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EQC funding, structure to come under microscope in government review

Tuesday 18th September 2012

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The Earthquake Commission's funding and structure will come under scrutiny in a government review of the legislation designed to provide a degree of public insurance when natural disasters strike.

Finance Minister Bill English and Earthquake Recovery Minister Gerry Brownlee have announced a legislative review of the Earthquake Commission Act 1993 to be led by the Treasury, with help from the Reserve Bank, EQC, Ministry of Business, Innovation and Employment, and a yet-to-be appointed independent policy expert.

The review's objectives include supporting a functioning insurance industry for economic growth opportunities, minimising the fiscal risk to the Crown in covering private property damaged in natural disasters, supporting efficient management of natural disaster risk and recovery, and reducing the potential for socially-unacceptable distress and loss for property owners caused by natural disasters.

"The government will review disaster insurance arrangements to look at where changes to existing policy settings are desirable," English said in a statement. "The review is also an opportunity to consider possible changes consistent with other government initiatives, particularly the Better Public Services programme."

English flagged the review last year after the cost of the Canterbury quakes escalated, wiping out the $6 billion Natural Disaster Fund and sending the government's operating deficit to $18.4 billion, or 9.2 percent of gross domestic product in the 2011 fiscal year.

The Treasury-led review will cover what the EQC insures, including the layer of loss covered, which natural disasters are covered, how multiple events should be treated, which types of property should be covered, the coverage of land, building and contents, what caps should be on the scheme, and whether it should be voluntary or mandatory.

The present legislation covers earthquakes, natural landslips, volcanic eruptions, hydrothermal activity, tsunami, natural disaster fires, and residential land is also covered by storms and floods.

Questions on pricing will include whether the levy should be risk-based, and if so if should be broken down by regional or policyholder risks, and how revenue should be collected. The government also wants to consider the schemes design and how the EQC as an institution should be structured.

The review will also consider what the government's risk preference is, and how that risk should be financed, including the size of the disaster fund and alternative financing instruments.

Under the current act, the government guarantees any shortfall in the natural disaster fund to meet the EQC's liabilities.

The review won't cover the EQC's performance and will not affect current claims and entitlements.

A discussion document will be put out for public consultation in March next year, with Cabinet expected to make a decision on legislative changes in mid-2013.

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