Opinion: EQC should be abolished

The EQC should be wound up and abolished. With the approaching switch to a Crown guarantee system, it has no social or moral licence to operate beyond 2018, says Thomas Coughlan.

From 2019 cover provided by the Earthquake Commission will be almost completely paid for by taxpayers.

You may think this was always the case. But it is not.

For 72 years, the EQC has been funded by a levy collected on home insurance. This meant that only people who owned property paid for the fund, as they stood to gain the most from it.

It’s a great idea — let’s face it, who in their right mind would offer New Zealand homeowners earthquake cover unless it wasn’t heavily subsidised. Even notoriously free-market states in America have EQC-like systems to cover disasters that no insurer would reasonably cover.

... when the EQC fund hits zero, as it will sometime next year, the Government will pick up the tab for any future claims. 

Over the years, money collected from the levy and invested by the EQC grew into a $6.4 billion dollar fund which stood at the ready to bail-out homeowners in the event of an earthquake. Since then, the fund has been steadily depleted by a string of expensive disasters. Does this mean the EQC is over? 

Not quite. 

The organisation has one last trick up its sleeve: the Crown guarantee. This means that when the EQC fund hits zero, as it will sometime next year, the Government will pick up the tab for any future claims. 

This is a massive guarantee. If earthquakes flattened Auckland, Wellington, and Christchurch in the coming decades — and let’s face it, in New Zealand nothing is off the table, the Government (or what’s left of it) would have to open up its books and shell out to property owners.

But here’s the thing — it could. 

Newsroom spoke to the three major ratings agencies in July, who confirmed New Zealand could comfortably borrow an additional $35 billion without scaring bond investors.

Being able to borrow $35 billion at the drop of a hat makes the EQC's depletion from $6.4 billion to zero over nine years seem rather pedestrian. Imagine rebuilding Christchurch a couple of times over — just for the hell of it. 

Finance Minister Grant Robertson is fond of saying New Zealand always needs to be ready for a rainy day. He’s right. We’re small, vulnerable, and isolated. But the ratings agencies tell us that there is readiness in our finances if we need it. 

And this isn’t a hypothetical situation. Even with last November’s increase in the EQC levy (and barring further catastrophes), the fund will have reached just $1.75 billion in a decade. It will take several more decades to reach pre-2010 levels. 

Another large earthquake is almost certain in that time, which will call on the Crown guarantee when the fund and EQC's reinsurance runs out. Researchers suggest the Alpine Fault could rupture soon, triggering an 8.2 magnitude earthquake and five minutes of shaking that could be felt as far away as Sydney.

And after the shaking will come the claims. Homeowners from all over the South Island and much of the lower North Island could draw on EQC cover, backed up by the Crown guarantee.

That’s no bad thing — the Government books are in good shape. New Zealand can handle it, but it is fundamentally unfair.

With home ownership plummeting to levels not seen since the 1950s a system that props up home owners with taxes earned by the general population can no longer be justified. New Zealand’s tax system is iniquitous. Poorer wage earners shoulder the greater burden whilst the wealthy get off relatively lightly.

And, horror of horrors, New Zealand’s relatively light taxing of capital gains means that the very people who should shoulder the greatest burden when the Crown guarantee is triggered — those who have the greatest proportion of their wealth tied in property — will get off relatively lightly. 

The burden will be unfairly born by the wage-earners, smokers, and consumers in the economy to maintain the fiction that it is possible to fairly insure a million-dollar property atop an active fault line.

Perhaps I am facetious. There are ways the EQC helps everyone.

The EQC assists renters too – the ability of landlords to affordably insure homes keeps the cost of renting down, but the gains are not borne fairly. In an out of control property market, the tax burden is unfairly shouldered by the income earners while gains are made elsewhere in the system. 

The EQC model might have worked in an age when property ownership was much higher — or when those who did not own property could reasonably expect to make it onto the ladder one day, but those days are gone.

The Government will not borrow to help young people into homes — fine, but it must then concede it has no moral justification for opening up the chequebook to bail out existing homeowners. 

The EQC's disaster fund sat at just $129 million on 31 August 2018. Its Minister Megan Woods has been notified the Crown guarantee will be triggered. As of early next year, it won’t be homeowners paying for their insurance, but mugs like me. 

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