Should EQC become a reinsurer only?

The Press reports:

Changes to the Earthquake Commission (EQC) are needed despite suggestions minor tweaks will be made after a review, insurers and industry experts say.

EQC has received harsh criticism from many in Canterbury since the earthquakes four years ago, but Earthquake Recovery Minister Gerry Brownlee said this week a report to Cabinet in the next few months would suggest minor changes only.

Insurers said changes to the model were necessary and they were still receiving over-cap claims from EQC almost four years on.

While defending EQC’s performance, Brownlee took the opportunity to criticise insurers’ handling of the rebuild.

“If insurers were so good at it, they would be further ahead with their claims. They are in no position to lecture the Government given their records,” he said.

The review, ordered by the Government in 2012, looked at what EQC insured, including contents insurance, how it priced its cover, how the Crown handled its exposure to natural disasters and how EQC was financed.

An IAG spokeswoman said changes to the EQC model were necessary to avoid confusion and delays.

“People are so confused about the whole EQC-insurer process,” she said.

Insurers could take the lead on claims that were easily over-cap to avoid duplication, the spokeswoman said.

I don’t think the current EQC model works well. I recall a global reinssurer executive giving figures showing how for most disasters they have paid out 90% within a year of the disaster but in NZ only around 30% was paid out three years in. The difference was our EQC model which means you need to get both EQC and the insurer agreeing to stuff.

There is merit in having EQC, as without it local insurers might collapse if they had to handle the full costs of an earthquake (as one did anyway). But should it be a “retail” insurer dealing with the public, or should it be more a reinsurer standing behind local companies. You could have it so its only clients are the front line insurance companies, and all claims go through them.

The front line insurers, while far from perfect, have existing large claims centres and staff. EQC, when a rare earthquake strikes, has to go from a minimal staff to a huge number.

So I don’t agree with the Government that the model only needs tweaking. I think more fundamental change should be considered.