The Natural Disaster Fund is filled by the EQC levy you pay on your home insurance (currently, $200 a year) and is there to cover EQC payouts.
Before the Christchurch quakes it had $6 billion. It also had reinsurance of $2.5b with an excess of $1.5b that it could get after each event. (so, first $1.5b paid for from the Fund, next $2.5b from reinsurance, above that comes from the Fund again). The Christchurch quakes not only completely drained it, including two rounds of reinsurance, the Government had to top up a further $1.5 billion.
Now, the Fund sits empty.
National’s plan is to refill it at a rate of $200m a year for 30 years – and that will only get back to how much it had before the Christchurch quakes – ie. not enough.
So what happens if there’s another big one, or even a medium-size one before then – as is likely and as the Wellington quakes have reminded us is possible?
John Key won’t exactly say. Here’s his comments on what would happen if the Government suddenly found itself liable for billions of dollars of EQC claims with nothing in the kitty:
“There is nothing at the moment that would advise to me that there is substantial fiscal risk to the Crown. We know that the EQC fund really has nothing in it from the last, from memory, time I looked at it. But
in essence the Government just backs that up.
“And we’ve got a strong balance sheet, we are in better shape the pretty much any other OECD country in the event that we need to rely on the Crown, but we are a long, long way away from that.”
What Key’s saying there is ‘we would borrow the money’.
Now, can you think of a worse time to go to the money markets and say ‘hey, lend us a few extra billion dollars, would ya?’ than right after a major city has been knocked out of action? Because I can’t. There’s actually a good chance that a government faced with having to dramatically increase borrowing at the worst possible time would instead refill the Fund in the way the Greens proposed – their now defunct QE plan.
But Key’s basically betting that another major disaster won’t happen. That’s a big bet and a long-shot given New Zealand’s history. Does that still look like such a good bet to you after the last few days?
The most important thing is getting that first $1.5 billion back in place – then we’re at least covered for anything up to $4b of damage.
That’s not a huge amount of money – 2% of the annual tax take. A doubling the EQC levy could get you there in a few years, or a one-off economy-wide levy could do the trick. Or we could, you know, just risk it, eh?