Annual Report 2010–11

annual report 2010–2011 We are Working hard to provide Canterbury people With Certainty around their claim situation. it is important that We are accurate With our Claims settlement proCess. not just for our customers in a very difficult and uncertain time but also for the Continued ConfidenCe of the global insuranCe market and the protection of the eQc funds for all new Zealanders. Ian SImpSon EQC ChiEf ExecutivE Contents Chairman's report 2 Chief exeCutive's report 6 researCh projeCts 12 eQC's Changing environment 14 natural Disaster Claims loCations 16 summary of Claims 18 eQC's reinsuranCe programme 20 finanCial statements 22 audit report 22 statement of responsibility 24 statement of Comprehensive income 25 statement of Changes in equity 26 statement of financial position 27 statement of Cash flows 28 notes to the financial statements 29 statement of service performance 57 other DisClosures 68 managing organisational health 68 investment processes 70 ministerial DireCtions 72 DireCtory 80 1 EQC Annual Report | 2010–2011 Chairman's Report Any consideration of the operations of the Earthquake Commission (EQC) over the last financial year must start with the acknowledgement that 182 people lost their lives in New Zealand’s most damaging natural disaster. Others were injured, some very seriously. The cumulative effect of 13 major and thousands of minor earthquakes in and around Christchurch has exhausted the emotional resources of many. The social trauma will be with the people of Canterbury and New Zealand, for years. 2 And yet there remAins a soliD beDroCk of soCial anD Community resilienCe on which Canterbury’s physicAl rebuild will be bAsed. To place these events in context, in just over nine months, builDings from 4 September 2010 to 13 June 2011, three major earthquakes struck within and around Christchurch. Each EQC is geared to settling claims in cash. But tens of one by itself would have tested EQC’s capacity. These, thousands of Canterbury homeowners, each with an EQC together with ten other smaller shocks have, at the time cheque and each trying to find a builder, would be a recipe of writing this report, generated more than 400,000 for repair cost inflation and variable quality of repairs. The claims on EQC. The claims in turn break down into more search for contractors to carry out repairs, and managing a than 600,000 individual exposures for building, land and contract once secured, would also have been an intolerable contents damage. burden for many distressed Canterbury residents. But the volume of claims is only part of the picture. The For these reasons and soon after the 4 September sequence of earthquakes caused damage on top of damage, earthquake, the Government requested that EQC take which made even more complex the allocation of costs direct responsibility for the repair of claimants’ houses between EQC, its reinsurers and the private insurers. where the cost fell within the EQC “cap” of $100,000 (plus These complexities were not envisaged when the GST). EQC in turn contracted Fletcher Construction to Earthquake Commission Act 1993 was drafted nearly manage the repairs on its behalf. Following the 22 February 20 years ago. As a result, the scope of EQC cover and, earthquake, the estimated number of repairs grew from therefore, the respective responsibilities of EQC and the around 50,000 to nearly 100,000. private insurers, needed to be clarified by the High Court. As the EQC contract with Fletcher Construction was already Few New Zealand governments have faced the mix of in place in February, the Government had at its disposal a geotechnical, civil and structural engineering, town field-force with which to respond to the pressing need for planning, legal, financial, social and economic policy emergency repairs following the 22 February earthquake, and considerations that the recovery from these events for the installation of home heating with the onset of winter. involves. I acknowledge that this is of little comfort to the The weatherproofing of houses, and the installation of people of Canterbury who are looking for certainty about heat pumps and solid fuel heaters, alongside aftershocks, the future and waiting for settlement of their claims. temporarily slowed the pace of the permanent repairs. These are now picking up again. 3 EQC Annual Report | 2010–2011 Chairman's Report lanD EQC’s land cover is highly unusual, if not unique in the The extensive land damage caused by the 22 February world. The cover is capped by land area, not dollar amount, earthquake led the Government to put these plans on and no premium is explicitly charged for land cover. I have hold. The amount and widespread nature of the damage stated previously that this is inequitable in that those with presented significant social, economic, environmental high value residential land benefit more than those with less and engineering challenges, meaning the land is unlikely valuable sections. to be able to be rebuilt on for a very long time. For its part EQC turned its resources to assisting in the assessment EQC’s land cover is also partial. It provides for putting of house and land damage in the “red” and “orange” residential land back to its pre-event state, as far as zones to determine the EQC financial contribution to any practicable. For example, it does not compensate a land Government offer to buy out the residents. owner for the costs of any post-event decisions of a local authority to set new conditions for rebuilding on their section. Eqc's Changing role Defining the EQC liability for land damage, particularly where there has been widespread liquefaction and Neither the repair of damaged houses through the contract associated crust thinning, requires thorough geotechnical with Fletcher Construction, nor the design and oversight of evaluation. For much of 2010/11, the work of EQC’s land remediation works to a standard above EQC’s statutory engineers, Tonkin & Taylor, who were assessing land liability, was “core business” for EQC. But as a result of the damage for EQC’s purposes, also provided the bulk of structural changes in the state sector in the late 1980s and the technical information which informed Government early 1990s, the New Zealand Government no longer has decisions on residential land remediation or retirement. a public works department. In the circumstances it was Prior to the 22 February earthquake, the Government had right for EQC to take on these roles and put in place the approved the construction of extensive perimeter works capability to discharge them. around residential land in parts of Christchurch and Kaiapoi. Whether the Government should in future retain this These would have reinstated land to a higher standard capacity, in some form, is a question beyond my mandate. It than EQC’s cover provided, both to give homeowners is a question which will, no doubt, be addressed elsewhere confidence to rebuild and to ensure, as far as possible, that in due course. But if EQC is to take on this role in any future the rebuild would be supported by insurers. The works event, we will need to be apprised of that expectation and were to have been funded in part by EQC and in part by the plan to meet it. Government, with design and construction of the works shared between EQC and local government. Photo: Margaret Low, GNS Science 4 Contents ConClusion By the end of the financial year EQC had received 147,000 The EQC model has worked. For years a broad base of claims for contents damage from Canterbury earthquakes, New Zealand’s homeowners has steadily built a fund in of which 22,000 had been settled with more than $100 anticipation of the national disaster which history and million paid out. The 22 February earthquake put a hold on science have shown will occur at some time. Successive processing contents claims. Boards and staff of EQC have nurtured the Natural Disaster Fund (NDF) and supported it through major placements of There were simply other, more pressing, priorities. In the reinsurance contracts. view of the EQC Board, the assessment of the most seriously damaged houses, the emergency works and winter heating The big calls on the NDF arrived in 2010 and 2011. The programmes, and the Government’s need for information money was available and will be spent for the purpose for on which to take decisions on residential land retirement which it was intended. That is the ultimate measure of the took precedence. This was a hard call, which withheld cash scheme’s success. payments from our claimants, some of whom would have Did we get everything right? Of course not. The challenges been hard pressed financially. of growing an organisation from 22 to almost 1,200 people Given the other priorities, I believe it was the right decision. in a few short months, responding to not one but three That said, EQC staff are working towards all claimants with a major and ten minor earthquakes, engaging with almost valid contents claim and adequate supporting information 200,000 claimants, and taking on major, additional roles (submitted by 28 October), receiving their claims payments and responsibilities to help with the Canterbury recovery, by Christmas this year. were never to be achieved with perfection. But the dedication, commitment and sheer perseverance of the It does however, raise a broader question. Should EQC Chief Executive, his managers and staff, have helped and even be in the business of covering household contents? continue to help tens of thousands of people through this From its own funds and its reinsurance, EQC will contribute life-changing experience. more than $10 billion in claims settlements to the total cost of the Canterbury rebuild.

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