoura earthquake and aftershocks).

However, it is not an acceptable state of affairs in a country as prone to earthquakes as New Zealand is that our main earthquake insurance provider should be without any funds. It also raises questions about how we fund the Earthquake Commission and how we expect it to dispense insurance in the future.

It needs to be remembered that E.Q.C. insurance is capped at N.Z.$100,000 and whatever is in excess of that is the responsibility of the claimants regular insurance company (State, New Zealand Insurance, A.A., and so forth). It is not geared to supporting businesses and only supports domestic assets.

In order to reduce the E.Q.C.’s own exposure it takes out insurance with large reinsurance companies. An example given is the $2.5 billion taken out with 30 reinsurance companies.

Still, the large earthquakes of the last several years have raised a concerning question. How will E.Q.C. cope if further earthquakes occur in the Christchurch or Kaikoura tectonic settings? Such concerns are real because the Hope Fault with a repose period of 120-150 years has not ruptured for 129 years, and typically ruptures in magnitude 7.0-7.3 earthquakes – it branches off the Alpine Fault and goes out to sea just north of Kaikoura. The Greendale Fault, which started the Christchurch earthquake sequence, only partially ruptured on 04 September 2010. Whilst there is no suggestion it is going to rupture in the immediate future, at some point the segment that has not, has to reconcile with the rest of the fault – that will probably be another magnitude 7.0 earthquake.

A Crown Guarantee ensures that should an earthquake breach the $1.5 billion excess cap, the Natural Disaster Fund pays out until its limit is met and then the Crown pays the remainder. All very well, but when the Crown has already forked out for multiple large events that have nearly completely drained E.Q.C., one should consider whether the Crown needs some sort of back up. I do not know how this might happen or if a backer is even possible, but still it is worthwhile considering this possibility.

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