EQC

End of Quantum Cover?

King Gerry VIII has announced a massive blow-out to the Earthquake Commission's fund - now it is another $4 billion on what they had previously estimated! How could they get this so wrong?

Endless Questions Converge?

One answer would be they are using the notoriously random Treasury clowns to do their forecasting. A psychic Octopus - or even a squid responding to a tarot readers' cards - would render more accurate projections than any muppet connected to the NZ Government. Heard Bill English on the radio explaining what had happened and all with a very hoarse voice - perhaps from screaming at Treasury officials all morning. Wouldn't be surprised to find on TV tonight that he'd ripped great gouges of hair from his head either. This is a nightmare for any Finance Minister.

Official statement:

Combined, these factors are likely to push the operating deficit before gains and losses up to about $18 billion - $1.3 billion higher than the Budget forecast. However these figures have not yet been finalised or audited.

So it could be even higher...

Because this increase is above EQC's level of reinsurance for the earthquake, which covers the cost of claims between $1.5 billion and $4 billion, EQC bears all of the increase on its own books.

And their books are the government's books are the taxpayers books when it all boils down:

Q. Who pays if the Natural Disaster Fund (NDF) is used up?
A. The Natural Disaster Fund managed by EQC held about $6 billion before the first earthquake on 4 September 2010. Based on the latest estimate the shortfall is $829 million. However due to the expected timing of claims assessments and payments, the eventual shortfall is not expected to exceed $500 million. Under Section 16 of the Earthquake Commission Act 1993, the Government would honour its guarantee if there is a shortfall, but the final form of this payment, if it is required, has not yet been established. In the meantime, this figure will be reflected in the Crown accounts as a small increase in forecast net Crown debt.

Q. Who pays if there is another event?
A. EQC has renewed its reinsurance, which means EQC has reinsurance for another two events the size of the 4 September earthquake. If the NDF could not cover EQC’s share of costs from a future event, the Government would honour its guarantee under the Earthquake Commission Act.

Yes, but as the first question was answered the fund is now in the negative to the tune of half a billion. The cupboard is bare. Reinsurance alone is supposed to pay for Wellington's "big one". Is it? The hit from Christchurch is 9% of NZ's GDP - Wellington may be a magnitude greater in both fiscal and seismic terms.

And the answer to what contigencies are available rests on Gerry's trip to Monaco:

Q. What is the Government doing to allay any concerns reinsurers might have about writing cover in New Zealand?
A. Canterbury Earthquake Recovery Minister Gerry Brownlee will lead a government delegation to London and to the Rendez-Vous de Septembre in Monte-Carlo, Monaco on 10-15 September. Mr Brownlee will give a presentation on the Canterbury earthquakes and meet several major reinsurers including Swiss Re, Gen Re and Munich Re.

Will they take the gamble? And at what price?