11 October, 2011
EQC levies rise to realistically reflect costs
Earthquake Commission (EQC) levies will rise early next year to help rebuild the commission's Natural Disaster Fund (NDF) and to more realistically reflect EQC's operating costs, Finance Minister Bill English says.
"The Government is committed to rebuilding Christchurch and supporting the people of Canterbury," Mr English says.
"The levy increase is a responsible step to ensure EQC can meet its long-term costs and continue to provide disaster cover around the rest of New Zealand in a sustainable way.
"Strengthening EQC's finances will provide additional confidence to homeowners throughout the country that EQC has the capacity to meet its obligations now and in the future.
"This is particularly important given the Government's tight fiscal position, which is reinforced today by the Crown's financial statements for the year to 30 June 2011."
Insured homeowners currently pay 5c per $100 of insurance cover, up to a maximum of $69 a year (including GST), as part of their insurance premiums. Under the proposed changes, homeowners will pay 15c per $100 of insurance cover, with an annual cap of $207 (including GST).
The increase, which will take effect from 1 February 2012, will:
• Provide revenue to meet EQC's operating costs, which for many years have been subsidised by NDF investment income, and to cover higher reinsurance costs.
• Enable EQC to rebuild the NDF to its pre-earthquake level of $6 billion in about 30 years.
• Reduce EQC's estimated $1.2 billion cash shortfall to $490 million, reducing the amount the Government may have to provide under EQC's Crown guarantee.
It will increase annual levy revenue from about $86 million to about $260 million.
"Raising levies for those who benefit from earthquake insurance cover is the fairest way to ensure EQC can meet its long-term costs," Mr English says. "The levy rise will add about $2.65 a week to most homeowners' insurance bill.
"The increase is not based on a full actuarial forecast of future liabilities, which will be calculated as part of a review of EQC in the future.
"I expect to take terms of reference for a review to Cabinet in coming months, but the exact timing will depend on getting more issues resolved on the ground in Christchurch. The Government and the EQC's first priority has always been progressing the recovery in Canterbury and that remains the case.
"However it is clear the current levy is too low and needs to increase now to pay for EQC's operating costs and to begin rebuilding the NDF," Mr English says.
The full Cabinet paper is available at:
Questions and Answers
What is being announced today?
From 1 February 2012 the Earthquake Commission (EQC) levy that homeowners pay as part of their insurance premium will rise from 5c per $100 of insurance cover to 15c per $100. The maximum amount a homeowner can pay, including GST, will rise from $69 a year to $207 a year. This change will be made by regulation.
The levy contributes to EQC's earthquake cover, which covers the first $100,000 of house damage, the first $20,000 of contents damage and damage to land, which is not covered by commercial insurers.
How will the levy increase affect homeowners?
Insured homeowners will pay a higher levy. This is automatically included in their insurance bill, so it is not necessary for them to do anything. The increase will add about $2.65 a week to most homeowners' insurance premiums.
Why is the levy being increased?
The current levy, which raises about $86 million a year, is not enough to pay for EQC's day-to-day operating costs, which include the cost of reinsurance, let alone the cost of rebuilding the Natural Disaster Fund (NDF), which stood at about $6 billion before the first Canterbury earthquake. Previously this was not a problem as the NDF was generating large amounts of investment income. However with the NDF expected to be exhausted by EQC's updated forecast $7.45 billion Canterbury earthquake liability and higher reinsurance costs, the current levy is insufficient to meet EQC's long-term costs. EQC's Canterbury earthquake liability has been updated to include the $380 million impact of the recent High Court decision.
Increasing the levy will generate enough revenue to pay for EQC's operating costs and to rebuild the NDF to pre-earthquake levels in about 30 years.
How will the increase impact on the Government's fiscal track?
The higher levy will meet some, but not all of EQC's projected costs over and above the amount it holds in the NDF. That shortfall is currently forecast to be about $1.2 billion. The higher levy is expected to reduce that shortfall to about $490 million, reducing the impact on the Government's fiscal track. This cost will show up in the Pre-election Economic and Fiscal Update.
What is the levy increase based on?
This increase was deemed a prudent level to meet EQC's operating costs and replenish the NDF in a reasonable time. However it is not based on an actuarial assessment of future liabilities. That will be carried out as part of a wider review of EQC in the future. It is possible that after that assessment the levy may need to be adjusted again. The Government believes the current increase is a prudent interim step given EQC's increased costs.
When will the Government review EQC?
The Government and EQC's first priority has always been progressing the recovery in Canterbury and that remains the case. However, the Finance Minister expects to take terms of reference for a review of EQC to Cabinet in coming months. The exact timing of the review will depend on getting more issues resolved on the ground in Canterbury.
Why has EQC's expected cash shortfall increased?
On 30 August, EQC's forecast cash shortfall, which the Government is likely to have to pay under EQC's Crown guarantee, was estimated at $500 million. This estimate has now increased to $1.2 billion without a levy increase. This larger estimated shortfall has been driven by the impact of the recent High Court decision, which EQC estimates will increase its liability by about $380 million, and the addition of an allowance for future non-Canterbury claims costs, both of which were not previously included. The levy increase will reduce the estimated cash shortfall to $490 million.
Is the increase necessary to meet EQC's earthquake claims?
EQC's Crown guarantee means it can meet its earthquake claims regardless of whether the levy is raised or not. However raising the levy reduces the amount the Government is likely to have to pay under the guarantee from about $1.2 billion to about $490 million. The Government believes it is better for insured homeowners, who directly benefit from EQC's cover, to pay a levy that reflects EQC's long-term costs, rather than all taxpayers effectively subsidising EQC.
Why not put in place an earthquake tax to pay for these costs?
Because this would mean that all taxpayers, regardless of whether they own a house or have insurance, would be subsidising insured homeowners who benefit from EQC cover. The Government believes it is better for insured homeowners, who directly benefit from EQC's cover, to pay those costs through a levy. In addition, raising income tax would have a negative effect on economic growth.