Speech to the Insurance Council of New Zealand annual conference
Good morning and thank you for the opportunity to speak to you today.
I would like to acknowledge my Parliamentary colleague the Minister of Commerce and Consumer Affairs Hon Paul Goldsmith; Insurance Council of New Zealand (ICNZ) President Chris Black; Council members and the other speakers today.
Over the past five years New Zealanders have seen the massive value of having insurance against natural disaster damage.
There is no doubt in my mind that insurance is an essential part of any economy. A point now understood by New Zealanders more widely than before the Christchurch earthquakes.
This country has absorbed an impact of about 20 per cent of GDP from the Canterbury earthquakes without having to impose additional taxes or levies, and without cutting important public services because of good insurance cover.
With a small population and exposure to almost every natural hazard, we have also seen the value of our public-private residential insurance model.
In the wake of the Canterbury earthquakes when making the Government offer to purchase damaged residential red zone land and buildings, we were pleased to discover more than 98 per cent insurance penetration, which meant almost every Canterbury home repair or rebuild had some form of insurance protection.
That is remarkable, and unique internationally for a disaster of this scale.
The importance of keeping insurance affordable and available for all by reducing risk is well demonstrated by Lloyd’s, the world’s specialist insurance market, which calculated that for every 1 per cent increase in insurance penetration, there is a 22 per cent decrease in the taxpayer contribution required post-disaster.
In New Zealand’s case, about 75 to 80 per cent of losses arising from Canterbury are being met from insurer and reinsurer balance sheets.
The Earthquake Commission (EQC), as you know, provides “first loss” cover against damage to residential homes from:
- Natural landslip
- Volcanic eruption
- Hydrothermal activity
- Or fire caused by any of these natural disasters
As private insurers, you provide residential cover above the capped EQC cover. This arrangement was put in place in 1993 at a time when New Zealand was becoming more aware of the risk we live with and private insurers less willing to take all that risk alone.
This arrangement has kept natural hazard insurance affordable for homeowners and created a viable residential insurance market for insurers and reinsurers.
So we have become something of an international example for the value of an holistic approach to natural hazard risk, and I will soon talk more about that.
It’s fair to say that the value of EQC cover has been well demonstrated, and there is considerable international interest in the role insurance plays in the Canterbury rebuild and beyond.
Internationally, private markets for catastrophe insurance tend to be marked by low rates of insurance uptake and fluctuations in supply of this type of cover.
This results in significant levels of under-insurance or non-insurance among property owners.
For instance, only about 10 per cent of Californian homeowners have earthquake insurance, despite California being very seismically active.
In Japan, 25 to 30 per cent of homeowners have earthquake insurance.
It is worth reflecting on the position Canterbury homeowners and the Government would have been in if only 30 per cent or less of earthquake affected homeowners had insurance compared to the 98 per cent who did.
That does not mean we haven’t seen room for improvement.
As you are aware, Treasury is leading a review of New Zealand’s future natural disaster insurance cover, which currently comes under the Earthquake Commission Act of 1993.
Many of you in this room will have made submissions on this review, and I thank you for taking the time to do that; I know considerable thought has gone into the views you have put forward.
EQC Act review
Treasury received about 60 submissions on the review discussion document.
Of these, about half are from organisations and half from individuals with specialist expertise, ranging from academics to industry practitioners.
There is clear support for retaining the broad structure of the current co-insurance model with EQC acting as the first loss insurer, but with a raised first loss cap.
Submitters also identified difficulties associated with interaction between land and building cover.
I think we can all agree that is an area that needs to be improved.
There was also near consensus that EQC should no longer offer contents insurance. On both these points the Government agrees.
It is important to note that EQC’s mandate goes wider than running an insurance scheme and maintaining the New Zealand Natural Disaster Fund to mitigate the financial impact of natural disasters on home owners.
As a public entity, EQC takes an holistic approach to natural hazard risk which includes:
- funding research to understand and reduce New Zealand’s vulnerability to natural disasters; and
- public education to reduce the impacts of natural disasters on individuals and communities.
Many submitters see that work as valuable, and want EQC to continue to do it.
We agree EQC should keep these roles.
Knowledge about New Zealand’s natural hazards informs pricing of New Zealand risk by international reinsurance companies.
And private insurers benefit from this risk profiling, as well as EQC.
Submitters have expressed concern about the proposals to change the EQC building cover to include site works, and have made alternative proposals.
The insurance industry will continue to be consulted through the review process on this and other issues raised in your submissions.
I know there is support for insurers managing EQC claims beyond claims lodgement and for this to be made explicit in the legislation.
As you may be aware, it is already possible under the current Act for EQC and insurers to reach such an agreement.
However I am cautious about this.
In the days immediately following September 4 2010 and February 11 2011, there was a need for some very clear indication that claims would be dealt with as expediently as possible.
Despite the view of some media commentators, EQC did a very good job of organising a large assessment and repair programme that created confidence that equity would be maintained for homeowners and inflation would not run way to predicted high levels.
Taking hold of the repair programme was important and I’m not keen to legislate for what could be a more diffused approach in a big event.
That said, I do believe there needs to be more collaboration with EQC to ensure the best result across events of different sizes and types to deliver a better claims experience for homeowners, and to better support the recovery of affected communities.
As we have seen in Canterbury, a lot hinges on assessment of natural hazard damage by assessors on behalf of insurers.
The EQC reforms are designed to ensure the scheme remains:
- focussed on insuring homes;
- resolves the difficulties experienced in Canterbury with the interaction of land and building cover;
- better integrates EQC and private insurers’ claims handling processes; and
- ensures the ongoing financial sustainability of the scheme.
Agreement on how that can best happen will need to be reached well in advance of any future natural hazard event.
I would like work to progress to the point where I can introduce a new Bill early next year, with a view to passing any changes into law – after the appropriate Select Committee consultation – before the end of 2016.
New Zealand hasn’t been alone in recovering from a devastating natural disaster in the past five years.
With the number of large scale events globally, there is increasing international recognition and awareness of the role that insurance and reinsurance markets play in supporting disaster risk reduction.
Earlier this year, I attended the third United Nations World Conference on Disaster Risk Reduction (WCDRR) in Sendai, Japan.
There, the Sendai Declaration was agreed by the Heads of State and Government, Ministers and delegates.
The Declaration is implemented through the Framework for Disaster Risk Reduction 2015-2030 (Sendai Framework), endorsed by the UN General Assembly.
The Sendai Framework has four priorities for action to prevent new, and reduce existing disaster risks.
These priorities are:
- Understanding disaster risk;
- Strengthening disaster risk governance to manage disaster risk;
- Investing in disaster reduction for resilience; and
- Enhancing disaster preparedness for effective response and to “Build Back Better” in recovery, rehabilitation and reconstruction.
I made it clear to the conference that New Zealand could only sign off on the framework if insurance was included as a tool to reduce the financial impact of disasters on both Governments and communities.
It surprised me that this is the first time the word insurance has appeared in such a framework document.
It is under Priority 3: Investing in disaster risk reduction for resilience, which says (Section 29):
Public and private investment in disaster risk prevention and reduction through structural and non-structural measures are essential to enhance the economic, social, health and cultural resilience of persons, communities, countries and their assets, as well as the environment.
These can be drivers of innovation, growth and job creation. Such measures are cost-effective and instrumental to save lives, prevent and reduce losses and ensure effective recovery and rehabilitation.
Specifically it says to achieve this it is important: (Section 30 (b)):
To promote mechanisms for disaster risk transfer and insurance, risk-sharing and retention and financial protection, as appropriate, for both public and private investment in order to reduce the financial impact of disasters on Governments and societies, in urban and rural areas;
In signing up to this agreement New Zealand has both domestic and international obligations.
Outside New Zealand, our key disaster risk reduction focus is with the Pacific Island countries, followed by South East Asia.
Our Pacific Island neighbours are among the world’s most vulnerable to natural hazards like tropical cyclones, earthquakes, tsunamis and volcanic eruptions.
In the Pacific, natural disasters have resulted in enormous losses with disastrous economic, human, and environmental consequences.
For several of these countries, the total monetary losses caused by natural disasters in the past 50 years are several times higher than their GDPs.
As part of the international donor community, New Zealand will continue to work with Government, Non-Government, regional and multilateral partners to prioritise practical activities that will help countries and communities to better withstand the impacts of disasters and to recover more quickly.
In New Zealand, the Sendai framework is proving influential and under development are:
- a programme of work to better understand the range of risks New Zealand faces, including the drivers of risk;
- a national resilience strategy; and
- a governance arrangement for disaster risk reduction.
All of these are in formative stages but are intended to proceed with a government-led and a whole-of-society approach - in keeping with the Sendai Framework.
It is important that the private sector remains actively involved in this work giving valuable insights and access to information and data where possible.
I think some of you have already been involved in events such as the Built Environment Leaders Forum in September, organised by EQC, the Ministry of Business, Innovation and Employment, and the Building Research Association of New Zealand (BRANZ).
The value of sharing data and information – lessons learned
On the subject of data and information sharing, this has been one of the successes of our lessons learned from Canterbury.
EQC has captured a lot of data, information and evidence to inform better asset management, land use and infrastructure planning.
And that has been centralised in the Canterbury Geotechnical Database with information from other sources to give the ‘big picture’ and overall understanding of land damaged caused by the earthquakes which is required for recovery, as well as property specific information for insurance purposes.
The EQC-led international research programme in Canterbury – the Ground Improvement Programme launched last week – has identified affordable and practical solutions to improve or strengthen residential land vulnerable to liquefaction.
The science behind this has informed building regulations for Canterbury and this information will be applicable to anywhere with a similar geological environment.
CERA’s ongoing role
As many of you will know, the Canterbury Earthquake Recovery legislation expires in April next year – five years after it was initially passed.
In October this year, the Greater Christchurch Regeneration Bill was introduced to the House and received its first reading.
The new Bill will enable the Government to work in unique collaboration with local leadership organisations to ensure regeneration of the region beyond emergency response and recovery, with a clear future focus.
When we passed the CER Act in 2011 we were responding to a national disaster, with significant loss of life and massive damage to houses, commercial buildings and infrastructure.
As the Government we urgently needed to find ways to help thousands of people who had their lives turned upside down. But almost five years on it is time for this form of extraordinary legislation to be replaced, so that we can continue to progress in a new way.
We have moved on from emergency and recovery to a time of regeneration, and this needs to be appropriately reflected.
This bill will allow the Government to continue the process of stepping back and enabling local leadership to take more control of planning and decision making required for regeneration.
The bill allows for the preparation of Regeneration Plans, which will become statutory documents setting out the direction and detail for addressing the regeneration requirements of particular areas of greater Christchurch.
This bill reflects the draft Transition Recovery Plan released in July, which set out proposals for the new legislation and invited public comment.
It was developed in consultation with the Advisory Board on Transition, central government agencies and CERA’s strategic partners.
Their advice is clearly reflected in the Greater Christchurch Regeneration Bill.
I also considered the written comments made by the public on the draft Transition Recovery Plan when making decisions about the new legislation.
The bill will enable establishment of a new organisation, Regenerate Christchurch, which will focus on the regeneration of specific areas of Christchurch city not necessarily connected to earthquake recovery – initially the central city, the residential red zones, and New Brighton.
Regenerate Christchurch will be jointly run by the Crown and the Christchurch City Council, and will exist until June 2021, after which time it will transition into a solely Council-owned organisation.
An independent board of seven will oversee Regenerate Christchurch, with three members each appointed by the Crown and the Council, and one appointed following consultation with Te Rununga o Ngai Tahu.
We have achieved a significant amount of progress in Christchurch and its outlying areas, progress which would have been impossible without the CER Act.
The Greater Christchurch Regeneration Bill enables collaboration in a form that has not been proposed anywhere else in New Zealand, but which we hope might provide a template for other areas dealing with other challenges.
I look forward to working with our strategic partners, the Christchurch City Council, Waimakariri District Council, Selwyn District Council, Environment Canterbury and Ngai Tahu as we create a vibrant, regenerated greater Christchurch.
As I said at the beginning, insurance is an important component of the economy. There are many many good stories that have come out of the disaster in Canterbury entirely due to insurance and your industry – but perhaps the most important future focussed insurance lesson for consumers is to read your policies. Know what you’re covered for and how the covers trigger.
In that regard, I am concerned to see that the move to sum-insured residential cover is better understood by households. Brokers have an important a role as insurers in helping buyers to make good decisions.
In conclusion, may I thank you for your contribution to New Zealand’s economy – to the recovery of Canterbury and for the opportunity to speak to you today. I wish you well for the rest of your conference.