Acts of God and Government

Sarah Miles:<> The Christchurch Fiasco: The Insurance Aftershock and its Implications for New Zealand and Beyond. Dunmore Publishing, 2012 ($37.99)


New Zealand Books: Volume 23, No1, Issue 101, Autumn 2013.


Keywords: Business & Finance; Political Economy & History;


Given New Zealand’s reputation as ‘The Shaky Isles’, together with its accompanying history of deluges, hurricanes, landslips, tsunamis and volcanoes, you might have expected the country to be reasonably well prepared for natural catastrophes. The response to the Canterbury earthquakes might suggest otherwise.


The main Canterbury shocks were not the largest in our known history; the Wairarapa earthquake of 1855 had a magnitude of 8.2 compared to their main shocks of 7.1 in September 2011 and 6.3 in February 2011. But they were in a damned inconvenient location (so was the 1931 Hawke’s Bay one, magnitude 7.8, with more deaths) and the severity of the Canterbury aftershocks was exceptional.


Whatever, the Canterbury earthquakes exposed poor building standards, inadequate preparation for rescue, a government unable to relate to a community, and serious deficiencies in the insurance industry.


Books (and e-publications) on the earthquakes have proliferated. Thus far they have mainly illustrated the region typically before and after, or are memoirs of those involved. No one has yet incorporated the experience into a novel (the Shaky Isles do not have a large literature of natural catastrophes). Aside from various official reports, Sarah Miles’s The Christchurch Fiasco is the first to explore some of the underlying issues.


Miles is a resident of Christchurch who has suffered, like many others, from frustrating interactions with insurance companies. However the book makes good use of Miles’s training as a lawyer. Because it is early in the publication cycle it also provides a background to her focus on insurance. Perhaps inevitably, the second chapter on the political response is disappointing; there is much to learn about the nature of New Zealand governance from the way it has responded. One day a political analyst will do that. Miles looks only at how the insurance system worked (or not) for householders. (The insurance experiences of businesses and commercial buildings are not covered.)


Her central theme is that while the insurance industry promised much before the shocks, afterwards their performance has been dreadful: cash-in with a smile; cash-out with a grumble – or not at all. Numerous reported anecdotes from individuals illustrate just how lacklustre the insurers have been. (Reflect on that, as your insurance premium rises.)

Miles did not approach the insurance industry for their explanation. It grumbles about more than 11,000 earthquakes over most of the past two years resulting in more than 450,000 different claims (apparently a 1989 industry review predicted 150,000 for major shock in Wellington), the difficulties of getting the data they need, that the size of the devastation has created enormous logistic challenges and that ‘a co-insurance model not designed to meet multiple events’ (sic).There are also all sorts of unforeseen legal complications, while the recovery program itself is adding to them. Moreover satisfied customers – such as the many dealt with promptly by the Earthquake Commission (EQC) – are unlikely to record offsetting favourable anecdotes.


Some of the customer grumbles – but certainly not all of them – are almost certainly unreasonable, based on excessive expectations about what they think should be (or had been) covered. But there are sufficient of the insured with what appear to be legitimate complaints, especially from delays, to suggest there are some deep structural problems, which the insurance industry acknowledges – in part – in its reference to the ‘coinsurance model’. As it happens the private insurers are involved with the biggest claims, where houses are the most munted and often in the worst hit areas where new legal and building standards have been introduced by government. Perhaps insurers should have been better prepared, but even if they had had a fool-proof plan, any repair/rebuild would have taken a long time.


The coinsurance problem arises because most householders – some were not insured at all – were covered for the first $100,000 of damage by the EQC and the excess by private insurers. (In practice this affected only about 20,000 houses out of some 140,000 affected.) The interface between the insurers has hardly been seamless. It took a remarkably long time to introduce the practice of their assessors visiting a damaged site together, so that at least there was some agreement on the facts.


Miles does not explain the origin of the co-insurance but it is relevant to the current mess and her proposed reform. In 1989 the Labour Government put forward a sensible reform of the existing provision based on the Earthquake and War Damage Commission (EWD). The new agency, the EQC, would no longer cover business insurance which would obtain its insurance from private insurers. (The justification was that they had diverse and specialist needs best met by a multitude of competing suppliers.) Insurance for households was more routine and a monopoly supplier would be more effective. The following National Government capped the exposure of the EQC (and therefore the Crown) to $100,000 (about $200,000 in today’s prices but devalued by inflation) and left the rest to be provided by private insurers. Hence two insurers per (insured) household, although this affects only about 20,000 houses from the Canterbury shocks.


A second principle was that the EQC would be an actuarial insurer – that is, set its premiums on the assessed risks, like a private insurer. It would build up a reserve and also purchase reinsurance for the possibility of the big one. Unfortunately this objective was never properly obtained, in part because other parts of the government did not let the EQC  pursue it vigorously.


The effect was to reduce the Crown exposure, since it was no longer covering businesses and its exposure for each house insured was limited to $100,000. Instead the exposure was shifted to private insurers – who would charge for their risk – and to the private sector (including households) where it was inadequately insured. All very neoliberal. (The total cost to the Crown of the Canterbury earthquakes is estimated as $13b, of which $7.5b comes from the EQC reserves. Most of the remaining public costs – such as infrastructure replacement – were not intended to be covered by the EQC.)


Miles wants the government to be the provider of insurance largely as it was under the pre-neoliberal regime and for houses under the Labour scheme. She underestimates the risk, and – it seems to me – the need for global reinsurance to spread it across the whole world.


The 1988 EWD minister, Peter Neilson, gave an assurance that ‘this [Labour] Government will always be compassionate in its approach to providing relief to disaster victims’. The issue is not simply the insurance system, which is necessarily contractual, but the way that the government would handle the entire catastrophe. Arguably neoliberalism (and contractualism) got in the way in Christchurch of the compassionate response that Neilson promised and the public expected.


The issues remain. In the 70 years between the Hawke’s Bay and Canterbury earthquake there have been three earthquakes of similar or greater magnitude to the first Canterbury (Darfield) shock of 7.1. Fortunately they were in rural locations unlike the second major Canterbury shock: in the Wairarapa in 1942 (7.2), Inangahua in 1987 (7.1) and Fiordland in 2009 (7.8). (There has also been a number just offshore.) There is no certainty that the next big shock, due in a couple of decades, will be rural.


There is to be a white paper on the future of EQC later this year. It is unlikely to address the wider compassion issue and may well be founded on the neoliberal preoccupations of reducing the Crown exposure and the further privatisation of insurance provision. (It will also address a lot of technical-legal issues which the Canterbury experience has raised.)


The public reaction will be interesting. My guess is the weight of its sentiment is with Miles. Will it will be able to reverse any neo-liberal proposals? If the social democrats are successful the future of the EQC may be a central issue in the 2014 election, not just because of its importance, but because it may symbolise two distinct political approaches. If the Shaky Isles has a healthy public debate, Miles’s book will be a part of it.