In 1988, a ministerial paper proposed reforms to New Zealand’s earthquake insurance. It came 44 years after the Government had established the Earthquake and War Damage Commission that would pay out for damages from a levy. The commission kept reserves in the event of The Big One striking, but they were inadequate. The thinking at the time was a major disaster could cost $36 billion in today’s prices. In the event, the Canterbury earthquakes are expected to cost $20-30 billion. A major Wellington quake or an Auckland volcanic eruption could be considerably costlier.
The commission’s reserves, however, were a piffling $3.6 billion. Because the Government guarantees the fund, the taxpayer is expected to make up the difference. Since the reserves were kept in government bonds, the effect is that taxpayers will pay the lot anyway. In 1988, Associate Finance Minister Peter Neilson’s commission reform paper gave the assurance that “this [Labour] Government will always be compassionate in its approach to providing relief to disaster victims”. Not that future governments would be bound by the statement.
The Government’s main proposals were:
1. The establishment of a new agency, the Earthquake Commission, to cover natural disasters, but not war damage. (Not mentioned, but one of its successes, has been the promotion of mitigation policies, including research.)
2. Businesses would not be covered; they could take out private insurance. This reflected the view that the Government should not provide as much protection to businesses as households (businesses are not covered by the Credit Contracts and Consumer Finance Act 2003, either).
3. The commission would provide comprehensive and compulsory insurance for residences (with some limitations and the possibility of voluntary exemptions).
An electoral earthquake – the 1990 defeat of Labour – meant the bill didn’t make it into law. Instead, in 1993, the National Government passed the Earthquake Commission Act, which dispensed with Labour’s proposal for compulsory disaster insurance for all residential properties on the grounds that regulation and bureaucracy would increase.
The new law meant those residences that were privately insured against fire would get disaster protection of up to $180,000 in today’s prices from the commission. Cover above that would be provided by the private insurer. Those without private insurance also missed out on the commission’s disaster cover. The change perhaps reflects the different ideologies of the two political parties: one keener to use the power of the state; the other more sympathetic to private provision. But there was another important difference: the Crown’s exposure was capped. The 1993 limit was not increased, so with inflation, its value has diminished to $100,000.
The new system covered minor shocks reasonably well. But it seems to have failed the people of Canterbury in at least two respects. First, the interface between the commission and private insurers has generated unnecessary transaction costs (like those incurred by the accident compensation system before the Woodhouse proposals eliminated them). The National Government’s 1991 claim that avoiding compulsion would reduce bureaucracy must seem farcical to Cantabrians tangled in private red tape.
Second, multiple centres of authority work badly for major disasters. That’s why the Government established the Canterbury Earthquake Recovery Authority (although it is too involved in policy decisions for my democratic taste). The rights of private insurance companies have prevented a single authority from dealing with the damage to Christchurch residences. Underlying this is the role of the Crown, a legal entity that acts on New Zealanders’ behalf. Too often, however, Government thinking has been based on the fallacy that Crown interests are separate from those of “us”.
To ask the question that I have put previously in relation to the Accident Compensation Corporation, whose side is the Crown on? A comprehensive answer is not easy. But as far as disasters are concerned, I favour Neilson’s view that the Government should always be compassionate in its approach to providing relief to disaster victims. At the same time individuals should be expected to take as much responsibility as practical to minimise a disaster’s impact.