EQC's cash reserves run close to wind

The Earthquake Commission (EQC) will run out of money by early next year if the Government does not step in to fund the natural disaster insurer, official documents reveal.

Emails between Treasury analysts and the EQC show the Natural Disaster Fund, which used to pay out customers, will run out as EQC cashflows dry up.

Taxpayers will inevitably wear the cost, experts say.

"Looking at the cashflow this will definitely happen next fiscal year," one email reads.

The analyst then asks for more detail of the specific month and quarter that this will occur.

The emails were sent to clarify the Government's position ahead of the pre-election fiscal update, which confirmed the fund would be exhausted in March 2015.

"However, there remains considerable uncertainty about the timing due to claim settlement rates and the outcome of the land declaratory judgment," EQC's chief financial officer Emma Hicks said in a statement to The Press.

A graph attached to an email shows EQC could be almost $2 billion in debt by June 2016 if no action is taken.

EQC had $3.9 billion in reinsurance for each event, Hicks said. "The existence of reinsurance will significantly reduce the impact on the Crown accounts if there is another large damaging event," she said.

Hicks said it was expected the Canterbury earthquakes would exceed the reserves in the Natural Disaster Fund as well as the expected contributions from reinsurers.

This shortfall, estimated to be at least $650 million, would be met by the Crown under a guarantee. "Customers can be assured that the cost of claims will be met."

Analysis provided to The Press suggests the Government will have to bail out the commission with a grant or a loan to make that happen. An EQC review, which began in 2012 and could decide in what form the payout would take, is still underway.

Council of Trade Unions economist Bill Rosenberg said the difference in the two options was who had to pay.

"If it is a grant, then the taxpayers will pay for that. If they lend to EQC, then that will come through in EQC levies," he said.

The EQC levy was already increased to 15 cents per $100 of cover in early 2012 but Rosenberg said it would take no less than 30 years to rebuild the Natural Disaster Fund.

"Someone has to pay the cost of that and that is a bit of a burden for people in an economy that is low."

The question of who would pay for the shortfall would raise larger questions about what EQC should be in the future and the role of private insurers, he said.

"It hasn't been a public conversation and it should be," Rosenberg said.

NZIER principal economist Shamubeel Eaqub said the issue "now raises the question of how do we design, fund and implement the next disaster recovery fund".

"The lessons from Canterbury will be critical to make sure we have a resilient system in place."

Labour's Earthquake Recovery spokesman Clayton Cosgrove said if elected, his party would instigate a full review into EQC and the private insurance industry, which would reveal the best way to deal with any deficit. "We have to look at the books. At the end of the day, it has to be funded but we need to know the extent of it."

A spokesman for the Minister Responsible for EQC, Gerry Brownlee, said the review had proven to be a "long and complex piece of work".

"I can't indicate at this point when the public discussion document will be released," he said.


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The Press