PUBLIC INQUIRY into the EARTHQUAKE COMMISSION
SUBMISSION TO THE INQUIRY
I am a professional engineer practicing in the field of Natural Environment engineering, including the assessment and mitigation of natural hazards, mostly concerning flooding, erosion and land slipping. For the last 30 years I have worked as a consulting engineer on catchment and river management issues throughout New Zealand, including hazard assessment, design and construction of works, water and soil resource investigations, the evaluation of environmental effects and economic impacts, and the management of assets.
I am a Fellow of EngNZ for: “his role in designing flood management schemes that harmonise with the natural environment. He has led the development and dissemination of an approach based on working with nature by understanding natural behaviour and the form of waterways, and then adding channels or fairways that augment rather than modify the natural behavoiur.”
I also provide a permaculture design and advisory service, and facilitate and tutor permaculture courses and workshops. I initiated the forming of a permaculture emergency response team, and was part of a small team that responded to the Christchurch earthquakes by providing information and guidance on compost toilets as an option, given the damage and disfunction of the city sewerage system.
With my partner, we manage a small 50 hectare property, with a diverse range of farm and forest activities, following the practices and methods of organic and biodynamic agriculture.
My academic qualifications are: Bachelor of Engineering (Civil – Hons 1st), Bachelor of Science (Physics) and Master of Commerce (Economics – Hons 2nd).
I have read the Terms of Reference [T of R] of the Inquiry. However, I am not clear what the inquiry will cover and what is excluded, for instance the meaning of ‘operational’ and ‘structural’ in reference to the purposes and practices of the Earthquake Commission [EQC].
In common with many New Zealanders, I have family, friends and professional colleagues who were directly affected by the Christchurch earthquakes, and I had direct contact with many people in Christchurch through the community-organised workshops on compost toilets, from February to September 2011. From this I am aware of the many issues and problems that arose concerning insurance claims, rebuilding actions and EQC responses.
My submission, though, is not so much about what happened in Christchurch, but more about why it happened in the way it did. It is about the wider context in which EQC operates, and how this impacts on its operational practices. As noted in the T of R, the Commission provides insurance for natural disasters, and this includes flooding and land slippage. My professional experience is on these hazards, of flooding, erosion and land slip. My experience also covers different institutional arrangements and government policy concerning the responses to and mitigation of these natural hazards.
My initial professional training was with the, then, Ministry of Works & Development, and as an engineer with qualifications in economics I was directly involved in policies and procedures on emergency responses, insurance and mitigation of risks, including the economic and environmental effects of alternative approaches. Since the late 1980s, New Zealand has been in the very unusual position, compared to other countries, of having no central government ministry of works or infrastructure planning agency.
Central government ministries or authorities now have no real operational capacity, and are generally reliant on outsourced contractors for professional and technical knowledge and advice. This is the case with EQC, as a government authority.
My submission, then, is based on my personal and professional experience of natural hazard events, of differing type and intensity, over a long period of time and under different institutional arrangements. Its focus is on the general context of natural hazard management, the role of insurance, and of the EQC in particular. I consider what happened in Christchurch, but my main concern is how EQC, and we as a country, respond to natural disasters (events causing substantial damage and social or economic dislocation).
Personally and professionally I have a deep concern about the ineffectiveness of our responses to high intensity natural events, and the lack of any real resilience in our infrastructure and in our social or economic capacity to cope with, adjust to and rebuild after severely damaging events.
The Christchurch earthquake activity was unusual in the number of significant damaging earthquakes in the region, and the long duration of earthquake activity. This made both the insurance and re-building responses especially complex. What made the insurance response even more difficult was the co-insurance between a public insurer and private insurance by a number of separate private companies.
The 1994 Act involved a partial privatisation of the Commission, to become the EQC, with the first $100,000 of claims covered by EQC and any additional amount by private insurers. For the Christchurch earthquakes, where the EQC determined that a number of earthquakes were ‘separate’ events in terms of its involvement trigger, and ‘events’ continued to occur over a relatively long period, the insurance liability and role of EQC relative to the private insurers became increasing complex and confusing.
At the same time, there was an assessment capacity and training shortfall, which from my knowledge and experience, appeared to become worse or more problematic with time, rather than being resolved by a well-directed and standardised training and assessment procedure. While standardised procedures and assessment templates were drawn up over time, they did not appear to be universally used or adhered to. The independent assessments of EQC and private insurers certainly did not help in this regard. There seemed to be a profound lack of coordination and overall management of the insurance and re-build activities.
The EQC, rather than facilitating the use of local companies and tradespeople, and supporting the training and up-skilling of local people, appeared to support the use of large (internationally owned) corporates, such as Fletchers, directing people to these companies. These large companies then took the cheaper option of importing the skilled people that they needed. The use and training of insurance assessors, by EQC and the private insurance companies, also seemed to be uncoordinated and without standardisation.
NATURAL HAZARD INSURANCE:
The social role of insurance is to spread the cost of loss and damage across the whole of society. Where the events that cause loss or damage are relatively rare and the risks can be assessed statistically across a large population, then premiums can be set for individuals, families or businesses, and the recovery costs spread over the population as a whole.
In my initial involvement with natural hazard risks and insurance in the 1970s, insurance companies were clear that they were risk spreaders, and calculated premiums on an actuarial basis. They were not in the game of social incentivising or proxy planning, for instance by charging varying premiums for flood damage insurance based on flood hazard vulnerability, to alter the behaviour of people and businesses. This was a matter for government authorities and planning agencies.
Over time, there has been a change in approach, with premium variations based on differing risks, generally for specific groups or parts of the population. An early example was the higher car insurance premiums for young people, and in particular young men. More recently there have been insurance companies that ‘cherry pick’ the safer end of the market, by offering lower premiums to selected people or businesses based on a risk profile.
Insurance has, thus, shifted, from a generalised premium that shares losses equally across the population, to a more targeted approach. The recent changes by private insurance companies concerning earthquake insurance in the Wellington region, to withdraw from cover or raise premiums, is a case in point.
Where flooding has given rise to extensive and expensive insurance claims, insurance companies tend to withdraw from the affected area, or will withdraw if improved flood protection is not provided. This puts pressure on the relevant authorities to fund improvements. Some insurance companies will pay out on a first flooding event, but then if there is another flood damaging the same properties, they will no longer provide insurance cover to those properties.
NATURAL HAZARD RISKS:
The natural processes and activities that give rise to hazards (that adversely affect us and our property or assets) have functional patterns in the intensity and extent of events. In general, the larger (and more intense) the activity the rarer the event. However, there are definite cyclical or oscillatory patterns, with periods of relative quiescence and period of more intense and frequent activity.
The records show that there are periods when more severe storms and flooding affects different regions in Aotearoa/New Zealand, [A/NZ] and larger events tend to come in clusters. When a severe storm/flood occurs in a region, there is often at least one other large event (within a period of about 6 months), and sometimes a series of other significant events (in terms of risk potential). The climatic conditions that generate a large event seem to persist long enough to generate another similar event, before the pattern changes.
This dynamic of quiescent and intense periods arises from the wind and ocean current circulation patterns of the south Pacific Ocean and the southern ocean circulation around Antarctica, which connects all the large oceans of the world. The intense period for a given region in A/NZ depends on the phase of these circulatory patterns, and different regions (east and west of the main mountain divide, and northern and southern regions) have their intense period at different times.
There is a similar pattern of quiescent periods and intense activity periods with earthquakes, but in this case the reasons or process dynamics for this variation are not so well known or understood.
Understanding these patterns of activity, and their relative timings, is clearly useful for insurance risk assessment, and for a more resilient community capacity and response effectiveness to hazard mitigation, including emergency responses and recovery actions.
The provision and protection of infrastructure could take these variations into account, and the reserve or emergency funds of public authorities could take cognisance of those patterns and differing risks over time.
An understanding of these patterns could also inform insurance risk assessments. However, what responses private insurers would take is an open question, as there are different strategies they could take to maximise their profitability. How the EQC as a public insurer, but providing only partial cover, and at the lower end of damages (up to $100,000), would, or should respond, in the context of differing responses of private insurers, seems to me to be a complex and difficult matter.
HAZARD VARIABILITY & CLIMATE CHANGE:
The tectonic location of A/NZ, with its earthquake, volcanic and land uplift and subduction activity, has given rise to a very active landscape, with steep and fractured mountain ranges and fast-flowing and very mobile rivers. Its oceanic location gives rise to a highly variable climate, that generates intense rainfall storms, and its mid-latitude position means that global climate changes have a very pronounced effect on the climate.
A/NZ is, then, naturally a high energy place, of strong winds, intense rainfall and frequent tectonic activity. Its landscape is very rugged and geologically undergoes relatively very rapid changes, while its climate is also highly changeable. This makes both the protection of human assets, livelihoods and lives, and insuring natural hazard losses, particularly challenging.
Rapid changes in the global climate from human-induced changes in the natural environment and ecosystems of the world, will have profound effects on the A/NZ environment and hence on people living here. Increasing risks and vulnerability are most likely in storm and flood related hazards, and along coastlines from storm generated waves and rising mean sea levels. The processes and dynamics of waterways are likely to change sufficiently in the near future to alter the form and natural character of our streams and rivers. This will greatly increase the vulnerability of a large proportion of the homes, farms and businesses of New Zealanders. Given the relatively high vulnerability to storm and flood damage in many places throughout A/NZ, we, as a country, face challenging times, in this regard, as well as in other ways.
The operations of EQC, as a partial insurer of natural hazard losses to residential properties, has a complex and difficult structural context. This is compounded by the fact that it is a relative small managerial authority and not an operational one, with its own in-house expertise and qualified staff to carry out its insurance assessments and actuary work.
I know of some changes in approach of EQC following the Christchurch earthquakes, but I have very little experience of the Kaikoura earthquake responses and re-build. I would note, though, that the largest and most expensive part of the rebuilding was funded directly by the state, in the reconstruction of the state highway and railway line between Blenheim and Kaikoura. Other infrastructure reconstruction was also supported by state funding.
EQC deals with the most difficult claims: of private citizens concerning their homes. The importance of a home as a safe and secure dwelling can bring about high levels of emotional anguish and distress when it is badly damaged, and especially when there are long delays in both the assessment of claims and in the actual rebuilding and securing of damaged houses. A well-developed strategy that can be effectively implemented in as short a time as practical is thus important for EQC operations. This would include the scaling up of capacity for larger-scale events, using pre-prepared training workshops of standardised procedures for assessment and rebuild monitoring.
If private insurers are contracted to act as EQC’s agents, as the T of R notes about the Kaikoura earthquakes, then what is the operational role of EQC? This further outsourcing makes the commission more operationally redundant and therefore further reduces its technical and institutional knowledge base. My understanding of the role of EQC is that of a lead insurer, taking an involved leadership role in the assessment and settling of claims, and thereby determining the required standards of assessment and rebuild, as the public authority responsible for natural disaster insurance.
The operations of the EQC can not be separated from its structural and policy context.
In my opinion the co-insurance of residential properties is a policy and operational disaster, which was clearly demonstrated by what happened in Christchurch. Either it is a matter for a public authority, as it has been in the past, or it should be completely handed over to private insurance. The mixed approach is a confusing and complex middle ground, and makes life unnecessarily difficult for all parties, and especially for home owners.
Natural disaster insurance has a context that is significantly different to other insurance, in terms of risk assessment and statistical analysis, and the potential payments from single events. For example, car accidents are individually small scale events that are spread relatively randomly over a large population. A single natural hazard event, such as a flood or earthquake, can cause a large amount of damage within a relatively small area of the country, with extensive damage across the area and consequential social and economic disruption and dislocation.
Because of the size of total claims from large natural hazard events, private insurance companies tend to be wary of such exposure, and will withdraw from insurance when they have been subject to large total payouts from specific events, or when they realise that their exposure may be unduly high, given their whole portfolio of insurances.
There has been a history of state intervention in insurance in A/NZ, and in particular natural disaster insurance. There seems to be a cycle of intervention, with the state becoming involved, in one way or another, as the private market fails to provide insurance for an increasing proportion of the population, or for specific types of hazards. The natural cycles in the intensity of events, with oscillations between quiescent and high intensity periods, may have some impact on this market and policy response cycle. Of course, particular ideologies of political economy will also influence state intervention, and this can have its own cycles.
At present we are in a time of a political economy that emphasises private enterprise and market forces, with government authority being confined to overall policy and ‘bottom line’ regulation. As the intensity of natural disasters increase, with environmental and climate changes increasing vulnerability to storm and flood damage, but also increasing impacts from pests, diseases, fire and drought, this present political economy is likely to become increasingly unfit for purpose.
As a society, we do have choices in how we will respond to natural disasters and increasing personal, social and economic vulnerability to natural hazards. When people loss their homes, farms and businesses from storms, floods or coastal erosion, we can respond as a whole society, sharing the losses and rebuilding or re-location costs. Or it can be a matter of private property and market forces, with the individual owners bearing the losses and coping by themselves with the disruptions to their lives. What approach will we take if relocation away from the coast or river floodplains is required due to the changes in natural processes and dynamics that occur because of both large and smaller scale environmental and climate changes? Is it a matter of the individual beware, or are there whole of society issues, with the changing impacts arising from what people as a whole have done?
If we are going to share out the losses and costs, how will this be done? And what is the role of insurance? Is it provided by private insurers on a market forces basis, or is there an operational as well as policy role for the government?
From my experience, within different political economy contexts, the easier and more effective way of keeping private insurers within bounds is by direct state intervention that provides real competitive pressure. Using a regulatory approach based on general policies gives rise to complex administration, approvals and monitoring requirements, which complicates the whole insurance industry, and can be quite ineffective in attaining the stated policy objectives.
Some time in the future, A/NZ may have an effective government Public Works department again — if The Treasury looses at least some of its present sway over government policies. What is evident to me from my professional experience, and what shows up in the EQC approach and operational procedures, is the lack of institutional knowledge within government ministries and agencies, and the general lack of training and maintaining of appropriate standards when operations are carried out solely by private enterprises in a competitive for-profit economy. The balance between public and private enterprise, and, for example, of publicly employed and private enterprise employed engineers, that I saw in the 1970s and early 1980s, has been lost.
To completely outsource natural disaster insurance in A/NZ, which appears to be the trend in EQC, would, in my opinion, be a social, environmental and economic disaster, compounding the problems and inefficiencies of insurance and reconstruction following natural disasters. We are sorely in need of effective planning and operational standards that take cognisance of the likely future increases in vulnerability to natural hazards.
There has been a generation of under investment in social and economic infrastructure, and in the training and maintenance of standards necessary to provide effective and resource efficient infrastructural services. We now have a much reduced resilience in our infrastructure, while facing more serious threats and potential damage to that infrastructure.
It is not the operational procedures of EQC that are the issue, it is the whole structural and policy context. The partial privatisation and co-insurance of the current enabling Act of the commission is, in my opinion, the worst of all possible arrangements. Without policy and structural changes in natural disaster insurance in A/NZ, rejigging EQC operational procedures is merely tinkering at the edges.
I would thus suggest that the inquiry does consider context, and make recommendations concerning the role of government in natural disaster insurance and reconstruction planning.
♦ The operational procedures of EQC and their effectiveness can not be separated from their structural and policy context.
♦ The complex and confusing procedures around insurance assessment and rebuild monitoring after the Christchurch earthquakes demonstrated the problems with a co-insurance approach, where EQC covers the first $100,000 of any event claim.
♦ The assessment capacity and training shortfall evident in Christchurch, with no pre-prepared plan for scaling up capacity, showed up a general lack of planning and government leadership in natural disaster insurance and reconstruction responses.
♦ There has been a generation of under investment in infrastructure, without the on-going training and maintenance of appropriate standards to ensure effective and efficient infrastructure.
♦ Natural disaster insurance has significantly different issues than other insurance, in terms of risk assessment and potential payouts from single events. This makes private insurers wary of too much exposure, and hence their tendency to withdraw cover or add surcharges to premiums.
♦ As a society, and individually, we are facing increasing risks and vulnerability from natural hazard events, and there is an urgent need for more effective planning with public authority development of appropriate standards.
♦ The return of direct government involvement in natural disaster insurance, preferably through full public insurance, with a lead operational capacity, in-house damage assessment and actuarial expertise, with training and plans for capacity scaling. Further regulation of natural disaster insurance by EQC as a small managerial agency would be counter-productive.