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. Contents claims are likely I would also like to acknowledge the EQC staff who pressed to be around 7% of this total. Yet they account for a on with “business as usual”. The Canterbury earthquakes were disproportionate share of EQC’s claims handling costs, take not the only events to which EQC was required to respond a disproportionate share of the valuable time of claims staff last year. While claims from minor earthquakes, the largest and are a source of understandable frustration to claimants landslip and the first tsunami in other parts of the country waiting for cash to replace household items. were small in number when compared to Canterbury, each was important to those affected by property loss. Put more simply, it seems counterintuitive that an organisation like EQC, established to be a buffer against Finally, I thank my colleagues on the EQC Board for their the financial shock of a major national disaster, when the unwavering support and their willingness to put in whatever demands on its human and financial resources are at their time and effort was needed to support EQC’s management greatest, should be devoting time and effort to resolve in getting the job done. claims for crockery and household appliances.
Michael Wintringham Chairman
5 EQC Annual Report | 2010–2011
Chief Executive’s Report
In July 2010, no one could predict that the year ahead would see EQC dealing with the fallout from not one but two of the most catastrophic earthquakes in New Zealand’s history.
On 4 September 2010, when the magnitude 7.1 earthquake hit Darfield in western Canterbury, we were all relieved that no one was hurt. While the damage was on a scale unseen in New Zealand’s history, household items, property and land could be fixed or replaced.
6 Photo: Margaret Low, GNS Science Sadly the worst was yet to come. On 22 February 2011, the devastating 6.3 earthquake in central Christchurch killed 182 people, left hundreds more injured and many thousands of Christchurch people facing very difficult living circumstances, without power, water and often with enormous damage to their homes. For the first time, a state of national emergency was invoked for a civil defence emergency.
7 EQC Annual Report | 2010–2011
Chief Executive’s Report
The September and February Canterbury earthquakes July and August 2010 were uneventful for EQC, with just combined were the largest and most costly insurance events 568 claims open, mainly from weather-related events. In in New Zealand’s history, generating more than 360,000 ‘normal’ times we handle about 4,000–5,000 claims a year. claims (consisting of over 550,000 individual contents, However, this was a year in which ‘normal’ had to be building and land exposures) to 30 June. recalibrated, many times over. Prior to 4 September 2010, the Inangahua earthquake of 1968 had generated the most claims from a single event with a comparatively tiny 10,500 claims. 4 September 2010 – 21 February 2011
The first game-changing earthquake abruptly woke July 2010 – September 2010 Cantabrians in the early hours of Saturday 4 September 2010. As the text messages from GeoNet came flooding in, I joined EQC in March 2010 and led an organisation of showing that there had been a shallow, magnitude 7.1 quake 22 permanent staff from one office in Wellington. We also near Christchurch, our Catastrophe Response Programme had 23 trained assessors around the country, available to was activated and the EQC team mobilised. work exclusively on EQC claims. Our outsourced claims administration facility was in Brisbane, where it would be In three days we received 21,800 claims – more than twice unaffected by a major disaster in New Zealand and could as many as our previous largest event. By the end of the first increase its staff numbers quickly if necessary. week our first field office was open and staff were on the ground assessing claims. Every residential property with residential fire insurance receives EQC’s natural disaster cover. At the beginning of By Christmas we had had gone from 22 to more than 1,000 the financial year EQC had approximately $5.9 billion in the people (comprising assessors, estimators, engineers Natural Disaster Fund (NDF) and a $2.5 billion catastrophe and support staff) and we had set up several offices in reinsurance programme in place to ensure we were able to Christchurch from which to run our Canterbury operations. pay out on claims. Prior to the Canterbury quakes, EQC had only occasionally EQC’s statutory responsibilities are to: taken on the responsibility for organising repairs to damaged homes and land. Claims were mostly settled by • provide insurance against loss or damage caused by payment. earthquake, volcanic eruption, hydrothermal activity, However, the size of the job and the Government’s desire to tsunamis and natural landslips to residential properties rebuild a resilient and stable Canterbury meant EQC needed insured against fire; to take on responsibility for the repair of the approximately • administer the NDF, including its investments and 50,000 houses where the damage was moderate to severe. reinsurance; and After a comprehensive tender, within New Zealand and • facilitate research and education about matters overseas, Fletcher Construction was appointed as EQC’s relevant to natural disaster damage and its mitigation. project manager to manage and ensure quality repairs at reasonable rates. There is a synergy to EQC’s core functions – insurance, We also put in place: protection of the NDF, research and public education – as they are all essential if New Zealand is to effectively manage • A fast-track process to pay out on claims for minor natural disaster risk. damage and contents less than $10,000. EQC’s insurance and the NDF protect against the financial • A process for claims that involved damage to chimneys. costs of natural disasters. Research is used to inform risk EQC, initially working with the Energy Efficiency and management and risk reduction by guiding land use, Conservation Authority, offered the installation of a building design and construction, disaster readiness and clean heat appliance as part of restoration. recovery planning. Public education enables people to take practical steps to make their homes safer against earthquakes or other disasters.
8 • Information for customers through leaflet drops, evacuated although fortunately there was no loss of life. publications, media, EQC's Canterbury website and An Auckland field office was set up in mid-February to meetings with community groups. process the 1,000 claims from Cyclone Wilma.
During the six months from 4 September 2010 to 21 February 2011 we settled 42,979 Canterbury claims with a 22 February 2011 – 30 June 2011 total value of $756 million and carried out full inspections of 81,775 properties. By late January 2011, we were coping with the workload. Even after doing her worst on the Mainland, Mother Nature Though the volume of 4 September claims meant that we had refused to relent. Cyclone Wilma struck Northland, the a backlog, we felt confident that this would soon be reduced. outer islands of Auckland, the Coromandel and Whakatane Then the earth shook violently again on 22 February. on 29 January 2011. It was the biggest landslip event EQC had ever handled. Homes were destroyed and hundreds of people were
www.tepapa.govt.nz
Public Education
Home owners need information and guidance on the most EQC and Te Papa effective measures they can take to prevent damage and also EQC has been a major sponsor of Te Papa and its very what to expect from EQC if there is a natural disaster. popular exhibitions Awesome Forces and Quake Braker since For many years we have had an active schools education 1998. Nearly 11 million people have seen Awesome Forces programme and delivered community information through since it opened. During this financial year, 689,909 people our websites, advertising campaigns and published resources. visited the exhibition, which is over half of all visitors to Te Papa. 118,850 people visited Quake Braker and 27,713 played We have used the popularity of museums with both adults the ‘Quake Safe Your House’ game in the EQC kiosk – an EQC and children to provide information about natural hazards mini-exhibition within Awesome Forces. and what people can do to mitigate their effects. We have had long-term sponsorships with the national museum Te Papa In addition to the exhibitions, EQC’s funding supported (Awesome Forces and Quake Braker exhibitions) and Auckland the Earth Rocks! earthquake weekend which attracted War Memorial Museum. 13,000 people and the museum-based schools education programmes. More than 5,000 school students took part in These initiatives have encouraged people to take steps to help the programmes during the year. prevent natural disaster damage to homes and have raised awareness throughout the country.
9 EQC Annual Report | 2010–2011
Chief Executive’s Report
Our first concern was for our Christchurch-based staff. From 22 February 2011 to 30 June 2011, EQC: Fortunately no one was seriously hurt and our Christchurch • completed 182,000 rapid assessments; offices were not badly damaged. For ten days our staff tried to support the emergency response effort wherever they could. • completed 26,535 full assessments; The devastating consequences for human life and • paid for or completed almost 50,000 emergency the extraordinary damage to the city’s buildings and repairs to ensure people had safe and sanitary living infrastructure meant that the 22 February earthquake was a conditions heading into winter; lot more difficult for everyone to accept. It was not helped • installed more than 8,000 heating units under the by the fact that there were continuous aftershocks, which winter heating programme in the most vulnerable made it difficult to get repairs and rebuilding done and for homes in Christchurch; people to get back to some sort of normal life. • responded to 376,000 calls from claimants; In addition to being responsible for the repair of homes through the Fletcher Construction project management office, • employed 220 assessment teams to do full inspections; EQC took on further roles following the earthquake. • expanded from three to five call centres and increased our Gallagher Bassett Services (GBS) claims 1. We completed rapid assessments on 182,000 administration capacity; and properties in Christchurch within two months to identify vulnerable households, those people needing • increased our staff numbers to nearly 1,200. temporary accommodation and to provide a quick overview of structural damage to property. The workload is huge. But it is important that we are accurate with our claims settlement process. Not just for 2. We oversaw the design and supervision of additional our claimants in a difficult and uncertain time but also for land remediation activities for work separately funded the continued confidence of the global insurance market by the Government. and the protection of EQC funds for all New Zealanders. 3. We also provided key engineering advice to the Nevertheless we are making progress paying claims. More Government to inform the Canterbury Earthquake than $1 billion has been paid out from 4 September to Recovery Authority's (CERA) decisions (as the work 30 June. That’s over $3 million dollars a day. done by our geotechnical engineers for our claims requirements has been used for much wider policy There is a long way to go yet and there have been many purposes). problems to overcome. Some remain to be solved. 4. We contributed to the social component of the I would like to thank the Board and all EQC’s staff for the recovery through our identification of those people in energy, commitment and sheer hard work they have shown greatest need of assistance, expanding our emergency day after day. It is very much appreciated. repair approach to include the uninsured (but where the costs of emergency repairs for uninsured premises was funded by the Government) and our implementation of the winter heating programme.
EQC also began working closely with the newly created CERA. When they announced their zoning of all areas Ian Simpson of Christchurch, we responded by changing our full Chief Executive assessment timetable to match CERA’s priorities so that our information would help property owners to make a decision on the Government land offer.
10 www.gns.cri.nz
Research
EQC believes that the greatest contribution to risk assessment We also assist the wider dissemination of relevant research and risk management by research is likely to arise from work results and experience through sponsorship of selected that improves our understanding of the hazard, our ability technical publications, meetings and conferences. to evaluate trends and our ability to mitigate – incrementally These initiatives, together with our on-going investment in the through time – the potential impact of the hazard. improvement of building codes and best practice guidelines We fund research to: (facilitated through Standards NZ and the Department of Building and Housing), contribute to the growth of intellectual 1. improve the detection and understanding of geological capital and the retention of unique expertise for natural hazard hazards; risk assessment and risk management in New Zealand. 2. improve the evidence base for hazard forecasting and the pricing of New Zealand risks; Our 2012 round of research funding will focus on the data and information that the Canterbury earthquakes will yield 3. advance engineering solutions that will improve risk and ways of further improving how we respond to any future performance in the built environment and the public earthquakes of similar size and impact. processes for establishing safety goals; and
4. improve understanding of the socioeconomic GeoNet consequences of hazards and the measures required to reduce the vulnerability of New Zealand communities. In 2001, EQC contracted GNS Science to begin upgrading the country’s geophysical monitoring network and its operational Through our programme, we fund: capacity. GeoNet gathers fundamental data on earthquakes and volcanoes with the coverage and resolution necessary • the GeoNet national hazard monitoring system; for modern research and risk assessment. This information is • faculty teaching positions at the universities of made public through the website www.geonet.org.nz. Canterbury (natural hazards and engineering), Victoria GeoNet has become an invaluable source of data for (seismic studies), Massey (social science and planning) engineering assessments of land and buildings in Canterbury and Auckland (volcanic risk and engineering); as well as public information about what is happening in the • Fulbright scholarship in studies related to natural environment. When the 4 September earthquake struck, disasters; visitors to the website went from a monthly average of about • scholarships and grants for postgraduate student 80,000 to 800,000. research; and • activities that raise awareness of hazard risk interdependencies among public and private “lifeline” infrastructure operators.
11 EQC Annual Report | 2010–2011
Research Projects funded by EQC, completed by 30 June 2011
Debris flow mechanics for New Zealand Understanding the holocene explosive eruption mountain catchments record of the Tongariro Volcanic Centre, New Zealand E Bowman, P Kailey, University of Canterbury (EQC funded project 08/548) A Moebis, Massey University (EQC funded project 07/U5 42)
Development, installation and testing of new models in the New Zealand Earthquake New Zealand’s next top model: Forecast Testing Centre Integrating tsunami inundation modelling into land use planning D Rhoades, M Gerstenberger, A Christophersen, GNS Science (EQC funded project 09/TV580) W Saunders, G Prasetya, G Leonard, GNS Science (EQC funded project 10/594)
Tsunami hazard posed to New Zealand by earthquakes on the Kermadec and southern A quantitative analysis of volcanic ash damage New Hebrides subduction margins to New Zealand roof structures and materials W Power, L Wallace, X Wang, M Reyners, GNS Science Supervised by J Cole, University of Canterbury (EQC funded project 08/561) (EQC funded project 10/SP607)
12 Predicting the location and volume of coseismic landslides A Bazgard, University of Canterbury (EQC funded project 08/U571)
Collection of seismic data from aftershocks of the 4 September 2010 M7.1 Darfield earthquake M Savage, E Smith, J Townend, T Stern, C Thurber, E Syracuse, Victoria University of Wellington (EQC funded project 10/CEQ618)
Consideration and propagation of epistemic uncertainties in New Zealand probabilistic seismic hazard analysis B Bradley, M Stirling, G McVerry, M Gerstenberger, GNS Science (EQC funded project 10/593) Photo: Milan Reinartz – www.behance.net/monopol/frame
13 EQC Annual Report | 2010–2011
EQC's Changing Environment In the context of the Canterbury Earthquakes
On 4 september 2010 we had 1 office. On 30 June 2011 we had 10 offices. On 4 september 2010 we had 22 staff. On 30 June 2011 we had 1,100+ staff. The gisborne earthquake in 2007 resulted in 6,221 claims. The canterbury earthquakes in 2010 & 2011 resulted in 360,000+ claims. In 2009/10 our claims settlement & handling Payments were $36.6 Million. In 2010/11 our claims settlement & handling payments were $1 Billion+.
14 We completed rapid assessments of 180,000+ properties in Christchurch.
EQC's Rapid Assessment process
The most visible response to the 22 February earthquake The contact details for those households that indicated a was the two month-long roll out of a triage or “rapid need for temporary accommodation was forwarded by EQC assessment” process. This involved the inspection of to the Canterbury Earthquake Temporary Accommodation all residential properties in metropolitan Christchurch, Service (CETAS). Lyttelton and affected parts of Selwyn and Waimakariri, The rapid assessment process also utilised iPads for irrespective of their insurance status. The primary focus of electronic, in-field data capture and transfer, which the rapid assessment process was to prioritise properties improved accuracy, simplified data capture and increased for subsequent full assessments and to identify properties efficiency. EQC used this experience to put in place similar needing emergency repairs. technology in its full assessment programme. This information was, on a regular basis, passed on to relevant government agencies.
15 EQC Annual Report | 2010–2011
Natural Disaster Claims Locations New Zealand and Canterbury
Claims by event type
Earthquake Landslip Tsunami
16 Claims by event type
Earthquake Landslip
17 EQC Annual Report | 2010–2011
Summary of Claims
Claims incurred in the Financial Year
2010–2011 2010–2011 2009–2010 2009–2010 No of Claims Payments $(000) No of Claims Payments $(000)
Earthquake 371,656 1,008,454 6,316 7,442 Landslip 2,467 11,235 1,494 13,342 Hydrothermal Activity 0 – 2 – Volcanic Eruption 0 – 0 – Tsunami 8 23 1 –
Total 374,131 1,019,712 7,813 20,784
Claims incurred by event
All Sep 4 + Feb 22 + June 13 + Non- Events Aftershocks Aftershocks Aftershocks Canterbury
Total Claims 374,131 185,016 161,126 23,825 4,164 Building Exposures 334,880 172,076 139,139 20,764 2,901 Contents Exposures 153,467 59,942 82,940 10,143 442 Land Exposures 77,677 28,176 40,990 6,038 2,473
Number of Claims & Exposures *
400,000 Total Claims
Building Exposures 350,000 Contents Exposures
300,000 Land Exposures
250,000
200,000
150,000
100,000
50,000
0 All Events Sep 4 + Aftershocks Feb 22 + Aftershocks June 13 + Aftershocks Non-Canterbury events
* A claim is comprised of one or more exposures.
18 A history of the Earthquake Commission’s Natural Disaster Fund
In 1944 the Government established the Earthquake and War How EQC’s Natural Disaster Fund was affected Damage Commission and started collecting a premium from by the 4 September 2010 earthquake all holders of domestic fire insurance. The premium was, as at 30 June 2011, 5c per $100 of cover*, unchanged since the After the first Canterbury earthquake in September 2010 Act's inception. the Fund started being drawn down to meet claims. Initially some $450 million of international equities were sold as From the beginning the Natural Disaster Fund underpinning two of the active equity managers were relieved of their the Commission’s potential liabilities was made up entirely mandates and some passive equities were sold. Gradually, of New Zealand fixed interest securities, mainly Government over the following months Government stock has been sold stock. Until the recent Canterbury earthquakes there back to the Debt Management Office to raise additional had not been any major claims on the Fund from natural cash to meet ongoing earthquake claims. disasters, which allowed EQC to slowly accumulate funds even while paying out hundreds of millions of dollars on The strategy is to keep selling Government stock until the claims from cumulative smaller events. Fund’s strategic asset allocation has been restored, and then to sell both international equities and Government stock In 2001 it was decided that an allocation to international in tandem. As reported in the media recently, on current equities would be made, partly to provide the Fund with the projections the Fund is expected to eventually be exhausted. potential to grow faster than it otherwise would. A new target EQC and the Government are working on what will happen benchmark for performance was established, namely for the with the next phase of the Fund. Fund to exceed the return on the NZ Government Bond Index, plus 1% per annum, measured on a rolling ten-year basis. * On 11 October 2011, Finance Minister Bill English announced that EQC's levies will rise in February 2012 to help rebuild The objective was to ensure there were tradeable financial EQC's Natural Disaster Fund. Homeowners will pay 15 cents assets outside New Zealand that would not be affected per $100 of insurance cover, up to a maximum annual cap of by a local major natural disaster. Any need to draw on the $207 (including GST). Fund to meet significant claims would be met initially by a sell-down of international equities in the market, keeping Asset Allocation (Actual Invested) the requirement for cash away from the Government for a time. A decision was taken to manage the equities on a currency unhedged basis, on the expectation that a severe 3.7% NZ Cash earthquake in the country’s capital, Wellington, would 12.2% NZ Inflation Bonds cause the NZ dollar to depreciate, boosting the value of the 27% Global Equities offshore assets in NZ dollar terms. 57.1% NZ Govt Stock
EQC Investments
$(billion)
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
19 EQC Annual Report | 2010–2011
EQC's Reinsurance Programme Reinsurance and the Canterbury Earthquakes
EQC reduces its level of disaster risk by purchasing a In 2010/2011 EQC had approximately $2.5 billion cover for reinsurance programme through Aon Benfield Limited. The a first major event, in excess of the $1.5 billion deductible. programme consists of policies held with a wide range of If claims on EQC for the 4 September event amount to less international insurers and is renegotiated annually. than $4 billion, the cost to EQC will be limited to the $1.5 billion excess. In the event of an earthquake, an aftershock is considered as part of the reinsurance “event” if: Costs incurred by subsequent events are more complex due to the range of possible scenarios. The reinsurance programme • it occurs within 30 days of the first earthquake; and consists of multiple layers and tranches, which have different placement durations and reinstatement conditions. • it is within 250km of the initial earthquake’s epicentre. The programme includes a $500 million ‘top and drop’ layer This distinction is only significant if the cost of a previous which is activated when an event exceeds $3.5 billion. Once “parent” event exceeds the relevant excess on EQC’s this layer is activated, EQC’s excess for a subsequent event reinsurance programme. At the time of publication, current drops from $1.5 billion to $1 billion. The ‘top and drop’ layer estimates indicate EQC is likely to claim for three parent has an aggregate value of $1 billion which can be claimed events – 4 September 2010, 22 February 2011 and 13 June 2011. over multiple events. EQC will be directly liable for the costs of any aftershocks, which:
• do not exceed the reinsurance excess; and • do not meet the criteria for becoming part of a parent event, which exceeds the reinsurance excess.
The aftershock on 26 December 2010 is likely to be a notable inclusion in this category.
20 EQC’s Direct Loss
Based on the latest actuarial data, EQC’s direct loss as a result of the Canterbury earthquakes is likely to consist of:
A reinsurance excess for the 4 September 2010 event. $1.5 billion + A reinsurance excess for the 22 February 2011 event. $1.5 billion + A reinsurance excess for the 13 June 2011 event. $1.0 billion + Claims payments above the upper reinsurance threshold for the three major events, if any. The ‘from ground up’ limit is $4 billion for the first event. It is likely to be $4 billion for the second event and $3.5 billion for the third event. Approximately $2.5 billion for the 22 February 2011 event + Claims payments for aftershocks that do not exceed the reinsurance excess or meet the criteria to be included with a parent event. Approximately $0.5 billion = Total direct loss to EQC. Approximately $7 billion
Renegotiation
EQC’s annual reinsurance renegotiations took place in International reinsurers suffered losses as a result of these March 2011, immediately after the Tōhoku earthquake and events, significantly impacting earnings and eroding their tsunami in Japan. In addition to the impact of the Canterbury capital base in some cases. This had the effect of pushing up earthquakes, reinsurers considered the Australasian region catastrophe reinsurance rates and toughening up contract to be particularly unstable following the Queensland flooding conditions, especially on loss-affected treaties. EQC was and Cyclone Wilma in January 2011. The tail-end of Cyclone inevitably affected by this change in market conditions. The Wilma resulted in 1,000 landslip claims lodged with EQC. Commission’s reinsurance premium increased significantly and the previous strategies of using three-year placements and pre-paid reinstatements were discontinued due to market sentiment.
Photo: Richard Jorgens, GNS Science
21 EQC Annual Report | 2010–2011
Financial Statements Independent Auditor's Report
TO THE READERS OFTHE EARTHQUAKE ›› fairly reflects, for each class of outputs for the year COMMISSION’S FINANCIAL STATEMENTS AND ended 30 June 2011, the Commission’s: STATEMENT OF SERVICE PERFORMANCE FOR -- service performance compared with the THE YEAR ENDED 30 JUNE 2011 forecasts in the statement of forecast service performance for the financial year; and
The Auditor-General is the auditor of the Earthquake -- actual revenue and output expenses Commission (the Commission). The Auditor-General has compared with the forecasts in the statement appointed me, Ian C Marshall, using the staff and resources of forecast service performance at the start of of Deloitte, to carry out the audit of the financial statements the financial year. and statement of service performance of the Commission on her behalf. We have audited: Emphasis of Matters – Uncertainties associated with the outstanding claims liability and • the financial statements of the Commission on pages 25 reinsurance receivables, and the appropriateness to 56, that comprise the statement of financial position of the going concern assumption as at 30 June 2011, the statement of comprehensive income, statement of changes in equity and statement Without modifying our opinion, we draw your attention of cash flows for the year ended on that date and notes to note 2 to the financial statements about insurance to the financial statements that include accounting liabilities, which explains how the Canterbury earthquakes policies and other explanatory information; and have affected the outstanding claims liability and related reinsurance receivables of the Commission. It also describes • the statement of service performance of the the significance of the amounts of the earthquake related Commission on pages 57 to 67. outstanding claims liability and related reinsurance receivables, and the inherent uncertainties involved in estimating those amounts using actuarial assumptions. Opinion The valuation of the reinsurance receivables is subject to In our opinion: similar uncertainties as the valuation of the outstanding claims liability. • the financial statements of the Commission on pages 25 to 56: Also, without modifying our opinion, we draw your attention to note 1 to the financial statements about the ›› comply with generally accepted accounting going concern assumption, which notes that total liabilities practice in New Zealand; and exceed assets, and that the Crown, under Section 16 of the Earthquake Commission Act 1993, is obliged to grant ›› fairly reflect the Commission’s: or advance sufficient sums to meet any current or future deficiencies. -- financial position as at 30 June 2011; and We consider the disclosures about both of the above -- financial performance and cash flows for the matters to be adequate. year ended on that date. Our audit was completed on 14 October 2011. This is the • the statement of service performance of the date at which our opinion is expressed. Commission on pages 57 to 67: The basis of our opinion is explained below. In addition, we ›› complies with generally accepted accounting outline the responsibilities of the Board of Commissioners practice in New Zealand; and and our responsibilities, and we explain our independence.
22 Basis of opinion Responsibilities of the Board of Commissioners We carried out our audit in accordance with the Auditor- The Board of Commissioners is responsible for preparing General’s Auditing Standards, which incorporate the financial statements and a statement of service International Standards on Auditing (New Zealand). Those performance that: standards require that we comply with ethical requirements and plan and carry out our audit to obtain reasonable assurance • comply with generally accepted accounting practice in about whether the financial statements and statement of New Zealand; service performance are free from material misstatement. • fairly reflect the Commission’s financial position, Material misstatements are differences or omissions of financial performance and cash flows; and amounts and disclosures that would affect a reader’s • fairly reflect its service performance. overall understanding of the financial statements and statement of service performance. If we had found material The Board of Commissioners is also responsible for such misstatements that were not corrected, we would have internal control as is determined necessary to enable referred to them in our opinion. the preparation of financial statements and a statement An audit involves carrying out procedures to obtain audit of service performance that are free from material evidence about the amounts and disclosures in the financial misstatement, whether due to fraud or error. statements and statement of service performance. The The Board of Commissioners’ responsibilities arise from the procedures selected depend on our judgement, including Crown Entities Act 2004 and the Earthquake Commission our assessment of risks of material misstatement of the Act 1993. financial statements and statement of service performance, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to Responsibilities of the Auditor the Commission’s preparation of the financial statements We are responsible for expressing an independent opinion and statement of service performance that fairly reflect on the financial statements and statement of service the matters to which they relate. We consider internal performance and reporting that opinion to you based on control in order to design audit procedures that are our audit. Our responsibilities arise from section 15 of the appropriate in the circumstances but not for the purpose Public Audit Act 2001 and the Crown Entities Act 2004. of expressing an opinion on the effectiveness of the Commission’s internal control. Independence An audit also involves evaluating: When carrying out the audit, we followed the independence • the appropriateness of accounting policies used and requirements of the Auditor-General, which incorporate the whether they have been consistently applied; independence requirements of the New Zealand Institute of Chartered Accountants. • the reasonableness of the significant accounting estimates and judgements made by the Board of Other than the audit, we have no relationship with or Commissioners; interests in the Commission. • the adequacy of all disclosures in the financial statements and statement of service performance; and • the overall presentation of the financial statements and statement of service performance.
We did not examine every transaction, nor do we guarantee Ian C Marshall complete accuracy of the financial statements and Deloitte statement of service performance. We have obtained all On behalf of the Auditor-General the information and explanations we have required and we Wellington, New Zealand believe we have obtained sufficient and appropriate audit evidence to provide a basis for our audit opinion.
23 EQC Annual Report | 2010–2011
Statement of Responsibility
The Board of Commissioners (the Board) is responsible for the preparation of the Earthquake Commission’s financial statements and statement of service performance, and for the judgements made in them.
The Board, through management, has the responsibility for establishing and maintaining a system of internal control designed to provide reasonable assurances as to the integrity and reliability of the financial reporting.
In the opinion of the Board and management, the annual financial statements and the statement of service performance for the financial year ended 30 June 2011 fairly reflect the financial position, operations and service performance of the Commission.
Signed on behalf of the Board:
Chairman Commissioner 29 September 2011 29 September 2011
24 Statement of Comprehensive Income for the year ended 30 June 2011
Actual Budget Actual 2011 2011 2010 Note $(000) $(000) $(000)
Earned premium Gross earned premiums 3 87,766 86,854 85,965 Outward reinsurance premium expense (48,660) (38,750) (38,809) Net earned premium revenue 39,106 48,104 47,156
Underwriting costs Reinsurance and other recoveries 4 4,229,314 – – Claims expense 5 (11,448,607) – (32,204) Catastrophe response programme 6 (7,456) (8,561) (7,390) Movement in unexpired risk liability 18 (281,120) – (6,000) Total underwriting costs (7,507,869) (8,561) (45,594)
(Deficit)/surplus from underwriting activities (7,468,763) 39,543 1,562
Other operating costs Public education 6 (1,386) (3,343) (2,381) Research (excluding GeoNet) 6 (2,796) (2,888) (2,747) GeoNet programme 6 (8,792) (8,300) (8,103) Total operating costs (12,974) (14,531) (13,231)
Investment activities Investment income 7 415,324 378,435 385,220 Investment costs 6 (7,570) (14,450) (8,746) Interest on cash balances 1,377 – 298 Surplus from investment activities 409,131 363,985 376,772
Underwriting fee – Crown guarantee 19 (10,000) (10,000) (10,000)
Net (deficit)/surplus for the year and total comprehensive income (7,082,606) 378,997 355,103
Explanations of major variances against budget are provided in Note 8. The accompanying notes form part of these financial statements.
25 EQC Annual Report | 2010–2011
Statement of Changes In Equity for the year ended 30 June 2011
Actual Budget Actual 2011 2011 2010 Note $(000) $(000) $(000) Natural Disaster Fund
Capitalised reserves Opening balance at 1 July 9 1,500,000 1,500,000 1,500,000 Movement for the year – – – Closing balance at 30 June 1,500,000 1,500,000 1,500,000
Retained earnings Opening balance at 1 July 4,426,205 4,481,543 4,071,102 Net (deficit)/surplus for the year and total comprehensive income (7,082,606) 378,997 355,103 Closing balance at 30 June (2,656,401) 4,860,540 4,426,205
Closing balance as at 30 June (1,156,401) 6,360,540 5,926,205 Photo: Margaret Low, GNS Science
The accompanying notes form part of these financial statements.
26 Statement of Financial Position as at 30 June 2011
Actual Budget Actual 2011 2011 2010 Note $(000) $(000) $(000)
Natural Disaster Fund Capitalised reserves 9 1,500,000 1,500,000 1,500,000 Retained earnings 9 (2,656,401) 4,860,540 4,426,205 Total equity 9 (1,156,401) 6,360,540 5,926,205
Assets Cash at bank 266,923 11,674 11,209 Premiums receivable 18,282 17,829 18,364 Reinsurance and other recoveries 10 4,229,557 – – Other receivables 11 46,099 – 189 Prepayments 10,578 6,405 6,725 Investments 12 4,903,564 6,397,760 5,973,608 Property, plant and equipment 13 21,561 15,504 14,828 Intangible assets 14 2,748 3,811 2,618 Total assets 9,499,312 6,452,983 6,027,541
Liabilities Trade and other payables 15 84,625 4,902 4,735 Provision for employee entitlements 393 216 210 Outstanding claims liability 16 10,204,135 8,901 11,845 Unearned premium liability 17 46,440 45,424 45,546 Unexpired risk liability 18 320,120 33,000 39,000 Total liabilities 10,655,713 92,443 101,336
Net (liabilities*)/assets (1,156,401) 6,360,540 5,926,205
* The Crown has confirmed, in writing to the Commission, its intention to meet its obligation under Section 16 of the Act, to ensure that the Commission can meet all its liabilities as they fall due. For further information refer to the going concern explanation under basis of preparation (Note 1, page 29) and Note 9 – Commission Solvency on page 41.
The accompanying notes form part of these financial statements.
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Statement of Cash Flows for the year ended 30 June 2011
Actual Budget Actual 2011 2011 2010 Note $(000) $(000) $(000) Cash flows from operating activities
Cash was provided from: Interest 227,149 236,243 237,953 Premiums 88,456 87,190 85,698 Dividends 32,814 45,000 37,942 Reinsurance and other recoveries 189 – – Net cash flow from GST – – 347
Cash was disbursed to: Outward reinsurance (51,855) (38,750) (38,824) Crown underwriting fee (10,000) (10,000) (10,000) Claims settlements and handling costs (1,177,594) – (36,650) Employees and other operating expenses (14,574) (26,309) (11,860) GeoNet operating expense (6,060) (5,529) (5,658) Research grants (1,851) (2,279) (2,059) Net cash flow to GST (46,380) – – Net cash (outflow)/inflow from operating activities 26 (959,706) 285,566 256,889
Cash flows from investing activities
Cash was provided from: Sale of investments 1,489,459 – 755,217 Sale of property, plant and equipment 42 – 13
Cash was applied to: Purchase of investments (263,000) (280,227) (1,006,590) Purchase of property, plant and equipment (10,518) (3,624) (3,454) Purchase of intangibles (563) (1,715) (258) Net cash outflow from investing activities (1,215,420) (285,566) (255,072)
Net increase in cash 255,714 – 1,817
Add opening cash brought forward 11,209 11,674 9,392 Ending cash carried forward 266,923 11,674 11,209
“Net cash flow (to)/from GST” represents the net GST paid to or received from the Inland Revenue Department. GST cash flow has been presented on a net basis as the gross amounts do not provide meaningful information for financial statement purposes.
The accompanying notes form part of these financial statements.
28 Notes to the Financial Statements
1. aCCounting policies
Reporting Entity
The Earthquake Commission (the Commission) is a Crown Entity as defined by the Crown Entities Act 2004 and is domiciled in New Zealand. The Commission’s ultimate parent is the New Zealand Crown.
The Commission’s primary objectives are to administer the insurance against natural disaster damage as provided for under the Earthquake Commission Act 1993 (the Act), facilitate research and education about matters relevant to natural disaster damage, and to manage the Natural Disaster Fund (the Fund) including the arrangement of reinsurance. Accordingly, for purposes of New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS), it qualifies as a public benefit entity.
The reporting period covered by these financial statements is the year ended 30 June 2011. These accounts were approved by the Board on 29 September 2011.
Basis of Preparation
Measurement Base
The financial statements have been prepared on a historical cost basis modified by the measurement of financial instruments at fair value through surplus/(deficit), and the measurement of insurance liabilities and reinsurance recoveries at present value as set out below.
Functional and Presentational Currency
These financial statements are presented in New Zealand dollars, which are the functional currency of the Commission, and are rounded to the nearest thousand dollars.
Going Concern
Actuarial estimates of the Commission’s claims liabilities, net of reinsurance, at 30 June 2011 indicate that total liabilities, net of reinsurance exceed its assets. The Crown has confirmed, in writing to the Commission, its intention to meet its obligation under Section 16 of the Act, to ensure that the Commission can meet all its liabilities as they fall due. Section 16 states: “If the assets of the Commission (including the money for the time being in the Fund) are not sufficient to meet the liabilities of the Commission, the Minister shall, without further appropriation than this section, provide to the Commission out of public money such sums by way of grant or advance as may be necessary to meet the deficiency upon such terms and conditions as the Minister determines.”
The Board has therefore adopted the going concern basis in preparing these financial statements.
Statement of Compliance
These financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice. They comply with NZ IFRS and other applicable financial reporting standards, as appropriate for public benefit entities. The accounting policies set out below have been applied consistently to all periods presented in these financial statements.
Accounting judgements and major sources of estimation
The preparation of financial statements in conformity with NZ IFRS requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised (if the revision affects only that period) or in the period of the revision and future periods (if the revision affects both current and future periods).
The actuarial judgements and estimations involved in measuring insurance liabilities and reinsurance recoveries are key areas of estimation where the assumptions made may have a significant effect on the financial statements, with a significant risk of material adjustment in future periods. The magnitude and number of Canterbury earthquakes have resulted in a higher than usual level of uncertainty associated with this measurement. These are discussed in Note 2.
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Significant Accounting Policies
Insurance
Premium Income
Premium income is recognised using the 24ths method to approximate the contract period over which the premiums are earned. The underlying assumption of the 24ths method is that all premiums booked during a particular month can be approximated by an annual policy that incepts during the middle of the month. Premiums not earned at balance date are disclosed in the Statement of Financial Position as unearned premium liability. Premiums receivable are reported net of discounts paid to collecting agencies.
Reinsurance Premiums
Premiums paid to reinsurers are recognised by the Commission as reinsurance premium expense in surplus/(deficit) from the attachment date over the period of indemnity of the reinsurance contract, in accordance with the expected pattern of the incidence of risk. Prepaid reinsurance premiums are included in prepayments in the Statement of Financial Position.
Reinsurance and Other Recoveries
Reinsurance recoveries are the expected reimbursement of claims settlements and claims handling costs that the Commission can recover under its reinsurance contracts, and other recoveries comprises reimbursement of expenditure incurred on behalf of other parties (predominantly the Crown or Crown entities).
Reinsurance and other recoveries received or receivable on paid claims, reported claims not yet paid, claims incurred but not reported (IBNR), and/or claims incurred but not enough reported (IBNER) are recognised as revenue in surplus/(deficit). They are measured as the present value of the expected future receipts, calculated on the same basis as the liability for outstanding claims.
Claims Expenses
Claims expenditure represents payments for claims, claims handling costs and the movement in the liability for outstanding claims.
The outstanding claims liability is recognised at balance date as the central estimate of the present value of the expected future payments for claims incurred to balance date, with an additional risk margin to allow for the inherent uncertainty in the central estimate. The expected future payments include those in relation to claims reported but not yet paid, IBNR, IBNER and claims handling costs.
The outstanding claims liability, comprising all unpaid claims and claims handling expenses related to claims incurred prior to the end of the reporting period, is valued in accordance with the Professional Standard No 4 (General Insurance Business) of the New Zealand Society of Actuaries.
Unexpired Risk Liability
At balance date, the Commission assesses the adequacy of the unearned premium liability by applying the liability adequacy test to determine whether the Commission’s unearned premiums at balance date are sufficient to cover future claims arising from existing contracts.
Where the current estimate of the present value of the expected future cash flows relating to future claims arising from the rights and obligations under current insurance contracts, with an additional risk margin to allow for the inherent uncertainty in the central estimate, exceeds the value of the unearned premium, the deficiency is recognised in net surplus/(deficit) and recorded in the Statement of Financial Position as an unexpired risk liability.
Assets Backing Insurance Liabilities
All assets of the Commission back its insurance liabilities in accordance with Section 13(3) of the Act, which states: “All money in bank accounts established by the Commission, and all investments and other assets of the Commission, shall be deemed to form part of the Fund”.
Grant payments
The Commission provides discretionary grants for earthquake research and research dissemination. Discretionary grants are those where the Commission has no obligation to award on receipt of the grant application and are recognised as expenditure when the performance criteria, on which approval of the grant was based, are met.
Foreign Currency
Transactions in foreign currencies are initially translated at the foreign exchange rate at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation, at year-end exchange rates, of monetary assets and liabilities denominated in foreign currencies, are recognised in surplus/(deficit).
30 Taxation
The Commission is exempt from the payment of income tax in terms of the Income Tax Act 2007. Accordingly, no charge for income tax has been provided for.
Goods and Services Tax (GST)
The Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows, and Commitments (Note 22) are exclusive of GST. The Statement of Financial Position is also exclusive of GST, except that the amount of GST owing to or from the Inland Revenue Department at balance date, being the difference between output GST and input GST, is included in receivables or payables as appropriate.
Investments
Interest
Interest income is accrued using the effective interest method.
Dividends
Dividend income from investments is recognised when the Commission’s rights as a shareholder to receive payment have been established.
Realised Gains and Losses
Income from investments includes realised gains and losses on all investments, including currency gains and losses, and gains and losses on the sale of investments.
Unrealised Gains and Losses
Income from investments includes unrealised gains and losses on all investments, including currency gains and losses.
Financial Instruments
A financial instrument is recognised if the Commission becomes a party to the contractual provisions of the instrument. A financial asset is derecognised if the Commission’s contractual rights to the cash flows from the financial assets expire or if the Commission transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Commission commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Commission’s obligations specified in the contract expire or are discharged or cancelled.
Non-Derivative Financial Instruments
Non-derivative financial instruments comprise investments in equity and debt securities, premiums receivable, other receivables, cash, trade and other payables.
Non-derivative financial instruments at fair value through profit or loss are recognised initially at fair value. Instruments not at fair value through profit or loss are recorded at fair value plus attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below.
Financial Instruments at Fair Value Through Profit or Loss
An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Commission manages such instruments and makes purchase and sale decisions based on their fair value. Upon initial recognition, attributable transaction costs are recognised in surplus/(deficit) when incurred. Subsequent to initial recognition, financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognised in surplus/(deficit).
Cash at Bank
Cash comprises cash balances, cash in transit and bank call deposits. The carrying amount of cash approximates its fair value.
Investments
All investment assets held by the Commission back insurance liabilities and are therefore designated at fair value through profit or loss.
Fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, fair values for initial recognition and, where appropriate, subsequent measurement are established by using valuation techniques.
Derivative Financial Instruments
The Commission uses derivative financial instruments to economically hedge its exposure to foreign exchange risks arising from investment activities. In accordance with its treasury policy, the Commission does not hold or issue derivative financial instruments for trading purposes.
31 EQC Annual Report | 2010–2011
Derivative financial instruments are recognised initially at fair value, and transaction costs are expensed immediately. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on re-measurement to fair value is recognised immediately in profit or loss.
Receivables
Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Receivables are recognised initially at fair value, being the present value of estimated future cash flows plus transaction costs. They are subsequently measured at amortised cost using the effective interest method, less any impairment losses. Receivables with duration of less than 12 months are not discounted.
Impairment losses are assessed by an evaluation of the recoverable amount. The recoverable amount of the Commission’s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). All individual receivables that are considered significant are subject to this approach. The impairment charge is recognised in the surplus/(deficit).
Other Financial Assets
Other non-derivative financial assets are initially measured at fair value and subsequently measured at amortised cost using the effective interest method, less any impairment losses.
Trade and Other Payables
Payables are non-derivative financial liabilities with fixed or determinable payments that are not quoted in an active market. Payables are recognised initially at fair value, being the present value of estimated future cash flows. They are subsequently measured at amortised cost using the effective interest method. Payables with duration of less than 12 months are not discounted.
Property, Plant and Equipment
Overview
Property, plant and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses.
Additions
The cost of an item of property, plant and equipment is recognised as an asset only when it is probable that future economic benefits or service potential associated with the item will flow to the Commission and the cost of the item can be measured reliably. Where an asset is acquired at no cost, or for a nominal cost, it is recognised at fair value when control over the asset is obtained.
Disposals
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of the asset. Gains and losses are included in surplus/(deficit).
Subsequent Costs
Costs incurred subsequent to initial acquisition are capitalised only when it is probable that the future economic benefits or service potential associated with the item will flow to the Commission and the cost of the item can be measured reliably.
The costs of day-to-day servicing of property, plant and equipment are recognised in surplus/(deficit) as they are incurred.
GeoNet Assets
GNS Science administers the design, engineering, operation and maintenance of New Zealand’s geological hazard monitoring system (GeoNet) under a ten-year agreement with the Commission. The services performed by GNS Science include the purchase, testing, installation and commissioning of capital equipment on behalf of the Commission.
The GeoNet assets, comprising buildings, computer equipment and other equipment, remain the property of the Commission and are included in the Commission’s property, plant and equipment in the Statement of Financial Position.
Realised gains and losses arising from the disposal of property, plant and equipment are recognised in surplus/(deficit) in the period in which the transaction occurs.
Depreciation
Depreciation is charged on a straight-line basis at rates calculated to allocate the cost or valuation of an item of property, plant and equipment, less any estimated residual value, over its estimated useful life. The estimated useful lives of different classes of property, plant and equipment are reviewed annually and are typically as follows:
32 Furniture and equipment 3–12 years GeoNet buildings 25 years GeoNet computer equipment 3 years GeoNet other equipment 8 years Canterbury event furniture, equipment and motor vehicles* 3 years
* Canterbury event assets are capitalised and amortised over their useful lives, which is currently estimated to be 3 years.
The remaining useful lives and residual values are reviewed annually.
Intangible Assets
Intangible assets are recorded at cost less accumulated amortisation and accumulated impairment losses.
Research and Development
Expenditure on research activities, undertaken with the prospect of gaining new scientific knowledge or understanding, is recognised in surplus/ (deficit) when incurred. The Commission does not undertake development of new products or processes other than software referred to below.
Software Acquisition and Development
Software development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Commission intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour, and overhead costs that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised when incurred.
Capitalised software development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses.
Intangible assets are amortised on a straight-line basis over the following useful lives:
Computer software applications and licences 1–9 years
Impairment of Non-Financial Assets
The carrying amounts of the Commission’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For intangible assets that are not yet available for use, the recoverable amount is estimated at each reporting date.
An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in surplus/(deficit).
The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. Value in use is depreciated replacement cost for an asset where the future economic benefits or service potential of the asset are not primarily dependent on the asset’s ability to generate net cash inflows and where the Commission would, if deprived of the asset, replace its remaining future economic benefits or service potential.
Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Leases
Operating leases, where the lessor substantially retains the risks and rewards of ownership, are recognised in a systematic manner over the term of the lease. Lease incentives received are recognised evenly over the term of the lease as a reduction in lease expense.
Liabilities (Other than insurance)
The Commission recognises a liability when there is a present obligation (legal or constructive) as the result of a past event, it is probable that expenditure will be required to settle the obligation, and a reliable estimate can be made of the obligation. Where the timing or amount of the obligation is uncertain the obligation is recognised as a provision.
Employee Entitlements
Employee entitlements to salaries and wages, annual leave, long service leave and other similar benefits are recognised in surplus/(deficit) when they accrue to employees. Employee entitlements to be settled within 12 months are reported at their undiscounted nominal value. The liability for
33 EQC Annual Report | 2010–2011
long service leave is calculated based on the present value of likely future entitlements accruing to employees, based on years of service, years to entitlement and the likelihood that employees will reach entitlement and contractual entitlements information.
Other Liabilities and Provisions
Other liabilities and provisions are recorded at the estimated fair value of the expenditure required to settle the obligation. Liabilities and provisions to be settled beyond 12 months are recorded at their discounted value. The increase in a discounted provision due to the passage of time is recognised as a finance cost.
Contingent Liabilities
A contingent liability is disclosed when a possible obligation arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Commission. A contingent liability is also disclosed when a present obligation arising from past events is not recognised because it is not probable that settlement of the obligation will result in a cost to the Commission, or the amount of the obligation cannot be measured with sufficient reliability.
Comparatives
When the presentation or classification of items in the financial statements is amended or accounting policies are changed voluntarily, comparative figures are restated to ensure consistency with the current period unless it is impracticable to do so.
In 2011, the Statement of Comprehensive Income was amended to disclose catastrophe response programme costs separately from claims expense and the comparatives have been adjusted accordingly.
Budgets
The budget figures are derived from the 2010 Statement of Intent as approved by the Board at the beginning of the financial year. The budget figures have been prepared in accordance with NZ IFRS, using accounting policies that are consistent with those adopted by the Commission for the preparation of the financial statements.
When presentation or classification of items in the financial statements is amended or accounting policies are changed voluntarily, budget figures are restated to ensure consistency with the current period unless it is impracticable to do so.
Superannuation Scheme
Defined Contribution Scheme
Obligations for contributions to the KiwiSaver and the State Sector Retirement Savings Scheme (SSRSS) are accounted for as defined contribution superannuation schemes and are recognised as an expense in surplus/(deficit) on an accruals basis.
Cost Allocation
Expenditure of the Commission is allocated across its four main functions: claims, research, education, and investment management. Expenditure is allocated to these functions by directly attributing costs as far as possible and by the apportioning of indirect costs based on the number of full time equivalents employed in each function.
Changes in Accounting Policies
Accounting policies are changed only if the change is required by a standard or interpretation, or otherwise provides more reliable and more relevant information. There have been no significant accounting policy changes in the 2011 financial statements.
Standards, amendments and interpretations issued that are not yet effective and have not been early adopted
NZ IAS 24 ‘Related Party Disclosures’ (revised 2009) replaces NZ IAS 24 ‘Related Party Disclosures’ (issued 2004), and is effective for annual reporting periods beginning on or after 1 January 2011. The new standard removes the general disclosure exemption previously available to public benefit entities for transactions between entities subject to common Crown control transacted at arms’ length. As a result, the Commission will be required to disclose the following information about such transactions:
(i) the nature and amount of each individually significant transaction; and (ii) for other transactions that are collectively but not individually significant, a qualitative or quantitative indication of their extent.
Previously the Commission has not disclosed this information. The Commission intends to adopt this standard for the year ending 30 June 2012.
Other standards and interpretations have been approved but are not yet effective, but are not expected to have a material impact on the Commission’s financial statements. These are expected to be adopted when they become mandatory.
34 2. insurance Liabilities
Actuarial Assumptions and Methods
The actuarial valuation report for 2011 was prepared by Neil Christie and Mark Weaver of Melville Jessup Weaver. Neil Christie and Mark Weaver are both Fellows of the New Zealand Society of Actuaries. The report was commissioned to provide estimates of the outstanding claims liability, reinsurance and other recoveries, and premium liabilities to be used in the liability adequacy test.
The effective date of the valuation is 30 June 2011. Neil Christie and Mark Weaver considered that overall the information and data supplied to them was adequate and appropriate for the purposes of their valuation.
Actuarial calculations were not performed with respect to the outstanding claims liability at 30 June 2010 as the number and total value of outstanding claims at balance date was very low. Accordingly, it was considered by the Commission that the benefit of calculating actuarial adjustments would not justify the cost as such adjustments would not be material.
Uncertainties Arising from the Canterbury Earthquakes
The Canterbury earthquakes have resulted in a higher than usual level of uncertainty associated with the valuation of the outstanding claims liability, reinsurance recoveries and unexpired risk liability. Some of the key sources of uncertainty are: the impact of multiple events on Commission coverage and reinsurance coverage; severe land damage and a complex land claims environment from both an engineering and legal perspective; the relatively early stage of claims development including the most recent large earthquake event of 13 June 2011 and the potential for construction cost inflation to exceed expectations. The declaratory judgement of 2 September 2011 on the reinstatement of cover has further added to the uncertainty surrounding claims estimates. The actual claims outcome may prove to be different from the liabilities that have been established.
The Act requires all claims to be reported within three months of an event, and usually the key area of estimation risk is therefore IBNER. However, for 2011 the key areas of estimation risk are both IBNR and IBNER due to the number, magnitude and timing of the major Canterbury earthquakes. The volatility of IBNER is partially mitigated by the maximum settlement amounts of $20,000 for personal property and $100,000 for dwellings. Claims in relation to residential land are not subject to a monetary limit and are therefore subject to greater volatility.
Outstanding Claims Liability
To determine the outstanding claims liability the actuarial approach adopted was to estimate the projected ultimate claims costs then deduct the payments made in relation to those claims, for the year ended 2011. An aggregate Bayesian stochastic frequency/severity model was used to calculate the estimated ultimate claims costs. Each component of the claims liability was split into separate groups depending upon the Canterbury earthquake event grouping or other “business as usual” claims. These event groups were further split into sub-claim valuation groups being land claims, building claims or personal property claims.
The following ranges of assumptions have been used in determining the outstanding claims liability for 2011:
Weighted average term to settlement 0.3 to 1.9 years Claims inflation rate per annum 2.5% to 5.0% Discount rate per annum 2.84% to 6.07% Risk margin 10.4% Claims handling expense ratio 6.1%
Processes Used to Determine Assumptions
Weighted average term to settlement: the weighted average term to settlement varies by valuation groupings having regard to the estimated future patterns of gross claim payments for these groupings.
Claims inflation rate: the claims inflation rates were set having regard to Treasury’s published CPI assumptions as at 30 June 2011 with some allowance for higher levels of claims inflation for the building claims. In addition, the risk margin implicitly allows for somewhat higher levels of claims inflation.
Discount rate: projected cash flows are discounted for the time value of money using Treasury’s published discount rates as at 30 June 2011.
Risk margin: the risk margins are derived directly from the claims distributions produced by the net incurred claims cost models. In order to determine the degree of variance and hence risk margins at higher aggregated levels, the variances of each component distribution are combined. Correlation is assumed at the event level but not at the sub-claim level. The risk margin is expressed as a percentage of the net discounted outstanding claims liability, including claims handling expenses, and is intended to achieve a 75% probability of adequacy.
35 EQC Annual Report | 2010–2011
Claims handling expense ratio: claims handling expenses are subdivided into event groups and estimated on a per-claim basis using per-claim assumptions derived from an analysis of expenses. Risk margins are also applied to claims handling expenses. The claims handling expense ratio is expressed as a percentage of the gross undiscounted outstanding claims liability.
Sensitivity of Assumptions
The impact of changes in the key assumptions on the value of the net outstanding claims liability is shown below:
(Net) outstanding Movements in claims liability Variable variable $(000) Weighted average term to settlement – years +0.5 years +31,100 -0.5 years -34,700 Claims inflation rate +1.0% +104,700 -1.0% -106,500 Discount rate +1.0% -124,600 -1.0% +142,600 Risk margin +1.0% +54,100 -1.0% -54,100 Claims handling expenses ratio +1.0% +58,600 -1.0% -58,600
3. premiums
Actual Budget Actual 2011 2011 2010 $(000) $(000) $(000)
Gross premiums 90,927 89,130 89,029 Less discount (2,267) (2,276) (2,211) 88,660 86,854 86,818
Unearned premium opening 45,546 42,707 44,693 Unearned premium closing (46,440) (42,707) (45,546) (894) – (853)
Gross earned premium 87,766 86,854 85,965
Premium income represents premiums collected and paid to the Commission by insurance companies and brokers. In accordance with Section 24 (2) of the Act, the Commission receives declarations provided by insurance companies and brokers that all premiums collected have been returned to the Commission.
36 4. reinsurance and other recoveries
Actual Budget Actual 2011 2011 2010 $(000) $(000) $(000)
Gross reinsurance recoveries 4,574,700 – – Discount (389,738) – – Discounted reinsurance recoveries 4,184,962 – –
Crown recoveries 43,808 – – Canterbury Earthquake Recovery Authority (CERA) 375 – – Other 169 – – Total other recoveries 44,352 – –
Total reinsurance and other recoveries 4,229,314 – –
The Commission is recovering from the Crown $2,368,000 for land damage claims, $4,154,000 for investigations into land remediation and $37,200,000 for land remediation, and also $86,000 for emergency repairs under Section 25 of the Public Finance Act 1989. The Commission is recovering $375,000 from CERA for investigations into land remediation in the Christchurch central business district.
5. Claims expense
Summary
2011 2011 2011 2010 2010 2010 Current Prior Current Prior year years Total year years Total $(000) $(000) $(000) $(000) $(000) $(000)
Gross claims – undiscounted 12,340,157 (612) 12,339,545 29,809 2,395 32,204 Discount (890,938) – (890,938) – – – Gross claims – discounted 11,449,219 (612) 11,448,607 29,809 2,395 32,204
Reinsurance recoveries – undiscounted 4,574,800 – 4,574,800 – – – Discount (389,838) – (389,838) – – – Reinsurance recoveries – discounted 4,184,962 – 4,184,962 – – –
Net claims incurred 7,264,257 (612) 7,263,645 29,809 2,395 32,204
Current claims relate to risks borne in the current financial year. Prior years’ claims adjustments arise when the actual number or value of claims settled differ from estimates at the previous year’s balance date or from a re-assessment of the estimated liability for prior years’ claims that remain unsettled at current balance date.
37 EQC Annual Report | 2010–2011
Claims Expenditure by Expense Type
Actual Budget Actual 2011 2011 2010 $(000) $(000) $(000)
Canterbury claims expense Advertising and publicity 3,777 – – Call centres and claims management – third party 21,293 – – Claims assessment fees (i) 92,737 – – Claims administrators and other contractors (ii) 17,925 – – Commissioners' fees 60 – – Depreciation 1,076 – – Employee remuneration and benefits 2,434 – – Engineers, and other consultants (iii) 21,810 – – Office rental 1,486 – – Other costs 10,173 – – Travel and accommodation (iv) 29,094 – – Project management and infrastructure – rebuilding programme 23,579 – –
Claims handling costs incurred – Canterbury 225,444 – –
Provision for future handling costs (undiscounted) 600,900 – – Total claims administration costs – Canterbury 826,344 – –
Claims settlements (undiscounted) 11,445,485 – – Discount (890,938) – – Estimated cost of earthquakes – Canterbury 11,380,891 – –
Other claims expenses (v) 59,516 – 32,204 Other claims handling costs 8,200 – –
Estimated cost of claims 11,448,607 – 32,204
(i) This comprises loss adjusting and estimating fees. (ii) This consists predominantly of claims processing costs, and administrative functions supporting that work, but also includes additional accounting staff, communications and information analysts engaged as a result of the Canterbury earthquake events. (iii) In addition to engineering consultancy of $11,657,000 this also includes valuation, legal and assurance services. (iv) This is primarily travel and accommodation for assessors and estimators, but also includes the rental and operating costs of vehicles for assessment work. (v) This consists predominantly of cyclone, flood, storm and tsunami claims and associated claims handling costs.
38 6. operating expenditure excluding Claims costs
Actual Budget Actual 2011 2011 2010 $(000) $(000) $(000)
Advertising and publicity 487 1,490 1,240 Amortisation of intangibles 433 514 378 Fees paid to the auditor Audit of the financial statements 156 92 90 Contract compliance assurance services 29 13 10 Commissioners’ fees 172 145 153 Depreciation 3,018 2,911 2,835 Employee remuneration and benefits 2,425 2,368 2,298 Grants for earthquake research 2,187 2,341 2,176 GeoNet operating costs 5,908 5,529 5,402 Investment and custodial expenses – third party 6,106 13,070 7,434 Office rental 451 447 481 Sponsorships 532 1,290 630 Other administration costs 6,096 7,332 6,240
Total operating expenditure excluding claims costs 28,000 37,542 29,367
Expenditure grouped by function Catastrophe response programme 7,456 8,561 7,390 Public education 1,386 3,343 2,381 Research (excluding GeoNet) 2,796 2,888 2,747 GeoNet programme 8,792 8,300 8,103 Investment costs 7,570 14,450 8,746
Total expenditure by function excluding claims costs 28,000 37,542 29,367
Photo: Margaret Low, GNS Science
39 EQC Annual Report | 2010–2011
7. investment Income
Actual Budget* Actual 2011 2011 2010 $(000) $(000) $(000)
Global equities Equity gains 271,301 193,071 162,710 Foreign exchange losses (162,425) – (124,691) Dividend income 32,299 – 37,836 141,175 193,071 75,855
NZ Government stock Interest and discount income 197,961 222,430 208,697 Price revaluation gains/(losses) 34,741 (47,380) 92,153 Realised gains on disposal 31,237 – – 263,939 175,050 300,850
Other short-term investments Interest income 10,210 10,314 8,515
Total investment income 415,324 378,435 385,220
* Budgeted investment income is based on projected medium-term (5 year) asset returns.
8. major budget variances
Canterbury Earthquakes
The Canterbury earthquakes during the 2011 financial year have resulted in a number of substantial variances to the budgeted financial statements published in the Commission’s Statement of Intent. Items significantly affected include the following:
(i) reinsurance costs
Additional cover was purchased to reinstate a portion of the Commission’s reinsurance after the September event. In addition, reinsurance costs also increased significantly upon renewal in June 2011.
(ii) Claims expense and claims handling expense
Canterbury earthquake costs and estimates are discussed under Notes 2 and 5. Canterbury earthquake costs and reinsurance recoveries were not budgeted.
(iii) investment assets
To provide for claims costs, the Commission has liquidated global equities, bank securities and New Zealand Government stock. The Commission’s cash holdings have increased to enable it to pay claims as they fall due.
(iv) Claims liabilities
Claims liabilities have been estimated by the Commission’s actuaries, based on information available at year-end. Due to the number, size, and timing of the Canterbury earthquake events, a precise assessment of the final liability is not possible at this time, and the actual liability may differ from that disclosed in these accounts. These calculations are discussed further in Notes 2 and 16.
(v) unexpired risk liability
The unexpired risk liability relating to unexpired insurance premiums at balance date has been recalculated in light of the increased probability of damage-causing earthquakes in the Canterbury region, and higher reinsurance costs.
40 Investment Returns
Investment returns were strong in 2011 and returns exceeded budget despite a reduction in investment assets. Returns on Government stock were very favourable as a result of a fall in average yields. Equity returns were also strong, but were largely offset by foreign exchange losses resulting from a sustained rally in the New Zealand dollar.
Other Claims Expenses
During the year, the Commission incurred land damage claims including claims arising from Cyclone Wilma in January and the storms that hit the Hawke's Bay in April 2011. Claims costs are not budgeted by the Commission.
9. natural Disaster Fund
Actual Budget Actual 2011 2011 2010 $(000) $(000) $(000) Capitalised reserves 1,500,000 1,500,000 1,500,000
Retained earnings/(deficits) Balance as at 1 July 4,426,205 4,481,543 4,071,102 Net (deficit)/surplus for the year and total comprehensive income (7,082,606) 378,997 355,103 Balance as at 30 June (2,656,401) 4,860,540 4,426,205
Closing balance of the Natural Disaster Fund (1,156,401) 6,360,540 5,926,205
Capitalised Reserves
1,500,000,000 ordinary shares of $1.00 each deemed to have been issued and paid up in full from the Fund on 1 October 1988.
Capital Management
The Natural Disaster Fund comprises retained surpluses/(deficits) and capitalised reserves. The Commission is subject to the financial management and accountability provisions of the Crown Entities Act 2004, which impose restrictions in relation to borrowings, acquisition of securities, issuing guarantees and indemnities and the use of derivatives.
The Commission manages its equity by prudently managing reinsurance, revenues, expenses, assets, liabilities, investments, and general financial dealings to ensure it effectively achieves its objectives and purpose, whilst remaining a going concern.
Commission Solvency
The Commission has exposure to liabilities in excess of its current level of assets. In the event that the Commission’s assets are insufficient to meet its liabilities, the Crown, under Section 16 of the Act, is obliged to provide, by way of grant or advance, sufficient funds to meet the shortfall (refer also Note 1 page 29). The Crown has confirmed, in writing, its commitment to meet this obligation.
41 EQC Annual Report | 2010–2011
10. reinsurance and other recoveries
Actual Actual 2011 2010 $(000) $(000)
Gross reinsurance receivable 4,574,700 – Discount (389,738) – Discounted reinsurance receivable 4,184,962 –
Other recoveries Crown 44,163 – CERA 432 – Total other recoveries 44,595 –
Total reinsurance and other recoveries 4,229,557 –
Current 1,206,035 – Non-current 3,023,522 – 4,229,557 –
11. other Receivables
Actual Actual 2011 2010 $(000) $(000)
Goods and Services Tax 45,741 – Other 358 189
Total receivables 46,099 189 Photo: Richard Jorgens, GNS Science
42 12. financial Instruments
Actual Actual 2011 2010 $(000) $(000)
Financial assets designated at fair value* through profit or loss Government securities 3,529,820 4,139,220 New Zealand bank securities – 149,423 Global equities 1,373,744 1,684,965 4,903,564 5,973,608
Loans and receivables measured at fair value Cash at bank 266,923 11,209 Premiums receivable 18,282 18,364 Other receivables 46,099 189 Reinsurance and other recoveries 4,229,557 – 4,560,861 29,762
Financial liabilities measured at amortised cost Trade and other payables (84,625) (4,735) Provision for employee entitlements (393) (210) (85,018) (4,945)
Central estimate of claims liability including risk margin (10,204,135) (11,845)
* fair value
Financial instruments that are measured subsequent to initial recognition at fair value are grouped into levels 1 to 3 based on the degree to which the fair value is observable:
• level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; • level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
All of the Commission’s financial instruments that are measured at fair value are classified within level 1.
43 EQC Annual Report | 2010–2011
12F A. inancial Instruments – Investments
Section 12 of the Act and Section 103 of the Crown Entities Act 2004 give the Minister of Finance authority to issue directions to the Commission.
A direction from the Minister of Finance was issued on 1 November 2001 permitting investments to be held in New Zealand Government securities (New Zealand Government stock, inflation-indexed stock and treasury bills), New Zealand bank securities (maximum $250 million) and global equities up to a maximum of 35% of total investments. All investments in New Zealand Government securities are only tradable with the New Zealand Debt Management Office (NZDMO).
At 30 June 2011 the fair values and concentrations of the Commission’s investments were as follows:
2011 2011 2010 2010 Fair Value % of total Fair Value % of total $(000) investment $(000) investment
NZ Government stock 2,913,003 59.4 3,427,541 57.4 NZ Government inflation-indexed stock 566,837 11.6 537,413 9.0 NZ Government treasury bills 49,980 1.0 174,266 2.9 Total Government securities 3,529,820 72.0 4,139,220 69.3
NZ bank securities – – 149,423 2.5
Global equities – active 781,392 15.9 1,012,494 16.9 Global equities – passive 592,352 12.1 672,471 11.3 Total global equities 1,373,744 28.0 1,684,965 28.2
Total investments 4,903,564 100.0 5,973,608 100.0
Current* 299,980 6.1 323,689 5.5 Non-current* 4,603,584 93.9 5,649,919 94.5
4,903,564 100.0 5,973,608 100.0
* Classification as current or non-current is based on the contractual period of the instrument. It is likely that a majority or all of the Commission’s investments will be realised over the next 6 years to settle claims and pay claims handling costs.
Interest Rate Risk
Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The Commission’s investments in Government stock, treasury bills and New Zealand bank securities expose it to interest rate risk.
The Commission passively manages its Government stock portfolio. This means that the portfolio is exposed to an interest rate risk identical to the New Zealand Government stock index.
In the event of a major catastrophe, and the need to immediately sell Government stock, the NZDMO has agreed to buy back the Commission’s Government stock at pre-catastrophe prices. In practice, following the Canterbury earthquakes, sales of Government stock have been (and will continue to be) spread out over many months, and as market prices have been favourable this facility has not been required.
The Commission’s investments have the following average market yields and durations:
2011 2011 2010 2010 Yield Duration Yield Duration NZ Government stock 4.08% 4.21 yrs 4.52% 4.14 yrs NZ Government inflation-indexed stock 1.67% 4.31 yrs 2.47% 5.12 yrs NZ Government treasury bills 2.48% 6 days 2.55% 59 days NZ bank bills n/a n/a 2.95% 47 days On-call funds 2.92% n/a n/a n/a
44 Fair Value Interest Rate Risk Sensitivity
A change in interest rates (yields) affects the price (fair value) that the Commission would receive upon the sale of a security.
The fair value is arrived at by discounting the cash flows arising from a financial instrument at the market yield and recognising in income or deficit. An identical increase or decrease in interest rates will therefore not produce an identical outcome. A 50 basis point increase in interest rates would increase the deficit at balance date by $70,811,741 (2010: decrease surplus by $81,774,509). A 50 basis point decrease would decrease the deficit by $73,105,409 (2010: increase surplus by $84,411,524).
Cash Flow Interest Rate Risk
The Commission does not invest in variable rate instruments, and is therefore not subject to cash flow interest rate risk.
Global Equities Market Price Risk
The Commission is exposed to price volatility and exchange rate fluctuations on its global equity investments.
Managing market pricing risks associated with global equities is achieved by maintaining a tracking error against the MSCI World Index of not more than 0.5% per annum for passive investments. Active global equity managers are allowed a larger tracking error, but are subject to other constraints. These include their aggregated individual company exposures being limited to 5% of funds invested in global equities, investment restricted to 5% of a company’s market capitalisation, and restrictions on industry and country exposures to limit sector over-exposure. Holdings in illiquid securities are restricted or prohibited. The multi-manager style also enables a diversification of risk.
The fair values of equity investments are determined by reference to published price quotations on the world markets.
The Commission’s global equity investments are concentrated in the following currencies:
2011 2010 USD 51% 51% EURO 16% 15% GBP 10% 10% JPY 7% 9% Other 16% 15% 100% 100%
Price and Foreign Exchange Risk Sensitivity
A 10% increase in the value of the New Zealand dollar at balance date would increase the deficit by $124,886,000 (2010: decrease surplus by $153,179,000). A 10% decrease in the value would decrease the deficit by $152,638,000 (2010: increase surplus by $187,218,000).
A 10% increase in the MSCI World Index at balance date would decrease the deficit by $137,374,000 (2010: increase surplus by $168,496,000). A 10% decrease in the index would increase the deficit by $137,374,000 (2010: decrease surplus by $168,496,000).
Credit Risk
The Commission is exposed to the credit risk of a bank or the Crown defaulting on an investment. The Commission reduces credit risk by investing funds only in securities issued by approved New Zealand banks that have a short-term credit rating of A-1 or higher from Standard and Poor’s. Exposure to any one bank with a rating of less than A-1+ is restricted to a maximum of 15% of total bank securities, but for banks with a rating of A-1+, the exposure may be extended to 25%. No collateral is held by the Commission in respect of bank balances or short-term securities due to the credit rating of financial institutions with whom the Commission transacts business. At balance date the Commission held on-call deposits with five registered banks but held no short-term securities (2010: $149,426,817).
45 EQC Annual Report | 2010–2011
12B. financial Instruments – Other
Credit Risk
The Commission limits its exposure to very large-scale natural disasters through the purchase of reinsurance. The Commission is exposed to the credit risk of a reinsurer defaulting on its obligations. Note 19 explains how the Commission minimises the risk of default. The Commission reduces credit risk by placing reinsurance with counterparties who have a credit rating of AAA to A- from Standard and Poor’s (i.e. from “extremely strong” to “strong”) and limiting its exposure to any one reinsurer or related group of reinsurers.
The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to Standard and Poor’s credit ratings (if available) or to historical information about counterparty default rates:
Actual Actual 2011 2010 $(000) $(000) Counterparties with credit ratings
Cash at bank and on-call deposits AA 229,923 11,209 AA- 37,000 – Total 266,923 11,209
Reinsurance recoveries AA 252,848 – AA- 1,497,076 – A+ 1,650,728 – A 622,118 – A- 162,192 – 4,184,962 –
Crown recoveries AAA* 44,595 –
GST receivable AAA* 45,741 –
Premiums receivable AA- 6,578 6,633 A+ 4,234 7,232 A 1,041 249 A- 6,404 3,995 Other 25 228 18,282 18,136
Counterparties without credit ratings
Other receivables 358 189
* On 30 September 2011, Standard and Poor's downgraded New Zealand's sovereign long-term local currency credit rating to AA+.
46 Liquidity Risk
The Commission’s financial liabilities consist of claims payable, and trade and other payables. It is expected that the majority of trade payables outstanding at balance date will be settled within 12 months (2010: 12 months). Claims payable at balance date will be settled within the next 6 years.
The Commission’s liquidity risk is the risk of having insufficient liquid funds available to meet claims, and trade and other payables as they fall due. To manage this risk, the Commission retains a strategic allocation of 7% of investments invested in either bank securities or treasury bills for periods up to 92 days. Under normal operating conditions bank securities' maturity dates are spread to ensure that at least $50 million is available each month to meet operational requirements. Following the Canterbury earthquakes, cash at bank has been held at higher levels to provide for claims costs and settlement, but has remained under the 7% threshold.
All other financial instruments are highly liquid and can be sold in a relatively short time-frame to meet any operational requirements.
13. property, Plant and Equipment
Canterbury Earthquakes Furniture GeoNet Furniture and Equipment and GeoNet Computer GeoNet Other Equipment Motor Vehicles Buildings Equipment Equipment Total $(000) $(000) $(000) $(000) $(000) $(000) 2011
Cost At 1 July 2010 1,200 – 1,361 1,895 23,055 27,511 Additions 183 7,655 – 214 2,808 10,860 Disposals (59) – – (216) – (275) At 30 June 2011 1,324 7,655 1,361 1,893 25,863 38,096
Accumulated depreciation At 1 July 2010 871 – 118 1,355 10,339 12,683 Depreciation charge 135 1,076 29 203 2,652 4,095 Disposals (27) – – (216) – (243) At 30 June 2011 979 1,076 147 1,342 12,991 16,535
Carrying amounts at 30 June 2011 345 6,579 1,214 551 12,872 21,561
2010
Cost At 1 July 2009 1,200 – 862 1,609 20,590 24,261 Additions 113 – 499 323 2,519 3,454 Disposals (113) – – (37) (54) (204) At 30 June 2010 1,200 – 1,361 1,895 23,055 27,511
Accumulated depreciation At 1 July 2009 828 – 46 1,187 7,968 10,029 Depreciation charge 146 – 72 205 2,412 2,835 Disposals (103) – – (37) (41) (181) At 30 June 2010 871 – 118 1,355 10,339 12,683
Carrying amounts at 30 June 2010 329 – 1,243 540 12,716 14,828
47 EQC Annual Report | 2010–2011
14. intangible Assets
Actual Actual 2011 2010 $(000) $(000) Computer software
Cost At 1 July 3,418 3,160 Additions 563 258 Disposals – – At 30 June 3,981 3,418
Accumulated amortisation At 1 July 800 422 Depreciation charge 433 378 Disposals – – At 30 June 1,233 800
Carrying amounts at 30 June 2,748 2,618
15. trade and Other Payables
Actual Actual 2011 2010 $(000) $(000)
Trade payables 77,716 257 Tax on reinsurance 1,723 1,335 GST payable – 640 Accruals 5,186 2,503
84,625 4,735
Trade and other payables are non-interest bearing and are normally settled on 30-day terms, therefore the carrying value of trade and other payables approximates their fair value.
16. insurance liabilities
The Commission covers the following types of hazard: earthquake, natural landslip, volcanic eruption, hydrothermal activity and tsunami, as well as fire caused by any of the above. At balance date, the Commission recognises a liability in respect of outstanding claims, including amounts in relation to claims reported but not yet paid, claims incurred but not reported, claims incurred but not enough reported and costs including claims handling costs. The Commission also assesses the adequacy of the unearned premium liability.
As explained in Note 2, the Canterbury earthquakes have resulted in a higher than usual level of uncertainty associated with the valuation of the outstanding claims liability. The actual claims outcome may prove to be different from the liabilities that have been established.
48 Outstanding Claims Liability
Actual Actual 2011 2010 $(000) $(000)
Outstanding claims liability Central estimate of outstanding claims liability 9,925,673 10,330 Claims handling costs 609,100 1,070 Risk margin 560,300 445 Gross outstanding claims liability 11,095,073 11,845
Discount (890,938) – Discounted outstanding claims liability 10,204,135 11,845
Current 3,530,400 11,366 Non-current 6,673,735 479 10,204,135 11,845
Risk margin applied 10.4% 3.9% Probability of adequacy 75.0% 75.0%
Reconciliation of movement in outstanding claims liability Outstanding claims liability at 1 July 11,845 8,901 Add claims expense 11,448,607 39,594 Less non-cash items in claim expense (1,077) – Less claims payments during the year (1,177,594) (36,650) Less claims handling cost in trade and other payables (77,646) –
Outstanding claims liability at 30 June 10,204,135 11,845
17. unearned Premium Liability
Actual Actual 2011 2010 $(000) $(000)
Unearned premium liability at 1 July 45,546 44,693 Deferral of premiums on contracts written in the period 46,440 45,546 Earning of premiums written in previous periods (45,546) (44,693)
Unearned premium liability at 30 June 46,440 45,546
49 EQC Annual Report | 2010–2011
18. unexpired Risk Liability
Actual Actual 2011 2010 $(000) $(000)
Unexpired risk liability balance at 1 July 39,000 33,000 Movement for the year 281,120 6,000
Unexpired risk liability at 30 June 320,120 39,000
An unexpired risk liability was determined as follows:
Actual Actual 2011 2010 $(000) $(000)
Calculation of deficiency Unearned premium liability 46,440 45,546 Central estimate of present value of expected future cash flows arising from future claims on general contracts issued (313,450) (85,100) Risk margin (64,200) (7,500) Gross deficiency (331,210) (92,600)
Present value of expected future cash inflows arising from reinsurance recoveries on future claims on general contracts issued 11,090 8,000 Net Deficiency (320,120) (39,054)
19. insurance Risks
The Commission must accept exposure to claims for the natural catastrophes as specified in the Act and therefore may not seek to reduce its claims exposure by diversification of its business over classes of insurance or geographical region. The premium level is set by the Earthquake Commission Regulations 1993.
Reinsurance Programme
The Commission limits its exposure to a very large-scale natural disaster through the purchase of reinsurance with the objectives of:
(i) minimising the overall cost to secure mandated protection to New Zealand homeowners; (ii) implementing a reinsurance programme that provides stability over time against reasonably foreseeable events; (iii) providing flexibility in the reinsurance agreement terms and conditions should the Crown determine a different risk profile under the natural disaster insurance scheme; and (iv) minimising the risk of default amongst reinsurers by limiting its exposure to any one reinsurer or related group of reinsurers, by applying the following policies:
• setting a target for the overall programme at placement that achieves a weighted average score of Standard & Poor’s (S&P) financial strength rating of A or better; • normally placing reinsurance with organisations who have the following security ratings:
-S&- P: AAA to A- (i.e. from “extremely strong” to “strong”); -- Best’s: A++ to A- (i.e. from “superior” to “excellent”); and
• diligent examination by the Commission's management of the case for inclusion of a non-complying reinsurer, with the assistance of its reinsurance broker, and obtaining Board approval for any decision to include such reinsurers.
50 Crown Underwriting Fee
Pursuant to Section 17 of the Act, the Commission is required to pay fees to the Crown as determined by the Minister of Finance, for the guarantee provided under Section 16 of the Act (refer Notes 2 and 9). The Minister of Finance determined that $10 million be paid for the year ended 30 June 2011 (2010: $10 million).
Interest Rate Risk and Credit Risk
No direct exposure to interest rate risk results from the financial assets or liabilities arising from insurance or reinsurance contracts. Financial assets and liabilities arising from insurance or reinsurance contracts are stated in the Statement of Financial Position at the amount that best represents the maximum credit risk exposure at balance date. Refer to Note 12B for consideration and concentrations of credit risk.
Research and Education
The Commission seeks to indirectly reduce the extent of claims incurred, by the dissemination of research and through public education programmes.
20. Credit Rating
The Commission was assigned an insurer financial strength rating of AAA (extremely strong) as accorded by international rating agency Standard & Poor’s on 25 September 2011. Standard & Poor's downgraded the Earthquake Commission's insurer financial strength rating to AA+ on 30 September 2011.
21. Contingent Liabilities and Assets
There were no contingent liabilities or assets at 30 June 2011 (2010: nil).
22. Commitments
ClaimCenter Services Contract
In 2007, the Commission entered into a services contract for the provision of a computer system for claims handling, processing and allocation.
Actual Actual 2011 2010 $(000) $(000)
Operating commitment (a) Not later than one year 1,959 1,959 (b) Later than one year and not later than two years 1,959 1,959 (c) Later than two years but not later than five years 5,878 5,878 (d) Later than five years 1,306 3,265
Total ClaimCenter commitment 11,102 13,061
51 EQC Annual Report | 2010–2011
Reinsurance Contracts
The Commission has signed contracts for reinsurance in the international market. The contracts are for terms ranging from one year to three years.
Actual Actual 2011 2010 $(000) $(000)
Operating commitment (a) Not later than one year 49,420 38,455 (b) Later than one year and not later than two years 7,998 21,301 (c) Later than two years but not later than five years – 6,544
Total reinsurance commitments 57,418 66,300
Te Papa Tongarewa, Museum of New Zealand
In 2008, the Commission signed a contract with Te Papa for sponsorship. The sponsorship relationship is linked to the Awesome Forces and Quake Braker exhibitions at Te Papa, which provide a mechanism to communicate the Commission’s key messages to a broad audience and meet its educational and research objectives.
Actual Actual 2011 2010 $(000) $(000)
Operating commitment (a) Not later than one year 500 500 (b) Later than one year and not later than two years – 500
Total Te Papa Tongarewa, Museum of New Zealand commitment 500 1,000
GNS Science
The Commission has a contract with GNS Science for the development and implementation of a seismic monitoring and reporting network (GeoNet). The term of the GeoNet agreement is for 10 years, but provides for a funding commitment from the Commission only for the first five years of the term. The Commission's funding commitment beyond 30 June 2015 must be agreed between the parties.*
Actual Actual 2011 2010 $(000) $(000)
Capital commitment (a) Not later than one year 3,498 3,426 (b) Later than one year and not later than two years 3,537 3,498 (c) Later than two years but not later than five years 9,685 10,060 (d) Later than five years – 3,161
Operating commitment (a) Not later than one year 5,580 5,512 (b) Later than one year and not later than two years 5,681 5,580 (c) Later than two years but not later than five years 17,709 17,389 (d) Later than five years – 5,600
Total GNS Science commitments 45,690 54,226
* The commitment at 30 June 2010 has been reduced from 11 years to 6. The impact of this change is $48,326,000.
52 Research Grants
Future research grants approved by the Board.
Actual Actual 2011 2010 $(000) $(000)
Operating commitment (a) Not later than one year 1,992 1,832 (b) Later than one year and not later than two years 1,255 1,070 (c) Later than two years but not later than five years 1,868 1,290 (d) Later than five years – 8
Total research grant commitments 5,115 4,200
Building Leases
The Commission has a non-cancellable long-term lease on premises in Wellington, plus other shorter term leases in Wellington and Christchurch to provide premises for Canterbury earthquake operations. The annual lease payments on the long-term lease are subject to three-yearly reviews, but are included below based on current rates.
Actual Actual 2011 2010 $(000) $(000)
Operating commitment (a) Not later than one year 1,538 494 (b) Later than one year and not later than two years 591 494 (c) Later than two years but not later than five years 1,481 1,481 (d) Later than five years 494 948
Total building lease commitment 4,104 3,417
Claims Management Services
The Commission had an agreement with Gallagher Bassett Services Pty Ltd for the provision of claims management services, which finished in 2010. Due to the Canterbury earthquakes, the agreement was temporarily extended, and is currently being reviewed.
Actual Actual 2011 2010 $(000) $(000)
Operating commitment (a) Not later than one year – 906
Total claims management services commitment – 906
53 EQC Annual Report | 2010–2011
23. related Party Transactions
The Earthquake Commission is a Crown Entity of the New Zealand Government and all significant transactions with the Crown result from Ministerial directions given under the Act or Section 103 of the Crown Entities Act 2004.
Key Management Personnel Compensation
Actual Actual 2011 2010 $(000) $(000) Salaries and other short-term employee benefits 1,123 1,026
Key management personnel for the 2011 year included all Commissioners, the Chief Executive and seven senior managers (2010: all Commissioners, the Chief Executive and four senior managers).
There are close family members of key management personnel employed by the Commission. The terms and conditions of those arrangements are no more favourable than the Commission would have adopted if there were no relationship to key management personnel.
KB Taylor has an associated entity that owns a property in Christchurch. This entity has lodged claims with the Commission. No payments have been made in respect of these claims (2010: nil).
T Burt has an associated entity that owns a property in Christchurch. This entity has lodged claims with the Commission. The Commission paid $114,074 to the entity (2010: nil).
24. board Member Remuneration
The total value of remuneration paid to each Board member during the year was:
Actual Actual 2011 2010 $(000) $(000)
MC Wintringham Appointed Deputy Chairman 1 June 2004, as Chairman 26 July 2006 60 46 KB Taylor Appointed 18 August 2006, as Deputy Chairman 1 May 2009 33 29 R Black Appointed 1 December 2010 15 – D Bovaird Appointed 1 January 2010 26 12 T Burt Appointed 1 December 2010 15 – G McLachlan Appointed 1 May 2009 27 23 L Robertson Appointed 10 August 2009 26 23 WN Hoadley Term concluded 31 July 2009 – 2 RJ Hooper Term concluded 30 September 2009 – 6 GT Muriwai Term concluded 1 January 2010 – 12
Total 202 153
A higher duties allowance of $60,000 was payable to Commissioners for the 2011 year (2010: nil) to recognise the complexities of governing the Commission following the Canterbury earthquakes. Of this allowance, $30,000 was paid during the year, but a further $30,000 remained unallocated at balance date.
54 Indemnity and Insurance Disclosure
The Commission has provided a deed of indemnity to each Board member in relation to certain activities undertaken in the performance or intended performance of Commission functions.
The Commission effected and maintained “Directors' and Officers' Liability” and “Professional Indemnity” insurance cover during the financial year, in respect of the liability or costs of any Board member, or employee.
25. employee Remuneration
The numbers of employees whose total remuneration for the financial year was in excess of $100,000, in $10,000 bands, are as follows:
Actual Actual $(000) 2011 2010
100–110 3 1 110–120 2 2 130–140 1 2 150–160 2 – 160–170 – 2 170–180 2 – 190–200 – 1 210–220 1 – 230–240 1 – 240–250 – 1 340–350 1 –
13 9
During the year ended 30 June 2011 no employees received compensation or other benefits in relation to cessation (2010: None).
55 EQC Annual Report | 2010–2011
26. reconciliation of Operating Surplus to Net Cash Flow from Operating Activities
Actual actual 2011 2010 $(000) $(000) Net (deficit)/surplus (7,082,606) 355,103
Add non-cash items: Depreciation and amortisation 4,528 3,213 Total non-cash items 4,528 3,213
Add/(less) items classified as investing activities Discount income and investment price revaluations (156,756) (124,977) (Gain)/loss on disposal of property, plant and equipment (10) 10 Total items classified as investing activities (156,766) (124,967)
Add/(less) movements in Statement of Financial Position items: Premiums receivable 82 (930) Reinsurance and other recoveries (4,229,557) – Other receivables (45,910) 15,166 Prepayments (3,853) (320) Trade and other payables 79,889 (167) Provision for employee entitlements 183 (6) Outstanding claims 10,192,290 2,944 Unearned premium liability 894 853 Movement in unexpired risk liability 281,120 6,000 Net movements in working capital items 6,275,138 23,540
Net cash flow from operating activities (959,706) 256,889
27. events after the Statement of Financial Position Date
On 2 September 2011 the High Court released its judgment in the case of Earthquake Commission v The Insurance Council of New Zealand Incorporated and others and Tower Insurance Limited v Earthquake Commission.
The High Court interpretation is that the Act provides for the Commission to have an “event” based liability during the currency of the fire insurance contract. For the duration of a fire insurance contract, damage caused by each and every event is separately covered up to the maximum settlement amounts.
The estimated financial impact of the judgement is reflected in the financial statements of the Commission.
On 30 September, Standard and Poor's downgraded New Zealand's sovereign long-term local currency credit rating to AA+.
On the same date, the Commission's insurer financial strength rating was downgraded to AA+ with a stable outlook.
56 Statement of Service Performance
The Earthquake Commission’s (EQC’s) operating environment is inherently unpredictable given the random occurrence, location and scale of natural hazard events. Consequently, reporting against time-specific targets within the financial year enables only partial assessment of EQC’s performance. For this Statement of Service Performance, EQC has elaborated on its processes and outcomes to better reflect its performance within this complex operating environment and, in particular, the extraordinary circumstances following the Canterbury earthquakes.
57 EQC Annual Report | 2010–2011
Output 1: Claims handling
This output class addresses EQC’s ability to compensate residential property owners following a natural disaster. EQC’s ability to handle claims enhances community recovery through the delivery of the Earthquake Commision Act 1993 (the Act) entitlements to claimants in the fastest practicable time by means of the Catastrophe Response Programme (CRP). Meanwhile, the claims handling process must be sufficiently robust to appropriately manage the Crown’s liabilities arising from natural hazard events.
For the 2010–2011 financial year, EQC’s operations have been dominated by the aftermath of the Canterbury earthquakes and the Government’s unique response to their unprecedented nature. The sheer scale of the Canterbury earthquakes can be gauged by EQC’s previous experience with natural hazard events:
• In the 2009–2010 financial year, EQC received 7,813 claims and paid approximately $21 million in claims settlements. • From 2003–2008, EQC received an average of 4,638 claims per year and paid out an average of $36 million in claims settlements per year. • The combined total number of claims for the Canterbury earthquakes between September 2010 and June 2011 (369,967) is more than seven times greater than the combined totals of all earthquake-related claims that EQC has received since its inception in 1945.
Alongside the Canterbury earthquakes, EQC has continued to attend to other natural disaster claims across New Zealand for which it is responsible under the Act. Excluding the Canterbury earthquakes, EQC received 4,164 claims for the 2010–2011 financial year. This includes EQC’s largest ever landslip event in the aftermath of Cyclone Wilma in January 2011, the first payments for claims arising from a tsunami in March 2011, and the landslips resulting from the storms in Hawke’s Bay in April 2011.
The 2010–2013 Statement of Intent (SOI), which stipulates the targets for EQC’s 2010–2011 Statement of Service Performance, did not anticipate repeated events within an isolated area on the scale that has occurred in Canterbury. Consequently, the reporting on claims handling has been supplemented as far as practicable to ensure an accurate reflection of EQC’s performance. This includes distinguishing Canterbury earthquake events from all other events for Output Class 1: Claims Handling. The remaining output classes are sufficiently generic to not warrant this distinction.
EQC’s reporting is complicated by the need to address timeframes for the lodgement, assessment and settlement of claims within the context of events occurring sporadically throughout the period. This results in events not reaching their deadlines within the reporting period. For example, none of the 13 earthquake events in Canterbury reached their one-year resolution deadline within the 2010–2011 financial year. In addition, the 90- day lodgement deadline for a number of events occurred after the end of the 2010–2011 financial year.
EQC regularly benchmarks its performance and procedures against private sector insurers, international best practice measures and claimant satisfaction surveys. This includes liaising with the Insurance Council of New Zealand, regularly meeting with private insurers and having regard to the Organisation for Economic Cooperation and Development’s Guidelines for Good Practice for Insurance Claim Management.
EQC commissions claimant satisfaction surveys to identify trends and measure its performance. Conducted quarterly by UMR Research, the results reported in the 2010–2011 Annual Report are for the July 2010–March 2011 period only.1 The results presented here are derived from a sample of 575 claimants for the Canterbury earthquakes and 615 claimants for all other events in New Zealand during the July 2010–March 2011 period.2
Table 1: Status of Claims Processing for Canterbury Earthquakes, as at 30 June 2011
CATEGORY REPORTED OPEN CLOSED PAID Claims* 369,967 315,350 54,617 $1,008,106,645 Building exposures 331,979 288,973 43,006 $901,978,285 Land exposures 75,204 70,391 4,813 $3,428,489 Content exposures 153,025 130,786 22,239 $102,699,872
* A claim is comprised of one or more exposures.
1 Due to operational constraints, the April-June quarterly survey was not conducted for 2011.
2 The margin of error for the surveys of Canterbury earthquake claimants is 2.5 per cent. The margin of error for the surveys of non-Canterbury earthquake claimants is 4.9 per cent.
58 Table 2: Claims Handling: Canterbury Earthquakes (September 2010–June 2011)
TARGET RESULT CLAIMS LODGEMENT: Achieved
All claimants were able to lodge claims within All claimants were able to lodge claims within the statutory 90-day period. the statutory period (90 days). EQC manages the lodgement process by informing the public through advertising campaigns, adequately resourcing its call centres and maintaining its claims management system at sufficient capacity to process lodgements.
EQC’s performance for the financial year was as follows:
• For the September event lodgement deadline, EQC undertook a media campaign for the week before the deadline; for the February event lodgement deadline, EQC undertook a media campaign for the three weeks before the deadline to smooth demand on call centre resources. • These campaigns involved advertising in Canterbury print and radio media, as well as nationwide media to capture claimants who had relocated. • 89 per cent of EQC’s target audience have heard an EQC radio advertisement three or more times. • An electronic newsletter is sent to over 120,000 claimant email addresses every fortnight and information flyers are regularly distributed to households. • EQC provided a toll-free contact number (0800 DAMAGE) and four email addresses for claimants. • From 4 September 2010 to 10 April 2011, EQC’s five call centres were open 24 hours per day, seven days a week. From 11 April 2011 the operating hours were reduced to 7am to 10pm, and remained open to midnight on lodgement deadline dates. For the year ended 30 June 2011:
-- 369,967 claims were received; -- 1,011,167 calls were answered; -- the abandonment rate since 22 February 2011 was 3.25 per cent (substantially less than the industry average of 5 per cent); and -- 121,000 items of mail, over 4,300 insurance certificates and 45,000 contents schedules were received.
• The EQC website was available 100 per cent of the time during the reporting period. Over 536,000 unique visitors viewed the website just over 1,000,000 times.
-- 219,690 claims were lodged online, 59 per cent of total claims lodged for the reporting period.
CLAIMS ASSESSMENT: Not Achieved
90 per cent of all other (non-imminent loss*) 31 per cent of claims that were not “imminent loss” were quantified within 90 days. claims quantified within 90 days. 36 per cent of all claims (including imminent loss) were assessed, comprising: *Imminent loss is damage to property that EQC • 37 per cent of all building exposures; considers certain to happen as a direct result of • 41 per cent of all land exposures; and a natural disaster and occur within 12 months of • 29 per cent of all contents exposures. that event. 69 per cent of all contents exposures lacked sufficient supporting documentation for assessment.
49 per cent of surveyed claimants were satisfied or very satisfied with the assessment process, 38 per cent were neutral or unsure and 13 per cent dissatisfied or very dissatisfied.
59 EQC Annual Report | 2010–2011
CLAIMS RESOLUTION:
1. All claims resolved* within the statutory period Not Achieved (one year from due determination**). The one year anniversary of the first Canterbury earthquake falls outside of the * Resolution includes settlement and partial or full reporting period. On current estimates EQC will not settle all claims within the one- declinature. A claim is settled when the payment year timeframe from the claim’s due determination. has been made and/or relevant repairs are Repeated earthquakes in Canterbury have compounded the damage to property and completed. required additional geotechnical surveys of land stability. Consequently, the repair of buildings, replacement of contents and remediation of land has been significantly delayed. ** Due determination is the point at which EQC has determined the value of a claim. As due With Ministers’ agreement EQC assumed responsibility for managing building repairs determination varies within the PMO structure, to ensure a high standard of repairs while controlling costs. EQC contracted Fletcher we rely on the inspection date as an imperfect Construction to manage building repairs costing between $10,000 and $100,000 proxy for “due determination”. However, this through its Project Management Office (PMO). Repairs settled outside this cost range proxy overestimates the time since actual due are paid out in cash. The additional responsibility for managing repairs has complicated determination. efforts to settle claims within the stipulated timeframe.
Following the 4 September event EQC estimated 50,000 building repairs would fall within the PMO’s responsibility. After the 22 February event that estimate increased to 100,000.
EQC had completed 81,775 building assessments across all repair-cost categories before the 22 February event and anticipated completion of all assessments by the end of March 2011. The severity of the 22 February event necessitated reassessment of previously damaged properties in addition to newly damaged properties. By 30 June, EQC had completed a further 29,000 building assessments.
For the July 2010–June 2011 reporting period, EQC had resolved the following:
• 54,448 claims (15 per cent of total); • 42,707 building exposures (13 per cent of total); • 4,544 land exposures (6 per cent of total); and • 21,980 contents exposures (14 per cent of total and approximately 46 per cent of exposures with sufficient supporting documentation).
Continuing uncertainty around the geotechnical stability of land and the labour availability are the primary hindrances to achieving settlement within the one-year timeframe. 2. Meet public expectations of the conduct of the Partially Achieved settlement process. 70 per cent of surveyed claimants whose claims were settled rated their experience with EQC as better or much better than expected, with 21 per cent neutral or unsure and 9 per cent as worse or much worse than expected.
This compares favourably with the State Services Commission’s Kiwis Count score of 55 per cent meeting expectations for business and tax services and 56 per cent for social assistance services in the New Zealand public sector.
EQC does not survey the general public on its expectations of the agency’s performance, instead relying on surveys of claimants as a proxy for the wider public. 3. 90 per cent of imminent loss claims receive Achieved entitlement within 12 months. 100 per cent of imminent loss claims received their entitlement during the period. This measure accounts for those claims that were assessed in the financial year. 4. Claims are settled to standards of individual and Partially Achieved overall fairness acceptable to the public. 82 per cent of surveyed claimants whose claims were settled agreed or strongly agreed that they were treated fairly by EQC in the settlement process, with 11 per cent neutral or unsure and 7 per cent disagreeing or strongly disagreeing.
This compares favourably to the Kiwis Count fairness rating of 61 per cent for social services and 63 per cent for business and taxation services in the New Zealand public sector.
60 5. 80% of claimants with settled claims* are satisfied Not Achieved with the level of service from EQC. 78 per cent of surveyed claimants whose claims were settled were satisfied or very * Settlement comprises fully and partially accepted satisfied with the overall quality of service, while 14 per cent were neutral or unsure and claims. 8 per cent dissatisfied or very dissatisfied.
This exceeds the latest Kiwis Count satisfaction rating of 69 per cent for overall public sector service delivery. However, the result compares unfavourably with a July 2011 Accenture insurance customer satisfaction survey of 7,000 customers in 13 countries, which found 84 per cent of respondents were satisfied with their insurance provider.
The result reflects the scale of the events and the impact of increasingly severe shortages of loss adjusters and engineers.
Table 3: Claims Handling: Non–Canterbury Events (July 2010-June 2011)
TARGET RESULT CLAIMS LODGEMENT: Achieved
All claimants were able to lodge claims within the All claimants were able to lodge claims within the statutory 90-day period (see table 2 statutory period (90 days). for explanatory notes of EQC processes encouraging and enabling claims lodgement).
1,566 claims were lodged online, 38 per cent of total claims for the reporting period.
CLAIMS ASSESSMENT: Not Achieved
90 per cent of all other (non-imminent loss*) claims 72 per cent of claims that were not “imminent loss” were quantified within 90 days. quantified within 90 days. The complexity of claims requiring geotechnical evaluation results in significant *Imminent loss is damage to property that EQC variability in the assessment timeframe. In January 2011, EQC responded to considers certain to happen as a direct result of a New Zealand’s largest ever landslip event, arising from Cyclone Wilma and resulting in natural disaster and occur within 12 months of 1,000 land claims. Meanwhile, the availability of geotechnical engineers, loss adjusters that event. and claims administrators during the reporting period was significantly affected by the earthquake events in Canterbury.
71 per cent of surveyed claimants were satisfied or very satisfied with the assessment process, 19 per cent were neutral or unsure and 10 per cent dissatisfied or very dissatisfied. CLAIMS RESOLUTION: Not Achieved
1. All claims resolved* within the statutory period For the July 2010–June 2011 reporting period, EQC had resolved 2,251 claims. Of those, (one year from due determination**). 97 per cent were resolved within 12 months of due determination. These resolved claims include those duly determined during the 2009-10 financial year. * Resolution includes settlement and partial or full declinature. A claim is settled when the payment 4,164 non-Canterbury event claims were lodged during the reporting period. Of those, has been made and/or relevant repairs are 41 per cent had been resolved. As the reporting period does not extend to the full one- completed. year target since due determination for each claim, it is not possible to determine the rate of successful resolutions within the stipulated timeframe. This will be possible in ** Due determination is the point at which EQC the 2011–2012 Annual Report. has determined the value of a claim. Before valuing a claim, EQC must determine that a natural hazard event has occurred and caused the claimed damage. In extreme cases, this can take up to a year of geotechnical testing.
61 EQC Annual Report | 2010–2011
2. Meet public expectations of the conduct of the Partially Achieved settlement process. 62 per cent of surveyed claimants whose claims were settled rated their overall experience with EQC as better or much better than expected, with 22 per cent neutral or unsure and 16 per cent as worse or much worse than expected.
This compares favourably with the State Services Commission’s Kiwis Count score of 55 per cent meeting expectations for business and tax services and 56 per cent for social assistance services in the New Zealand public sector. 3. 90 per cent of imminent loss claims receive Achieved entitlement within 12 months. 90 per cent of imminent loss claims received their entitlement during the period. 4. Claims are settled to standards of individual and Partially Achieved overall fairness acceptable to the public. 75 per cent of surveyed claimants whose claims were settled agreed or strongly agreed that they were treated fairly by EQC in the settlement process, with 11 per cent neutral or unsure and 14 per cent disagreeing or strongly disagreeing.
This compares favourably to the Kiwis Count fairness rating of 61 per cent for social services and 63 per cent for business and taxation services in the New Zealand public sector. 5. 80% of claimants with settled claims* are satisfied Not Achieved with the level of service from EQC. 69 per cent of surveyed claimants whose claims were settled were satisfied or very * Settlement comprises fully and partially accepted satisfied with the overall level of service, while 17 per cent were neutral or unsure and claims. 14 per cent dissatisfied or very dissatisfied.
This is comparable to the latest Kiwis Count satisfaction rating of 69 per cent for overall public sector service delivery. However, the result compares unfavourably with a July 2011 Accenture insurance customer satisfaction survey of 7,000 customers in 13 countries, which found 84 per cent of respondents were satisfied with their insurance provider.
The result reflects the impact of increasingly severe shortages of loss adjusters and engineers following the Canterbury earthquakes.
Photo: Margaret Low, GNS Science
62 OUTPUT 2: RESEARCH
This output class addresses research and teaching in subjects related to natural disaster events and damage, the reduction and prevention of natural disaster damage, and the type of insurance provided under the Act.
EQC raises natural hazard awareness and promotes disaster damage prevention through its advocacy of, and investment in, science and engineering research. This research helps reduce the Crown’s liabilities arising from natural hazard events by improving the resilience of communities to natural hazard events. This includes applying the funded research to improve risk assessment management for civil defence, emergency management, building controls, construction practices, land use and risk financing strategies.
TARGET RESULT Fund relevant research projects and manage their Achieved performance to achieve the contracted requirements. Four projects have been completed within the financial year and 34 are underway. All have met their contracted requirements. GeoNet meets its contracted requirements to develop, Achieved maintain and provide data and hazard warning GeoNet has met all of its contracted requirements. Its data for the Canterbury region information. has been used extensively by engineers, assessors, emergency managers, reinsurers and researchers.
GeoNet’s activities for the year were heavily influenced by the Canterbury earthquakes. The response was achieved within the existing budget.
The website was improved to handle significant spikes in traffic following earthquakes and aftershocks in Canterbury, with peak loads of 12,000 requests per second. A Canterbury tab was added to the website and a special issue of GeoNet News produced in response to the Canterbury events.
Several instrument deployment trips have been made to Canterbury to supplement the core sensor network in the region, including the landslip response in the Port Hills. Production of the earthquake catalogue was accelerated to evaluate the pattern of aftershocks and identify fault structures in the region. Reduce the inherent risks in the variability of land-use Partially Achieved planning and practice throughout New Zealand. EQC has supported multi-agency efforts to improve planning for the management and use of landslip-vulnerable land.
Guidance for the repair of housing affected by ground movement was published with the Department of Building and Housing (DBH) in December 2010. Sustain national research and teaching capacity for Achieved timely and high quality science research and risk All contractual requirements related to EQC’s funding of research and teaching assessment/mitigation, while ensuring contracted capability programmes have been met. requirements are met. This includes funding of:
• the Colleges of Engineering and Science at Canterbury University; • the Institute of Earth Science and Engineering at the University of Auckland; • the EQC Chair in Natural Hazards Planning at Massey University; and • the EQC Fellowship in Seismic Studies at Victoria University.
EQC’s contract with GNS Science has enabled the development of the national hazard monitoring system, GeoNet. Data from GeoNet for the Canterbury earthquakes has informed reconstruction and repair strategies for infrastructure, housing and commercial properties in the region.
Volcano surveillance and tsunami monitoring undertaken by GeoNet included a wide range of techniques and active participation with agency partners, including the Department of Conservation, the Ministry of Civil Defence and Emergency Management, Land Information New Zealand and MetService.
63 EQC Annual Report | 2010–2011
Active EQC involvement with engineering lifeline Achieved groups, local government, consultancy firms, Standards In July 2010, EQC convened a DBH-led workshop on earthquake-prone building policy NZ and the reinsurance industry. to provide leadership and guidance to local government; over 50 territorial authorities attended. EQC also sponsored and spoke at the 9th Pacific Conference on Earthquake Engineering in April 2011, which was attended by representatives from consultancies, reinsurers, local government and engineering lifeline groups. Achieving a desired return on the investment of Achieved research funds. EQC has minimised transaction costs and encouraged collaboration across enterprise and government agency boundaries. EQC has worked directly with DBH, the Canterbury Earthquake Recovery Authority (CERA) and the Christchurch City Council to use EQC-funded data and research to inform recovery decisions. Transforming research outputs to social outcomes. Achieved
EQC’s sponsorship of the Science-to-Practice programme has fostered the transfer and uptake of science research by end-users. This includes application to the assessment of volcanic and seismic risk, and informed planning for the mitigation and response to these events. DBH’s Guidance on house repairs and reconstruction following the Canterbury earthquake was published based on GeoNet data. Enabling the intensive research opportunity presented Achieved by disasters, at home and overseas. EQC’s internal decision and funding systems have been sufficiently flexible to respond to urgent needs, including:
• the rapid collection of Canterbury aftershock data by Victoria University and GNS Science; • the rapid collection and analysis of liquefaction data by the University of Canterbury; and • disseminating lessons learnt from the Chile earthquake recovery and the Canterbury earthquakes.
OUTPUT 3: PUBLIC EDUCATION
This output class comprises:
1. public education about seismic hazards and methods of reducing or preventing subsequent damage; and
2. public education about EQC’s role and the importance of home insurance.
These outputs address EQC’s obligation under Section 5(1)(e) of the Act to “[f]acilitate research and education about matters relevant to natural disaster damage, methods of reducing or preventing natural disaster damage, and the insurance provided under this Act.”
The outputs improve the community’s capacity for rapid recovery from natural disasters. Public education also supports the efficient management of the Crown’s assets and liabilities by reducing the Crown’s exposure (and cost of reinsurance) to natural hazard events, as households take precautions to minimise damage arising from these events.
The lessons EQC learns from the recovery from natural hazard events results in safer communities, as lessons are shared to improve levels of knowledge and encourage New Zealanders to make their homes safer from natural perils and understand EQC’s role.
TARGET RESULT Production of one new virtual field trip for Partially Achieved school students. A virtual field trip had been organised, including a tour to Christchurch, on 23 February. The tour was cancelled due to the magnitude 6.3 earthquake on 22 February, but all resources and materials remain available for teachers to use. Museums and other exhibitions sponsored by EQC Achieved meet set targets including visitor numbers and • Awesome Forces was the second most popular permanent exhibition at Te Papa brochure distribution. with 689,909 visitors; and • the Wairakei Volcanic Activity Centre had 18,100 visitors for the 2010–2011 year.
64 Shape public expectations of EQC’s service. Partially Achieved
EQC advertised claims lodgement information in a range of media following significant natural disaster events.
EQC commissioned qualitative research of the experiences and opinions of Canterbury earthquake claimants. The research has identified challenges and opportunities for EQC to better inform the public of its service. Communications strategies to address these are being formulated for the 2011–2012 financial year. Sufficiently prepared to respond to opportunities to Achieved educate the public on mitigation and EQC activities. EQC employed a range of methods with which to communicate its messages, including Utilising appropriate forms of communication for the internet, press advertising, newsletters and museum exhibitions. educating the public.
OUTPUT 4: POLICY ADVICE
This output class addresses the provision of policy advice to the Government on issues related to EQC’s statutory functions, including:
• damage from natural hazard events; • minimising Crown liabilities through the prevention of damage from natural hazard events; • government response to natural hazard events; • relevant risk management issues; • management of the Natural Disaster Fund and protection of its value; and • the terms and conditions of EQC insurance.
For the 2010–2011 financial year, EQC’s policy advice included the response to the Canterbury earthquakes and the complexities associated with recovery in the region following repeated events.
TARGET RESULT All requests for participation in policy preparation met Achieved within agreed timelines so that EQC input is reflected in All ministerial enquiries during the year were responded to within agreed timelines. completed policy papers. EQC has been part of a whole-of-government response to the Canterbury earthquakes. The Commission worked closely with CERA so that areas of mutual interest, such as planning, mitigation and recovery, can be addressed jointly.
EQC also worked closely with other agencies directly involved in the recovery effort, including the Department of Building and Housing, Housing New Zealand, the Ministry of Social Development, the Canterbury Earthquake Temporary Accommodation Service, the Ministry of Civil Defence and Emergency Management, Inland Revenue, the Department of Internal Affairs, the Ministry for the Environment, the Department of Prime Minister and Cabinet and the Treasury. Policy advice on natural hazard damage, methods of Achieved reducing or preventing natural hazard damage, and EQC significantly bolstered its capacity in policy advice following the September government response to hazards. earthquake in Canterbury.
65 EQC Annual Report | 2010–2011
OUTPUT 5: ADMINISTRATION OF THE ACT INSURANCE SCHEME AND NATURAL DISASTER FUND
This output class addresses EQC’s ability to optimise its contribution to community recovery from disaster by development and maintenance of the financial capacity to meet all obligations imposed by the Act. This involves administration of the Natural Disaster Fund (the Fund), including collection of the premiums payable and, so far as reasonably practicable, protection of the Fund’s value through the investment of money held in the Fund and reinsurance in respect of the whole or part of the insurance provided under the Act. It reflects EQC’s functions as set out in sections 5(1)(b), 5(1)(c) and 5(1)(d) of the Act, and directly contributes to the Government’s outcome of efficient management of the Crown’s assets and liabilities.
TARGET RESULT Negotiation of a reinsurance programme for 2010–2011 Partially Achieved that maintains the risk to the Crown of a call under Reinsurance for 2011 was negotiated on a 1 June renewal against the backdrop of section 16 of the Earthquake Commission Act at 1-in- significant and recent earthquake reinsurance losses worldwide – including Chile, 1,000 or better. New Zealand and Japan. With the continuing Canterbury earthquake sequence, EQC succeeded in placing its existing reinsurance programme together with reinstatement premium protection. However, as the Canterbury earthquakes are expected to use most of the existing Fund, it was impractical in terms of market pricing and capacity to contemplate purchase of additional cover to immediately restore the 1-in-1,000 year protection. Investment performance achieves targets set in the Partially Achieved Statement of Investment Policies, Standards and EQC met or exceeded the benchmark return in three of its five assets classes. Procedures, approved by the Minister. However, the total portfolio underperformed in relation to the benchmark returns.
ASSET CLASS ACTUAL RETURN BENCHMARK NZ Government Stock 6.7% 6.8% NZ Inflation-Indexed Bonds 9.8% 9.8% Cash on call /Bank Bills (RCD) / Treasury Bills 2.9% 2.8% Passive Global Equities 9.0% 8.7% Active Global Equities 8.5% 8.7% Total Portfolio * 7.3% 7.5%
*The target return for the total portfolio is 1% plus the NZGS index return, over a rolling 10-year period. The structure has not been in place long enough to compare 10-year returns. For the five years to 30 June 2011, the actual total portfolio return was 3.8% versus the target of 8.1%. The Active Global Equity figures are net of fees. EQC has acted in accordance with its Responsible Achieved Investment Policy, Standards and Procedures. EQC has met its responsible investment obligations. EQC has complied with its asset allocation strategy Achieved and investment managers have complied with their EQC invested in approved asset classes only, ensuring cash was invested in banks with agreements. high credit ratings, receiving compliance and audit reports from custodians and fund managers, and reporting on the Natural Disaster Fund to the Board and Investment Committee.
However, due to the exceptional demand for liquidity following the Canterbury earthquakes, global equities fell below their specified range for most of the financial year. Subsequently, Government stock was reduced in order to bring equities back towards their specified range on a relative basis.
66 Output Expenditure for the Year Ended 30 June 2011
ACTUAL ACTUAL BUDGET BUDGET REVENUE EXPENDITURE REVENUE EXPENDITURE OUTPUT CLASS ($ million) ($ million) ($ million) ($ million) Claims handling and the Catastrophe Response Programme* – 7.5 – 8.6 Research – 11.6 – 11.2 Public Education – 1.4 – 3.3 Policy Advice – – – – Management of the Natural Disaster Fund 504.5 66.2 465.3 63.2
* This includes only the costs of operating the Catastrophe Response Programme and excludes claims settlements and directly associated costs, including costs associated with Canterbury earthquakes. Refer Note 5 of the financial statements. Photo: Hera Hjartardottir – www.herasings.com – Hjartardottir Hera Photo:
67 EQC Annual Report | 2010–2011
Other Disclosures
Managing organisational health Our People EQC takes its role as a good employer seriously because human resources are integral to its business. To ensure that The context of our changing environment staff regard EQC as a good employer, EQC will continue to: Since the Canterbury earthquakes on 4 September 2010 and • demonstrate leadership and vision that articulates 22 February 2011, and subsequent aftershocks, EQC has faced EQC’s values and makes a difference to the lives of a huge increase in its claims assessments and settlements. New Zealanders; In response, EQC has set up a number of site offices in • provide equal employment opportunities for staff as an Christchurch and has rapidly engaged a large number Equal Employment Opportunities (EEO) employer; of contractors and temporary staff across New Zealand and Australia to assist with the EQC response to the • encourage staff to develop through internal and Canterbury events. external training, coaching and mentoring; • take account of the need for staff to balance work with Catastrophe Response Programme the rest of their lives; New Zealanders rely on EQC to provide efficient claims • utilise performance management practices that are assessment and settlement in the aftermath of a disaster. transparent and fair; This means the challenges facing EQC include: • provide a working environment that is free from all forms of harassment and bullying and provide safe and • the need to adjust to substantially increased demands fair means of dealing with complaints; at short notice; • provide a healthy and safe workplace, observing • the need to maintain expertise in the management occupational health and safety requirements at of insurance, reinsurance and investments, as well as the corporate office and as part of the CRP, ensure technical expertise in disaster response; and temporary field offices and claims sites are safe for • the need for staff and contractors to work away from EQC’s workers; and home and families under stressful situations. • provide a confidential Employee Assistance Programme for any staff member to seek assistance. For these reasons, organisational health and capability are of strategic importance to EQC. EQC addresses organisational capability and readiness to respond to crisis both through good management practices and also through its Catastrophe Response Programme (CRP). EQC has contingency plans in place when New Zealand is affected by a major catastrophe, providing for expansion of organisational size at short notice. Following the Canterbury earthquakes, EQC successfully demonstrated the capability of the CRP catastrophe response plans by setting up new offices in Christchurch after the September quake. As part of this response, EQC has engaged close to 1,200 people to support our claims assessment and settlements process: Wellington (272); Christchurch (746); Australia (145); and, in addition, EQC has 100 contractors providing call centre services.
68 Developing and supporting our leaders EQC Workforce by occupation and location The capability of our leaders within EQC is integral to our EQC Workforce organisation delivering on its Statement of Intent and for as at 30 June 2011 providing a workplace environment that supports and encourages high performance. Assessors 480 Over the next two years EQC will develop and deliver EQC Corporate Office/Support Staff 404 a deliberate and structured leadership strategy and Claims Administrators 219 development opportunities for all its leaders. Valuers/Engineers 60 These initiatives will include: Total 1,163
• reviewing and redesigning EQC’s leadership team Canterbury 746 accountabilities and operating model; Wellington 272 • developing and implementing a competency Australia 145 framework for all leadership roles; Total 1,163 • refreshing and re-evaluating position descriptions; • developing a process for identifying potential talent; Total Workforce 1,163 • agreeing and delivering individual development plans; and • supporting our leaders to access leadership development programmes including those provided by the Leadership Development Centre and other public sector leadership programmes.
The outcome from this strategy will deliver a highly capable and high performing leadership team at all levels across the organisation.
69 EQC Annual Report | 2010–2011
Other Disclosures
Investment Processes – Investment Managers Environmental, Social and EQC appoints external investment managers to manage Governance Considerations portions of the Fund. As part of the selection process EQC assesses the overall investment management capabilities of candidate managers, including the ability to implement EQC’s Principles requirement to avoid prejudice to New Zealand’s reputation as a responsible member of the world community. EQC considers that responsible investment decision- making that takes account of Environmental, Social and Investment managers are required to be vigilant against the Governance (ESG) considerations is part of evolving best effects on companies’ long-term performance prospects that practice. Responsible investment actions can include could arise from any practices which alienate civilized society engagement, voting, exclusion of certain investments, including socially and environmentally irresponsible behaviour. and/or divestment. Maintaining open dialogue with investment managers, EQC, at its discretion, and provided that it is consistent including in relation to the requirement to avoid prejudice with its obligation to invest the Natural Disaster Fund to New Zealand’s reputation, is considered to be critical to (NDF) on a prudent, commercial basis, may consider other the achievement of EQC’s objectives. issues arising from the NDF’s investments. In doing so, In addition, consistent with the UNPRI, EQC encourages its EQC may take into account factors such as whether the investment managers to integrate ESG factors into evolving issue is contrary to New Zealand law and New Zealand’s research and analysis and to undertake and report on ESG- international agreements, or is inconsistent with Crown related engagement. The investment managers report to actions. EQC on their application of the responsible investment EQC is a signatory to the United Nations Principles for requirements, on a six-monthly basis. Responsible Investment (UNPRI), and acknowledges Investment managers are formally instructed of any internationally agreed standards for responsible corporate exclusion or divestment decisions by EQC. behaviour and investment. As such, EQC aims to encourage companies in which it invests to meet internationally agreed standards for responsible corporate behaviour. Exclusions In line with the obligations and responsibilities of the Implementation responsible investment policy, EQC and its investment managers do not invest the Fund in the following: If companies invested in are found to have corporate practices that breach its responsible investment policy, • organisations engaged in the development, EQC will consider engaging with the company either production, transfer, possession, acquisition, directly or in conjunction with other investors, or taking stockpiling or use of anti-personnel mines, or other shareholder action. EQC believes that it can, in most • organisations engaged in the production of cluster instances, have a greater impact on company practices munitions, or through dialogue with company management in conjunction with others, than through immediate divestment. • organisations engaged in the manufacture, simulated testing and/or refurbishment of nuclear explosive As a last resort EQC may divest of investment in companies devices, or that are found to have corporate practices that breach its responsible investment policy. • manufacturers of cigarettes and tobacco.
70 Future Responsible Voting Rights Investment Development Pooled Accounts EQC’s approach to responsible investment is evolving and EQC will continue to work with the other New Zealand The Board will retain the right to exercise any vote attached Crown Financial Institutions (CFIs) to improve its ability to to units held in a pooled account. The right to exercise any meet its responsible investment obligations. vote attached to a share or unit within a pooled account will normally rest with the manager of the account. All CFIs are required to avoid prejudice to New Zealand’s reputation as a responsible member of the world community. CFIs, including EQC, are sharing responsible Directly held Accounts investment research resources. The responsible investment Any voting rights attached to any securities that form part unit of the New Zealand Superannuation Fund undertakes of the portfolio shall be exercised by the manager: significant background work and secretarial services and • as directed by EQC by written notice to the manager; or all CFIs now have access to the output of a leading global research company in responsible investment. EQC’s • if no such direction is made, in accordance with arrangements with the New Zealand Superannuation Fund the manager’s duties and obligations under their and our membership of the United Nations Principles for agreement and in particular, avoiding prejudice to Responsible Investment give us mechanisms to engage with New Zealand’s reputation as a responsible member of investee companies which are believed to be at risk of non- the world community. compliance with globally expected standards.
Proxy Voting Policy EQC believes that good corporate governance should maintain a balance between the rights of shareholders on one hand and the needs of the corporate board and management to direct and manage the company’s affairs on the other. Responsible governance should reinforce a culture of integrity and transparency, contribute to the achievement of strategic goals, ensure Board alignment with shareholder interests, reinforce and maintain good business ethics, and Photo: Neil Gardner – www.nzsnaps.com – Gardner Neil Photo: recognise environmental and social considerations. EQC believes that good corporate governance will also maximise returns to the Fund without undue risk. Voting rights are important to the Fund for maintaining shareholder oversight of directors and company policies. EQC will use its voting rights to encourage good corporate governance.
71 EQC Annual Report | 2010–2011
Ministerial Direction 14 September 2010
Office of Hon Bill English MP for Clutha-Southland Deputy Prime Minister Minister of Finance Minister for Infrastructure
Mr Michael Wintringham Chair The Earthquake Commission PO Box 790 Wellington 6140
Dear Mr Wintringham Pursuant to section 12 of the Earthquake Commission Act 1993 I now issue a new Ministerial direction to The Earthquake Commission. The direction takes effect from Wednesday 15 September 2010, and expires on 14 September 2011. I intend to publish the direction in the Gazette and present a copy of it to the House of Representatives as soon as practicable. Yours sincerely
Hon Bill English Minister of Finance
72 Direction to the Earthquake Commission pursuant to Section 12 of the Earthquake Commission Act 1993
1. This direction comes into effect on 15 September 2010. 2. As of 15 September 2010, paragraph 2 of the direction dated 30 October 2001 is revoked and replaced with the following:
2. The Earthquake Commission (the Commission) shall invest the Natural Disaster Fund (the Fund) in:
i. New Zealand Government securities comprising Treasury bills and/or Government stock and/or Inflation- Indexed Bonds tradeable only through the New Zealand Debt Management Office; ii. global equities; and iii. New Zealand bank securities, including New Zealand bank bills and deposits, held only in Banks which are registered under the Reserve Bank of New Zealand Act and which have a short term credit rating of A-1 or higher; Prime 1 or higher; and if rated by both Moody’s and Standard and Poors, ratings from both which equal or exceed the foregoing ratings. Funds invested in New Zealand bank securities shall be held across a number of banks.
3. As of 15 September 2010, paragraph 9 of the direction dated 30 October 2001 is revoked and replaced with the following:
9. The Commission must consult with the Minister if it intends to modify the portfolio composition of the Fund from the following:
i. New Zealand Government securities; ii. up to a maximum of 35% of the market value of the Fund in global equities; and iii. up to a maximum of $2,000 million of New Zealand bank securities.
4. All other parts of the direction dated 30 October 2001 are unchanged and remain in effect. 5. This direction is in effect from 15 September 2010 to 14 September 2011. As of 15 September 2011 this direction is revoked.
Hon Simon William English Minister of Finance
73 EQC Annual Report | 2010–2011
Ministerial Direction 14 December 2010
Office of Hon Bill English MP for Clutha-Southland Deputy Prime Minister Minister of Finance Minister for Infrastructure
Mr Michael Wintringham Chair The Earthquake Commission PO Box 790 Wellington 6140
Dear Mr Wintringham Pursuant to section 12 of the Earthquake Commission Act 1993, I now issue a Ministerial direction to the Earthquake Commission. This direction comes into effect immediately and shall continue until amended, revoked or replaced in the same way that it is given. I intend to publish the direction in the Gazette and present a copy of it to the House of Representatives as soon as practicable. Yours sincerely
Hon Bill English Minister of Finance
74 Direction to the Earthquake Commission pursuant to Section 12 of the Earthquake Commission Act 1993
1. This direction comes into effect immediately upon signing. 2. The Earthquake Commission (the Commission) shall perform the following additional functions:
a. To investigate options for mitigating future earthquake damage to land damaged throughout the Canterbury region as a result of the Darfield earthquake sequence (the Canterbury earthquake). The investigation shall:
i. facilitate the reinstatement of residential land and residential buildings which have suffered physical loss or damage as a direct result of the Canterbury earthquake; and ii. take into account that the level of land remediation for the land damaged as a result of the Canterbury earthquake should be such that buildings on the land can remain habitable following a similar earthquake event in the future. This means that in such a similar earthquake event, the land should at worst suffer mostly moderate with some major land damage;
b. To prepare a concept design report for land remediation works in respect of the land which is identified as “Zone C” in the Darfield Earthquake 4 September 2010 Geotechnical Land Damage Assessment & Reinstatement Stage 2 Report prepared by Tonkin & Taylor Limited (land remediation works). The Tonkin & Taylor report is available on the Commission’s website at http://canterbury.eqc.govt.nz/publications/2010/11/stage2; c. To do such other things as may be reasonably necessary to prepare for carrying out the land remediation works; and d. To carry out works to mitigate the lateral spread of the land at Nos 3 to 8 Riverside Lane, Spencerville, which have been damaged as a direct result of the Canterbury earthquake.
Hon Bill English Minister of Finance
75 EQC Annual Report | 2010–2011
Ministerial Direction 23 March 2011
Office of Hon Gerry Brownlee MP for Ilam Minister for Economic Development Minister of Energy and Resources Leader of the House Associate Minister for the Rugby World Cup
Mr Michael Wintringham Chair The Earthquake Commission PO Box 790 Wellington 6140
Dear Mr Wintringham Pursuant to section 12 of the Earthquake Commission Act 1993, as Responsible Minister for the Earthquake Commission (with the authority of the Prime Minister), I now issue a Ministerial direction to the Earthquake Commission. This direction comes into effect immediately and shall continue until amended, revoked or replaced in the same way that it is given. I intend to publish the direction in the Gazette and present a copy of it to the House of Representatives as soon as practicable. Yours sincerely
Hon Gerry Brownlee Minister for Canterbury Earthquake Recovery
76 Direction to the Earthquake Commission pursuant to Section 12 of the Earthquake Commission Act 1993
1. This direction comes into effect immediately upon signing, and applies from 12.51pm on 22 February 2011 up to and including 30 April 2011. 2. The Earthquake Commission (the Commission) shall perform the following additional function:
a. to carry out, so far as is reasonably practicable and to the extent not already covered by the Commission’s existing functions under the Earthquake Commission Act 1993 (the Act):
i. inspections of residential premises; and ii. emergency works to repair damage to dangerous or insecure residential premises;
arising from the Canterbury earthquake event on 22 February 2011 and aftershocks or subsequent earthquakes.
3. For these purposes:
a. “residential premises” means residential premises (whether or not the residential premises have EQC cover under the Act); b. “dangerous or insecure residential premises” means residential premises which, in the opinion of the Commission:
i. are likely to cause injury or death (whether by collapse or otherwise); ii. are likely to be seriously injurious to health because they are in a state of disrepair; iii. are likely to cause damage to other property (whether by collapse or otherwise); iv. have insufficient or defective provision against moisture penetration so as to give rise to the risk of water ingress into the premises or into any adjoining premises; or v. are not secured against unauthorised entry.
Hon Gerard Anthony Brownlee Minister for Canterbury Earthquake Recovery
77 EQC Annual Report | 2010–2011
Ministerial Direction 18 April 2011
Office of Hon Gerry Brownlee MP for Ilam Minister for Economic Development Minister of Energy and Resources Leader of the House Associate Minister for the Rugby World Cup
Mr Michael Wintringham Chair The Earthquake Commission PO Box 790 Wellington 6140
Dear Mr Wintringham Pursuant to section 12 of the Earthquake Commission Act 1993 as Responsible Minister for the Earthquake Commission (with the authority of the Prime Minister), I now issue a Ministerial direction to the Earthquake Commission to enter into and carry out roles and responsibilities set out in the Memorandum of Understanding (MOU) with the Waimakariri District Council. The direction also allows the Commission to carry out certain land remediation works in North Kaiapoi where they are ready to be carried out before the approval of the Concept Design Report. This direction comes into effect immediately and shall continue until amended, revoked or replaced in the same way that it is given. I intend to publish the direction in the Gazette and present a copy of it to the House of Representatives as soon as practicable. The MOU anticipates that a Project Control Group (PCG) will be established to ensure that the project objectives are achieved. As this is a key means for managing the Crown’s investment and highlighting potential project risks, I expect that you will update me regularly on the PCG’s work and report on developments with this project including progress on cost, completion, and risks. The MOU includes provision for the Commission to indemnify the Waimakariri District Council against unforeseen claims that might be made against the Council by any third party, subject to the Council assuming the first $1,000,000 (plus GST) of such a liability. I am satisfied that this risk will be appropriately managed, and I accept the Commission’s decision to offer the indemnity. Now that remediation work in Christchurch city has been deferred, pending further investigation, the $140 million (plus GST) land remediation budget is likely to be more than is required to undertake the planned works in Waimakariri District. In light of this, I expect that the recommended approach detailed in the Concept Design Report will continue to be financially prudent and will only utilise the minimum aMOUnt of funding required to deliver objectives. The direction directs the Commission to carry out certain land remediation work in the vicinity of Charles Street, North Kaiapoi in advance of the approval of the Concept Design Report in circumstances where that work is ready to be carried out before that approval is given. I note EQC’s advice that these accelerated works are consistent with a sensible programme of works and have been prioritised after having careful regard to the Tonkin & Taylor Limited’s Stage 2 Report and subsequent advice. I also note that the accelerated works will not unduly constrain Ministers’ ability to make adjustments to the approved programme of works, if necessary.
78 The MOU states that the EQC will obtain Crown approval of the Concept Design Report before progressing. This will be a shared decision between the Minister of Finance and me, as the Minister for Canterbury Earthquake Recovery. Such an approval should be sought before any commitments are made to carrying out any of the works, except where previously or separately authorised. The Crown will in turn fund EQC to meet the payment provisions under the MOU and this direction for the cost of the works. This excludes, subject to further Crown decisions on the matter, any costs relating to the indemnity contained in the MOU. Yours sincerely
Hon Gerry Brownlee Minister for Canterbury Earthquake Recovery
Direction to the Earthquake Commission pursuant to Section 12 of the Earthquake Commission Act 1993
1. This direction comes into effect immediately upon signing. 2. The Earthquake Commission (the Commission) shall perform the following additional functions:
a. to enter into the Memorandum of Understanding between the Commission and Waimakariri District Council in the form sent to me on 23 March 2011 (the MOU); b. to carry out the Commission’s roles and responsibilities set out in the MOU (as amended from time to time); and c. without limiting anything in paragraph 2b., to carry out works before the approval of the Concept Design Report referred to in the MOU where those works:
i. are designed to mitigate future earthquake damage to damaged land located in the vicinity of Charles Street and eastward towards Hall Street, North Kaiapoi, Waimakariri; and ii. are ready to be carried out before the approval of the Concept Design Report.
Hon Gerard Anthony Brownlee Minister for Canterbury Earthquake Recovery
79 EQC Annual Report | 2010–2011
Directory
Minister in Charge of the Senior Management Earthquake Commission I Simpson – BSc (Hons), MBA The Hon Bill English Chief Executive
P R Jacques – BSc, DipMGT, DipACC, Ca, CFIP Minister for Canterbury GM Corporate Services Earthquake recovery L R Dixon – Graddipbusstuds (Ins Mgt), Anziif (Fellow) The Hon Gerry Brownlee Chief Advisor
Commissioners H A Cowan – Phd GM Research & Education Michael Wintringham – CNZM, BA (Hons) Chairman – Former member of the Remuneration Authority, B P Dunne – BSc, BA (Hons), MA (Dist.), Cert MS former State Services Commissioner, Chief Executive of the GM Strategy, Policy & Legal Services Ministry of Housing and Assistant Auditor General. H Stewart – BBS (ER), FHRINZ (Fellow) Keith Taylor – BCA, BSc, FIA(London), FIAA, AFIOD GM Organisational Development Deputy Chairman – Chair, Government Superannuation B Emson Fund; Director, Southern Cross Healthcare Society, Reserve GM Customer Services Bank, Gough, Gough and Hamer Ltd, Port Marlborough Ltd and Member of the Takeover Panel; former Group Managing D Barber Director and Chief Executive Officer of TOWER Ltd. GM Communications
Russell Black – BE(Civil)(Hons), FREng(UK), Auditor FHKAES, FIPENZ, FHKIE Commissioner – Former Director of Metro Trains Ian C Marshall, Deloitte Melbourne Pty. Ltd, formerly on Hong Kong Government’s (On behalf of the Auditor-General) Vocational Training Council, Construction Advisory Board and the Construction Industry Council, and former Executive Banker Projects Director of MTR Corporation in Hong Kong. National Bank Of New Zealand, Wellington Denise Bovaird – BCom, FCA Commissioner – On the Board of the Real Estate Agents Solicitors Authority. Formerly on the Board of the New Zealand Institute of Chartered Accountants. Chapman Tripp, Wellington Trevor Burt DLA Phillips Fox, Wellington Commissioner – Director of Lyttelton Port Company Ltd, Silver Fern Farms Ltd, Mainpower NZ Ltd, Chair of Ngai Tahu Investment Advisor Holdings Corporation Ltd and advisor to NZTE Beachhead Russell Investment Group Ltd, Auckland Advisory Board. Former Executive Director of The Linde Group in Munich. Address Giselle McLachlan – LLB Level 20, Majestic Centre, 100 Willis Street, Commissioner – Former partner in Phillips Fox and Po Box 790, Wellington 6140, New Zealand General Counsel & Head of Corporate Services with IAG Telephone: +64 4 978 6400 New Zealand Ltd. Facsimile: +64 4 978 6431 Linda Robertson – BCom, Dip Banking, Free Phone: 0800 326 243 FINFINZ, GAICD, AinstD Internet Address: www.eqc.govt.nz Retired from the Board August 2011.
80 From 4 September 2010 to 30 June 2011 more than $1 billion has been paid to customers. That’s over $3 million a day. From 1 July 2011 to 30 September 2011 we've made 55,000 full assessments, settled 12,463 claims and paid out $697,259,632. Photo: NASA