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Impact of the Canterbury earthquakes on EQC and government-owned assets

The economic and fiscal impacts of the Canterbury earthquakes and the Government's response to these are discussed in the Fiscal Strategy Report (FSR) and the BEFU.

The following box highlights the impact on the National Disaster Fund (NDF) and EQC.

The impact of the Canterbury earthquakes on EQC

The impact of Canterbury earthquakes on EQC.

EQC is funded by a levy on domestic insurance policies and manages the NDF, which is intended to help meet the costs to EQC of a major earthquake, or other natural catastrophes covered, within New Zealand. The NDF has grown from those levies and from investment income. EQC has a Crown guarantee; if the NDF and reinsurance cover was ever to be fully used up as the result of a natural disaster, the Crown would provide whatever further funding was required to settle claims against EQC.

Size and composition of NDF

Prior to the 4 September Canterbury earthquake, the NDF had investments totalling around $6 billion, invested in cash ($300 million), global equities ($1.7 billion) and New Zealand government bonds ($4 billion). EQC had also purchased $2.5 billion of reinsurance cover, with a further $500 million purchased after the September 2010 Canterbury earthquake. The two major Canterbury earthquakes and associated aftershocks are likely to reduce the size of the NDF by $3 billion (with EQC's reinsurance covering any costs above this), and increase the cost to EQC of purchasing reinsurance cover for future natural disasters.

Risks and challenges

For the Crown, the main balance sheet risks associated with EQC include having to make payments under the Crown guarantee, or having to borrow to redeem the NDF's investments in New Zealand government bonds in the event that the Crown exercises its option to redeem these. The appropriate size of the NDF is an important issue. Given the Crown guarantee, the NDF and EQC reinsurance programme are effectively a form of pre-funding a contingent liability - the cost of natural disaster claims against EQC; the larger the fund and level of reinsurance, the smaller the chance that the Crown guarantee will be called on.

Once all claims from the Canterbury earthquakes have been met, the NDF is expected to consist of around $3 billion of assets. The NDF will grow over time from premium income and investment returns. The Treasury has estimated that it would take the NDF approximately 15 years to grow back to its previous size of $6 billion, under current policy settings. This estimate is based on a number of important assumptions, including that there are no further major natural disasters during that period. The appropriate size and mix of investments of the NDF will need to be reassessed as a result of the Canterbury earthquakes.

Government priorities

The short- to medium-term priorities include managing the response to the Canterbury earthquakes.

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