The Canterbury tails

After a decade of wrangling, the messy Christchurch earthquakes recovery has morphed into a collaboration between insurers and the EQC

By Miranda Maxwell

New Zealand might be receiving world attention for its handling of COVID-19, but possibly just as important is the way the nation has embraced lessons learned the hard way on how to hone its natural disaster response.

Ten years ago this month, the largest of a series of major quakes to strike Christchurch and its surrounds happened on a conservative plate margin between the Pacific Plate and the Australian Plate.

Its magnitude was 6.3 and the focus was very shallow at 4.99km deep. That was followed by a sequence of thousands of smaller quakes and extraordinary devastation for the nation which, unprepared for the magnitude of the event, endured years of wrangling to determine costs.

There have been around $NZ36 billion in insured losses to date across around 750,000 claims.

It was the biggest insured event in New Zealand history and at the time the fourth most expensive insured natural disaster.

“This is the largest and most complex, single economic project in New Zealand’s history,” then-prime minister John Key said in 2013. “The scale of the rebuild is unprecedented.”

Prior to the Christchurch catastrophe, The Earthquake Commission (EQC), a government agency originally established to deal with war damage but which had earthquakes added to its mandate in the 1940s, employed just 23 staff and was equipped to manage just a few thousand claims a year. Then came the Christchurch catastrophe.

The EQC was the first port of call for about 500,000 residential insurance claims in Canterbury, some of which remain unresolved today. To date, the EQC has paid close to $NZ11 billion in claims for the Canterbury events.

A damning public inquiry report published in March last year exposed major shortcomings in New Zealand’s natural disaster cover, finding the EQC was poorly prepared, to put it mildly, to cope with the volume of claims.

Today, the New Zealand Government is busy modernising the 1993 Earthquake Commission Act and expects to introduce a bill this year based on the findings of a year of community engagement which resulted in a raft of recommendations.

The EQC has agreed a world-first arrangement in which private insurers will in future assess and manage earthquake claims, acting as agents, a vastly more efficient arrangement removing a number of the causes of anguish and delays from the Canterbury earthquakes experience.

“Some of the people of Canterbury are still, after all this time, waiting,” Consumer NZ Head of Research Jessica Wilson told Insurance News. “There’s been a legacy of botched repairs.”

In a notorious two-step process, the EQC’s claims management was capped at $NZ100,000 (later raised to $NZ150,000). Cases that went over this sum were forwarded to private insurers, where the process started all over again.

Only after the Christchurch claims shemozzle did the EQC introduce a policy under which a single case manager deals with the settlement of each claim, rather than multiple individual contacts separately dealing with damage to the house, the land, the drains and so on.

“It was a very messy and difficult process for customers to navigate through at a time of severe need which certainly created a lot of stress for people,” EQC Chief Executive Sid Miller says. “The customer was really sort of caught in the middle of this complex process, and many handovers, which led to incredible frustration.”

A decade on from February 22, 2011, the details of the claims confusion continue to cause shock and bewilderment. The tragedy resulted in the deaths of 185 people, and thousands more were injured. More than half the city’s buildings were damaged.

The economic and social aftershocks have rippled through the community in the years since. Arcane terms like “over cap”, “liquefaction” and “red zoned” are all too familiar to Canterbrians, as the city of 350,000 clocked up an insurance claim for every man, woman and child, as Insurance Council of New Zealand (ICNZ) Chief Executive Tim Grafton puts it.

“It was a very complicated, very large event,” he tells Insurance News. “Lots of different building requirements had to be developed, depending on the classification of the land and foundations.”

The EQC freely admits it was slow to adapt and not as easy to deal with as it should have been. The inefficient system, which also managed repairs, saw unfortunate competition with private insurers for the same pool of resources, such as loss adjusters, and led to the EQC using builders instead, prompting complaints of unprofessional results.

“You need to have the most efficient use of resources across the whole insurance sector, whereas that fragmentation of it created an awful lot of problems,” Mr Miller says. “The EQC was rightly criticised.”

The innovative new claims processing model, which is in implementation phase at the moment and will go live in the middle of this year, will see private insurers handle New Zealanders’ claims from start to finish, with the EQC reimbursing the insurers.

“We are the first in the world to have done that, so there is a lot of interest globally,” Mr Miller says. “We are certainly quite unique in the way we are positioned now, and I want to acknowledge that is about learning the lessons from Canterbury.

“We are tapping into a workforce that’s already there dealing with a very high volume of claims for a single lodgement, single settlement pathway.”

The EQC and its board retain all their statutory responsibilities and will be responsible for monitoring the performance of insurers in handling claims to ensure everything is compliant with the EQC Act.

The ICNZ’s Mr Grafton says private insurers will now have “clear line of sight right from the get-go” and avoid the “duplication, and sometimes triplication” that occurred after the Canterbury events when a claim went “over cap”.

“That was totally unacceptable and I am very pleased that the EQC and private insurers have come together to address that issue and remove those hurdles.” Mr Grafton says.

Not everyone loves the new arrangement. Consumer NZ says there are cost implications of “farming that process out to a range of different insurers” rather than having it centralised within the EQC. It would prefer the EQC claims cap to be raised to $NZ400,000 instead. While that would increase the EQC levy paid alongside home insurance, Ms Wilson says it should also reduce insurance premiums.

“The amount you pay your private insurer should go down because they are paying much less of the risk,” she says.

The EQC’s $NZ100,000 level, which was in force until 2019, was set in 1993 when the estimated cost of a house build was $NZ774 per square metre. It’s now estimated to be closer to $NZ3000 per square metre.

The recovery response to the earthquake catastrophe has dramatically changed the topography of the Canterbury region.

Much of the land in eastern Christchurch was very low lying with a low water table, either side of the Avon River, and highly vulnerable to earthquake-caused liquefaction in which water-saturated sediment lost strength and became fluid.

Large areas of towns such as Dallington were deemed unfeasible to rebuild on and placed into a residential red zone, under which around 8000 houses were voluntarily acquired and demolished.

Further west are higher water tables and non-liquefiable land. This has benefitted satellite towns such as Rolleston. Here, only a few houses were condemned and there has been a boom in demand for property, encouraged by a new motorway.

Almost the entire CBD was demolished, though large parts of that have now been rebuilt, assisted by more than $NZ10 billion in commercial property private insurance settlements.

Commercial insurance payouts after the earthquakes – exclusively the remit of private insurers – broke national records.

Christchurch City Council received a record $NZ635 million and the University of Canterbury $NZ550 million from their insurers. The Lyttelton Port Company received $NZ440 million after mediation with Vero, NZI and QBE, while the Canterbury District Health Board settled for $NZ320 million, and the Arts Centre $NZ163 million with Ansvar New Zealand and Lumley Insurance.

Insurers also helped with the establishment of a Residential Advisory Service (RAS) to provide free legal advice and helped community groups support Cantabrians with social issues.

ICNZ says a lot has changed for the better in the region, with more resilient buildings erected. These have attracted more affordable insurance premiums, which have been a catalyst in changing the complex relationship between government, public insurers and residents.

“The scheme and the insurance industry in New Zealand was tested like never before,” the EQC’s Mr Miller says. “We’ve learned an awful lot on the way.”

Fortunately, New Zealand had very high levels of insurance penetration in both residential and commercial assets, and insurance and reinsurance effectively met the costs of around three-quarters of all losses from the earthquakes.

“It’s been a positive story,” Mr Grafton says. “Learnings taken from the experience will make the response to the next major event much better.

Unprecedented destruction: more than half of Christchurch buildings were damaged. Credit: Margaret Low/GNS Science

“[The Christchurch quakes] were very substantial, huge for New Zealand, in terms of losses and the impact on the economy. So insurance has definitely proved its worth. Having said that, there have been lessons.”

Those lessons are being applied across the nation, for example in Wellington, a high-risk seismic area. Much of the capital city’s CBD is built on reclaimed land.

“It has been built in the wrong place,” says Mr Grafton, whose office sits on an escarpment above the low-lying CBD. “We have got to be focusing on how we can make rebuilding in Wellington more resilient.”

Mr Grafton says the Canterbury earthquakes, which produced insured losses in the order of $NZ23 billion for private insurers, have helped refine insurance pricing, which now better reflects the true underlying risk. There has been a “very clear message” about what is required from planners, builders and other stakeholders.

“The truth is that the pricing of the risk had been far below what it should have been for many years,” he says.

Understanding the risks around liquefaction, multiple earthquake events occurring over many months and the ways multi-story buildings behave when shaken has since been perfected, giving confidence to reinsurers. Mr Grafton says he “firmly believes” reinsurers will continue to support New Zealand.

The country buys some of the largest reinsurance programs in the world, spurred by its almost saturated insurance penetration.

EQC is just starting this year’s negotiations for its $NZ6.2 billion program, and will know the outcome by the end of March. Mr Miller is confident the new agreement with private insurers will assist the faster settlement of claims and less disputes via the single settlement path.

“I am entering the [reinsurance] negotiations from a confident starting point,” he says. “We are certainly hearing that there is capacity in the market. We continue to have their confidence and they continue to support and grow the program. It’s been a positive start.”

ICNZ approached the EQC after the Kaikoura earthquakes in 2016, insisting they could do better than in Christchurch if insurers were made agents for managing and settling the commission’s claims so customers had one point of contact, accountability and responsibility.

The arrangement agreed formally last year followed a spate of public apologies from the EQC, which apologised “unreservedly” for “shortcomings in our response to the Canterbury earthquake”.

The EQC said it was required to take on functions it was “not well equipped” to perform, particularly a huge managed repair program, while it was inundated with an unprecedented number of often complex claims.

Cost allocations also became an issue because a series of earthquakes struck the region between the two disasters, resulting in complexities in calculating building and land damage plus the cost of repair between the different earthquake events.

Some of the initial Christchurch assessment was done visually and the real damage was only discovered much later, with what was deemed superficial damage in the first event later revealed to be significant structural damage in subsequent events. That created many challenges in trying to apportion amounts between events under reinsurance contracts.

“We did not do as well as we should,” former EQC Chairman Michael Cullen said in acknowledging serious criticisms of its handling of the earthquake claims. “This has left a legacy of mistrust and hurt that we must continue to address and remedy,” he said, admitting the commission “too often added to the trauma felt by the residents of greater Christchurch”.

Inquiry Chair Dame Silvia Cartwright noted “an adversarial environment of continuing litigation” between private insurers and the EQC over land damage valuations or sums owed by the EQC to private insurers.

Since then, Suncorp – which operates the Vero Insurance and AA Insurance brands in New Zealand – as well as IAG New Zealand and locally owned listed insurer Tower have reached cost allocation settlements with the EQC for the 2011 earthquake claims, avoiding protracted court proceedings.

“We’ve captured an awful lot through the experience with Canterbury,” Mr Miller says. “Christchurch is back to being a very vibrant city. There are still things to be done but the people are really active and enjoying life in their city.

“It’s about staying ready and being adaptable and agile and not unprepared when [the next big earthquake] happens, because we don’t know when it will occur. But we know it will.”