Increases to EQC Levy

News of an increase to the EQC building cap has been met with concern by some within the insurance sector, with warnings it could undermine an already competitive industry and unfairly penalise those who live in low seismic-risk parts of the country.

The Government recently announced it will increase the amount of insurance risk taken on by the EQC, increasing the cap from $150,000 (plus GST) to $300,000 (plus GST), for damage caused by earthquakes, tsunamis, volcanic eruptions, hydrothermal activity and natural landslips.

The change will be significant, adding an extra $207 to homeowners’ premiums when it comes into effect from October 1, 2022.

The Government increased the cap in response to insurers moving to risk-based pricing, which meant policyholders in high-risk areas like Wellington, Hawkes Bay and Canterbury were paying higher premiums. In those areas it was becoming difficult to obtain policy cover at affordable prices.

The Minister responsible for the Earthquake Commission, Dr David Clark, said the ongoing COVID-19 pandemic had “highlighted the importance of having the right financial and other support when disaster strikes” and it was his government’s wish for “New Zealanders to have access to affordable residential property insurance”.

Insurance Council of New Zealand (ICNZ) chief executive Tim Grafton says the change will mean policyholders will now be at the mercy of not only nature but the Act of Parliament when it comes to natural disasters.

“The increase will mean private insurers will cover far less of the loss to a residential property caused by an earthquake, volcano, tsunami, landslip, or geothermal activity, meaning insurers will need to buy less catastrophe cover for New Zealand risk from reinsurers,” says Grafton.  “This means that the EQC will need to buy more and insurers will still be managing and settling claims as agents for the EQC under commercially agreed terms.

“Customers, though, will need to understand that far more of their loss will be covered by what an Act of Parliament says and not what the insurance policy they bought says in the event of one of these natural disasters.”

The ICNZ’s concerns are not a recent development.  The possibility of a cap increase had been publicly canvassed well before the official announcement, and Grafton says the ICNZ’s warned the government of “market distortion and unintended consequences”.

In summary, the concerns raised by the ICNZ with the government included:

•      New Zealand has continued to enjoy extremely high levels of home insurance uptake and consequential EQC cover, indicating that there is no evidence of a significant affordability problem.
•      The view that the ability to send risk-based price signals is fundamental to insurance.
•      The equity consideration of low-risk areas subsidising those in high-risk ones.
•      The potential for a “moral hazard” of incentivising people to favour high-risk locations with cheaper property prices and/or not undertaking risk avoidance work.
•      The precedent a large cap increase would set in terms of public expectations about how the Government should manage other risks, including climate change impacts to property owners, like flooding and erosion.

A spokesperson for IAG said the company has been “extensively engaged” with the government on the reform of the EQC Act and the current change to the EQC cap. “Our focus has always been on ensuring there is a healthy and sustainable insurance industry to support New Zealanders,” they said.

“We are still working through the implications of this announcement for our customers, and we will communicate any changes to customers prior to implementation on 1 October 2022.”

A report released by New Zealand actuarial firm Melville Jessup Weaver says by increasing the EQC cap, EQC is choosing to community-rate a greater portion of a policyholder’s earthquake insurance premium.

The report outlined that while in theory this should result in premium reductions for policyholders in high-risk locations, in effect the EQC levy requires policyholders in Northland to subsidise the high cost of earthquake insurance in Wellington. “Of course, different insurers will see things differently,” the report concluded. “There are a variety of catastrophe models on the market and numerous choices of vulnerability functions to use. There is no one right way to allocate reinsurance costs between policyholders, nor is there a right way to allocate overheads. Different insurers have different priorities and will make different decisions.

“In short: individual results may vary.”