Ian Simpson interviewby Fiona Rae
EQC boss Ian Simpson defends his organisation’s performance, explains why his agency and the insurance industry are going to court, and insists that the money is finally starting to flow.
You are probably the single most important person in Christchurch and Canterbury and yet you have had a very low profile and certainly haven’t had many media appointments. What’s the reason? I disagree, to be honest. I’ve attended a whole range of public meetings set up by the local MPs at the start, pre-February before CERA took on more of a role with organising those public meetings. But when we were having public meetings through the local MPs I was attending quite a few of those. Since then, in terms of radio, in terms of TV, I’ve made myself available for just about everything we can. There are of course instances that we can’t make a TV appearance, Wednesday night [June 15] with John Campbell being one of them. But I’m certainly not trying to hold back or hide from cameras or microphones.
How often do you come down? I’m down every week for at least - depending on what else is going on - between one and three days.
Operating from a field office here? From the central office that we’ve got in Christchurch.
And where is that? That’s just on the corner of Hagley Park down there.
Many householders feel that EQC systems are simply not coping with the task. Claimants don’t have a case manager they can call who knows anything about their claim. Every phone call to EQC seems to elicit different answers. There is often a sense that the person at the other end of the phone has a lack of knowledge about things that are quite fundamental, such as the progress of land reports and so on. Are you satisfied with the performance of your own agency? I am absolutely satisfied with the performance of the agency. That’s not to say we can’t do things better. So if you think about the scale of the event at hand, which is 350,000 claims the way we count them, or 550,000 the way any normal insurer would count them which is to separate out the land building and contents components. We can’t find another example anywhere in the world of any insurer that has had to handle that many claims from a single sequence of events, and this includes organisations in the States with 70,000 employees, and we started with 22 and some plans. So, you know, is everything perfect? Absolutely not. But we are handling not just a big New Zealand event, this is an international scale disaster, as you will be aware of living amongst it more than anybody. New Zealand had Art Agnos over recently. As you know he was the mayor of San Francisco when they had the 89 earthquake. That was the largest insured loss in American history at the time, and it’s since been overtaken over by Katrina and others. He came and had a look around in Canterbury and he said Canterbury is just far worse, it’s on a different scale completely to San Francisco’s quake. In San Francisco you had some shaking damage and some fires. The extent of land damage and the extent of damage is on a different league to what was suffered in San Francisco. So we shouldn’t forget the scale of what’s out there. Then it comes back to us as an organisation. Yes, we have had to scale up extremely rapidly. So, you know, we are still not into the first anniversary of this thing, and we have grown into organisation with call centres across the country, a back office in Australia, a group of loss adjustors and estimators and assessors that we’ve brought in from around New Zealand - and less so now from overseas - but overseas as well. And we have had to try and not only get them trained up on the technicalities and get them up and running and get our systems up and running, but also refine that and try and get some sort of common culture and common communication. And I would agree with your comment that our communication, both our ability to get out to individuals and to come degree communication within the organisation is still an area that we are absolutely focused on in terms of getting that better.
This is the whole point of your existence as an agency - and event like this. So why are you struggling with issues like organisational culture and communication? Because culture and communication are driven by people, and as a levy payer would you be happy for me to have even 500 people sitting around since 1945 when the commission was first set up, waiting for this event. In the quiet times there is always a balance between what we keep as a core team and the preparation we can do, versus the staff were are going to need in a large event. So it was always known that we would have to scale up and we have scaled up. The investment that my predecessors have put in place in terms of the core systems and the plans that we have in place I think have borne up particularly well. In terms of rate of assessments, we are assessing at an absolute world class pace and the process is now better, but we still have to ensure that all winds up in terms of going through to the payments. But I would still contest that there are not many other insurers that can settle this many claims as quickly as we are.
So why isn’t it winding up in terms of settlement of payment? Let’s talk numbers. How many homes do you have assessed as over $100,000 cap from September and how many over the $100,000 cap from February? I don’t have that in front of me so I will back to you with that. [Figures later provided to the Listener by EQC show $632 million had been paid out in over-cap payments of $100,000 as at June 20. EQC says 5320 house claims from the September quake have been assessed as over the $100,000 cap, and 1613 from the February quake (although the rapid assessment process showed 12,000 properties may be over the cap). EQC says 6345 over-cap payments have been made for houses damaged in September (the number of payments is larger than the number of over-cap properties because multiple smaller payments may have been made to the homeowner – for instance emergency repair work plus a cash payout). Of those homes thus far assessed as over-cap from the February quake, 1060 payments have been made.] The other issue that we’ve got, if we are coming onto the assessment process post February, and it is probably worth talking about that for a second, in that February is completely different from September in terms of the way we have to understand the claims that came from it. In September we could go to a house and if the house was damaged over $100,000 it’s simple. We pay the $100,000 cheque as long as it was insured. In parallel to that we had our fast track process, which is where if the damage was likely to be cosmetic, then we’d assess those over the phone which would be faster than trying to get people out into the field. That was the way we could get money out to the community as quickly as we possibly could, but still maintain the rigour we have to have to make sure we are paying people the right amount. When it comes to February when we come to a house that’s clearly damaged over the $100,000, there isn’t just one single outcome, that they get their $100,000. We have three possible outcomes. If the house was an economic write-off after September, then we have no further liability. If the homeowner’s insurance had renewed between September and February, then we might be managing claims up to $200,000 because the cover reinstates, and therefore we will be managing that through our project management office which is run by Fletchers. And the third option is that we pay out the $100,000. So whereas in September it was simple - we just get there, assess the damage, and pay the cheque, we have now got something where we’ve got to pull in information from the insurer about the level of damage and whether it was a write off the first time round. We have got to pull out all the claims the individual has put against that house for other aftershocks and other events. We have to allocate the cost of current damage between those events, and then we work out what we actually pay for this one. So that does two things, first, it means there is a longer set of steps to get to the payment, but it also means that the $100,000 payment is just one of three possible options, where it was the only option before. On top of that we can’t run the fast track process, which is different from emergency repairs. The idea we could just ring up, ask a few questions about damage and then pay the cheque, we can’t do that now because there is a huge risk we would end up paying for the same damage twice. So there are reasons why it’s very different this time round.
You are talking about matters relating to the court action, so if we can come back to that, and come back to my question about the number of homes that are over the $100,000 cap. Keep it simple. How many people have been paid out their $100,000 for September and how many for February? I’m not trying to dodge the question, but let me tell you what I have in front of me and we can try and come back with the data you ask for. For September to date we have paid a total of $860 million, and for February we have paid a total of $76 million.
That’s a total sum of money. How many households who are over the $100,000 cap have received their money? Those two figures add to $937 million, and of that $628 million is $100,000 payments.
How many of that $628 million are September payments and how many February? I will have to come back to you with that.
I can tell you I know of only one person in Christchurch who has been paid their $100,000 from February and almost everyone I know is over the $100.000 cap. There is a real perception that it is very slow. Far slower than it should be. Well, the first part of that answer is because if it’s over the $100,000 not everyone will get the $100,000 because it might be the house was written off first time, or all those other reasons I just talked about. Secondly, because we had the rapid assessment programme first, which we did back in March, and now because we have this slightly longer pipeline, it has taken longer to start getting those payments out. But just as an indication two weeks ago the dollar payouts for 22 February were at $40 million, today they are $76 million. So we have almost doubled the payments in the last two weeks. So, we had to go through some extra steps to get that pipeline set up, but now it’s in place and we are ramping up the rate of the payments.
So money is going to start to flow? It is, absolutely.
Because that’s what you are obliged to do. Your catastrophe response plan says you aim to get claims settled fairly and expeditiously. The word expeditious is one that people in Christchurch will be interested in hearing. You are being as expeditious as you possibly can? Absolutely, and I would go back and remind you of the scale of this on an international basis.
Is there a deliberate delay, that EQC and the industry generally wishes to hold back somewhat until the ground settles down, so that you are not paying out again for repaired damage that then gets damaged again? No,absolutely not.
You are not holding back for the aftershocks to stop? Not in the slightest. Our obligation is to get out and get payments made, and especially from a cash payment perspective, there is no incentive. We just want to get the money out into there into people’s hands so they can get on with the rebuild or whatever they need to do.
That’s not true. You say there is no incentive but there is every incentive to delay? Why would that be?
Geological uncertainty for a start – the ground keeps shaking, and you have just explained to me that you are embroiled in enormous complexity because of the multiple events. I would have thought from organisational point of view you had every incentive to delay. But deferring payments just means you’ve got payments for more events that you need to untangle. And let’s face it, the construction job we have got on through our project management office, which is being organised by Fletchers, is the largest and most complex construction in New Zealand. That’s what Fletchers have told me. Full stop. History. The longer we delay, the more we will be exposed to inflated labour rates and inflated material rates as everyone starts to try and rebuild at the same time. If you ask people in the insurance industry, they want to settle these claims as quickly as possible, then they are not having to add on super-imposed inflation post the earthquakes.
Your policy around homes with over $100,000 damage. A few weeks ago there was an announcement that if the damage was over $100,000 EQC would effectively get out of the way and let the private insurer take over. That you would cough up and move aside and let the homeowner take it up with their own insurer. Why is this not happening? Your own staff don’t appear to know about this. Well, hopefully most of them do. But it’s as we discussed earlier, the EQC cover does reinstate under certain circumstances. And the insurers will be the first to tell you they are no longer liable for all the damage over $100,000 in a number of cases, possibly the majority between September and February [where] because people’s insurance policies were renewed, EQC is up for $200,000 worth of damage.
But it’s not even happening in straightforward cases where there was no significant early damage followed by major February damage. There is a lot of confusion about this policy and this interface. It’s not a policy. It comes back to the question about interface with insurers and agreement or otherwise about when our cover reinstates. So, it’s not clear because it’s not clear, and that’s why we are [seeking court declaration].
We will come to that, but there is a perception of a lot of duplication in the interface between EQC and private insurers. And your review in 2008 talked about the fact you had minimal collaboration with the private insurers. Did you not act on that at that time? Yes we did. I joined in March 2010 and my first act was to go round all the insurers and talk to them about the protocols we wanted to set up with them in terms of claims handling. At the time, and this is not being necessarily critical of the insurers, but they had much bigger issues on their plate, such as competing with each other and running their businesses. So this is what we find in our business. When it’s quiet it’s very hard to get heard. I will tell you now that since September and especially since February we are far more collaborative. In fact, this morning I was on conference call with the executives and chief executives of all the private insurers, we have monthly operational meetings in Christchurch for the operations people from each of the insurers. We are absolutely as an industry focused on doing the best job we all can together through this event. You will know that we have said we will accept the assessments of the insurance firms themselves rather, than us needing to go out and assess as well. So far we have received, I think, 600 assessments from the insurers and we have completed I think about 22,000 as we speak.
You have received 600 assessments done by private insurers’ loss adjusters in cases of over $100,000 damage? Or over $200,000 or wherever they think the limit is.
Accepted without question and paid out at that point? I wouldn’t say we accept them without question. But what we have done with the insurers is understand their assessment process, let them know the sort of information we need, and therefore agree that they can deliver us an assessment that’s quickly going to go into our process. And just about all of them have signed up to that so it’s working well. Then we do flow those through into following the payments through. But just to be really honest with you, I can’t guarantee here exactly that all those 600 have gone through to the payment but they are in the system and working their way through.
Tell me about the court case. Why are EQC and insurers having to go to court and how much has it delayed things? We are going to court because there is a view among the insurers that the EQC act is not clear on what conditions the $100,000 worth of building cover reinstates. Basically there is a difference of opinion on the terms under which the cover renews. So on one level, there are lots of areas where we do agree. So if someone renews their home insurance policy then clearly the EQC cover reinstates along with their home insurance policy. So the disagreement is within that 12 month period of the insurance policy, what triggers a reinstatement of EQC cover. And very loosely, the insurers believe that every aftershock triggers a reinstatement of EQC cover, and we take the wording that’s in the Act that says EQC cover reinstates effectively when we make a payment on the claim.
You mean that once you have paid, it reinstates? Yes.
So if you were assessed, for example, after September and were paid $100,000, then you have more damage in February and you have another $200,000 say, you will then pay that next $100,000? Yes, and the insurer picks up the rest.
Why have you not been able to come to an agreement on what the right answer is to this? This argument has been going on for months. It’s a discussion. As you have probably seen from press reports, we haven’t let this become an argument. We’ve approached it in a very sensible and grown-up manner. This is about how you read the EQC legislation. So we can sit there and try argue and compromise, which actually doesn’t particularly work well for either of our reinsurers if we start compromising. Or we can go collaboratively to the High Court and get a declaratory judgement on how the New Zealand legislation should be interpreted.
So you are skipping happily hand in hand together to the court? Yes.
How jolly. The difference is that Tower decided they wanted to start their own proceedings. Same question, but they wanted to do their own proceedings. But for all the other insurers, we and the Insurance Council on behalf of insurers are taking the case forward.
The court will have to dig deep to find the answer because there is no international precedent because no-one else has an EQC type system, and clearly the leigslation didn’t envisage this kind of multiple ongoing trainwreck of a geological event? That’s right, I’m not sure that international precedent has a great deal of role to play. I’m not a lawyer or a judge. There is a piece of legislation and we are asking the High Court to help us decide, to tell us how that wording should be interpreted in a practical sense.
The homeowners don’t care. They just want to be paid out. Has this been part of the delay, the fact you have not been able to reach agreement? Again, it’s absolutely not delayed any aspect of EQC’s payment and we are working hard with the insurers to make sure it doesn’t delay any payments they might want to make either.
Tell me about reinsurance. How many reinsurers do you have, what kind of contract period and how much is it? We have 50 reinsurers on the panel.
Have you always had that many? In years gone by, possibly over a decade ago, we had over 100. When the EQC reinsurance programme started in 1988 it was the largest single risk catastrophe reinsurance programme in the world, and it was limited by a capacity of the international markets at $2 billion. The markets have developed since then and that is no longer the case but at that time there were a lot of reinsurers. Before my time, a while back now, it was whittled down to 50 reinsurers.
Are they staggered contract periods? Yes and no. Each one of them has the same terms, all 50. But the programme itself is smoothed over a three year period.
What does that mean in terms of what you are covered for? For any single event we pay the first $1.5 billion, and the reinsurers pay the next $2.5 billion up to a total of $4 billion, and if the event is more expensive than that we pay the rest.
How does that work when you now have 12 events? But there are only two that matter for reinsurance purposes.
But you keep on saying every decent shake is a new event? But it’s very rare that they will cost us more than $1.5 billion. So from a reinsurance perspective they only kick in when EQC has paid the first $1.5 billion. So for example Monday [June 13], while it was a very severe sequence of aftershocks, is not going to trigger our reinsurance. We have registered 12 events for homeowners to lodge a claim against, but only two of those will be over the $1.5 billion that triggers the reinsurance.
So that’s September and February? Yep.
But the reinsurers only pay the next $2.5 billion in each case. Yep.
But that’s nowhere near what’s needed is it? Of course, no. Our range for September is a total cost to EQC before the reinsurance claim of $2.75 billion and $3.5 billion. And February, well we haven’t come out with an estimate for February yet because we have to untangle all the costs, but I would doubt if it’s through the top of the reinsurance programme.
You doubt it? But this is a $30 billion event all up. Because if you look at September - for the total loss to New Zealand for September, EQC’s cover was probably about half of it, then the private insurers’ residential losses were about 25%, and the private insurers’ commercial losses were another 25%. Clearly for February, the commercial losses are orders of magnitude higher than they were in September. So September is a far more expensive event, but by the time we look at the incremental EQC losses, when you subtract all the stuff you have already paid for from September, it [February] is around a similar size, I would guess. Now this is guesswork at the moment, because of all that complexity we talked about in terms of subtracting - we only claim the incremental cost of damage caused in February against what we already paid for damage caused in September.
What level of detail do reinsurers get involved in, in terms of payouts to claimants? Do they look at, for instance, an individual home owners claim, blow by blow? They will do eventually, on sample basis. Up front right now they are being unbelievably helpful. They have the right to come and audit case by case, claim by claim files. At the moment all they are saying is ‘we are here and tell you when you need money to start paying claims’. Because we all recognise this is going to take years to settle, especially when it comes to the actual reconstruction rebuild and there is plenty of time for them to come in later and absorb our time by conducting large scale audits. But for the time being they’re just standing back, saying ‘we’re here, we’re here to support you, let us know what we need to do’.”
Are we getting their money now? Because we have to pay $1.5 billion for each event, we are still paying out of the EQC fund.
RM: So you have to get through that trigger point before you say we need you now? Yes. There are provisions where we can say we are clearly going to go through it so they can prefund into a New Zealand account.
Are they? We’re lining them up to do that. We don’t want to call their money too early because it’s just wasteful.
RM: Maybe you need to ring the back economists and tell them the flow of reinsurance money isn’t happening yet because they seem to think you are boosting the balance of payments. Well it’s interesting, because the insurers know they are up for it they will already be buying Kiwi dollars to hedge their exposures.
So it’s having that effect, but not into money into back accounts as such. Not the physical transferring into bank accounts, no.
Will you be able to get new reinsurance? We already have. It renewed from the 1st of June.
But you had negotiated that in April. They didn’t know about Monday [June 13] at that point, and they didn’t know we are sliced up with faults all over the show here. Will they reinsure Christchurch? As you know we invest $10 million a year into geotechnical research and seismic research, and as part of our road show to the reinsurers when we went to talk to them about renewal we gave them a very clear map about liquefaction risk in Christchurch and the fault lines that we had seen, and let’s face it, the fault lines we know about are the ones that tend to move – there are lots of fault lines across New Zealand we don’t know about. So Monday, you are right, has reset some risk parameters, but again [I was] on a call to a reinsurer today who said the capacity is still there for New Zealand; it’s all about price.
Chris Ryan [Insurance Council chief executive] was saying earlier this week that earthquake cover won’t be available in future. Do you disagree? There was an emotional reaction in the reinsurance markets after Monday.
Are they suffering from anxiety too? I think everybody is, absolutely. But there was that number that was quoted from a US modelling firm who said [June 13] would cost $6 billion, which is just ludicrous. That had caused a huge amount of consternation in the markets. I can’t speak for reinsurers, they need to speak for themselves.
But you are in the business of reading their response and you have to understand what they want. Do you think you will be able to continue getting reinsurance for earthquake cover insofar as it covers this region? Absolutely. Again, absolutely, based on everything we know now. Given the number of events, if there is another string of very large events then we need to have the conversation based on what we have actually seen and the facts that we know. But at the moment there is absolutely cover, it depends on the price.
How much will the price go up? In general across the reinsurance market, and this is before Monday, rates had probably just about doubled. And you’d need to talk to other insurers about what conditions they are seeing at the moment as they try to put their renewals in place. So before Monday, EQC’s reinsurance cost went up by 50% but we renewed half the programme. The other half was already locked in at prior prices. So the half we renewed is twice the price.
How much more will it go up next time you go back to them? I’m not in the market now, and by the time we come to next year there will be a whole different set of facts. We would hope it would stabilise. We know Canterbury is going to be more active, and we’ve be very open with our reinsurers when we did our renewal. We know it will possibly be at the same activity level as Wellington or other parts of New Zealand going forward for the medium term. We know there is a high liquefaction risk. We talked about that to reinsurers back in March and April. Now, Monday short term may have changed things and we will need to see where that settles down.
Does the question have to be asked whether the EQC model of insuring land is simply not viable any more? I suspect that within the next year or two every aspect of New Zealand’s response and the EQC response and the model will be reviewed. I would say though that considering that we charge $69 a year including gst to everyone who buys insurance, and we have just covered two extremely large international scale events I would say the scheme has worked - and I’m talking about the cover, not the organisation - but the cover has worked extremely well.
A concise version of this interview will appear in our July 2 issue.
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