If Wellington was hit by a devastating earthquake or Auckland was smothered by volcanic ash, would we do any better than the homeowners of Canterbury?
Nine years after the Canterbury earthquakes, there are still over 1500 claims outstanding.
Those affected by the Christchurch and Kaikoura earthquakes will be well aware of the importance of the $100,000 cap in place when those earthquakes struck.
Being "above cap" meant that the EQC paid out the first $100,000, and the homeowner's private insurer was responsible for the remainder of the cost of repair or replacement.
Here's a look at the issues involved.
The problems of two insurers
Sharing each claim over-cap is a recipe for delays and arguments. The greater the damage, the greater the incentive for EQC and private insurers to shift costs to each other, or to the homeowner. Time spent arguing between insurers diverts resources away from paying out on claims and getting homes fixed.
When Treasury put out a discussion document in 2015, there had already been more than 24,000 over-cap Canterbury claims.
Treasury's document said: "Many stakeholders believe the way in which the dual insurance model has operated in Canterbury has created unnecessary cost, confusion and complexity."
How the cap was set
The $100,000 cap was introduced in the EQC Act 1993. Looking at what was said in Parliament at the time, it becomes clear that it was based on the cost of rebuilding a typical New Zealand home.
Speaking in Parliament, minister Maurice McTigue, said: "... the cover that is offered by the commission will in the majority of instances be fully sufficient to rebuild homes that are destroyed by earthquakes or other natural disasters."
The clear intention at the time was that homeowners would only need private top-up insurance to deal with rare cases such as where relatively expensive homes needed to be completely rebuilt.
However, since then building costs have roughly tripled. Looking at one Stats New Zealand measure of building costs, the cap would need to increase to $288,000 to keep up. Alternatively, based on the value of building consents, the cap would need to be lifted to $323,000.
Rising building costs have pushed the values of more and more homes above the cap, and increased the share of premiums going to private insurers compared to EQC. Private insurers benefit from keeping the cap low.
Should the cap have been adjusted over time?
Yes, of course it should have been adjusted, probably multiple times, over the past 27 years. The law specifically allowed for the cap to be increased "from time to time by regulations under this Act".
As long ago as 2008, the EQC advised its new minister that the cap set in 1993 no longer fulfilled its function and that 'good public policy process' required an increase: "Inflation in the domestic construction industry indicates that, to regain parity, the cap on a dwelling should now be doubled, to $200,000."
Last year some changes were finally made to the out-dated 1993 legislation. But despite the tripling of building costs, and unfortunately for homeowners, the Government decided to increase the cap to only $150,000.
An inquiry into EQC led by Dame Silvia Cartwright has since recommended the Government consider increasing the cap to cover the average cost of building a house in New Zealand. It also recommended the cap be adjusted regularly.
Just get rid of the cap?
But there is another option which is to get rid of the cap altogether, making government fully responsible for insuring residential buildings against natural disaster.
EQC would cover residential buildings to their individual sum-insured value; people would only have one insurer to deal with; and future governments would no longer be called upon to bail out private insurers like AMI in 2011.
A number of private insurers have been imposing huge premium increases for natural disaster cover in higher-risk areas, making it prohibitively expensive for some. The government, on the other hand, can take risk into account to an extent, but spread it across all New Zealand homeowners to keep premiums affordable.
The capacity of private insurers could still be used by EQC if needed, for example, by contracting with them to collect premiums or for various aspects of claims management.
In 2015, former EQC chief executive David Middleton pointed out that getting rid of the cap would resolve the demarcation problem with private insurers and, more recently, Dame Silvia also recommended that this option be considered.
To me, getting rid of the cap is the way to go.
Another major earthquake could happen at any time.
That's why the next government needs to stop the endless reviews and make this change urgently.
Having your home severely damaged by a natural disaster is hard enough: no-one should have to spend the following nine years fighting with insurers for their claim to be settled.
- Kathy Spencer worked in Treasury for nine years, was a general manager in ACC and a deputy director-general in the Ministry of Health. She has also worked as a Senior Advisor to a Minister of Health and a Minister of Revenue.