Govt doubles Canterbury quake provision to $7.1 billion

The Earthquake Commission (EQC) has increased its estimated Canterbury earthquakes liability by about $4 billion to $7.1 billion.

The new estimate follows an actuarial valuation of EQC's liability, based on available field assessments of damage claims. It includes an increase of $2.17 billion from the 22 February earthquake and $1.42 billion from the 13 June earthquakes and other aftershocks, which were not previously included.

Finance Minister Bill English said the numbers are still estimates based on available assessments and EQC. The Treasury will continue to periodically re-estimate the expected liability as more claims are completed and more information becomes available. EQC won't know the final cost of all the Canterbury earthquakes until all claims have been assessed and settled. EQC is aiming to complete its assessments of buildings and settle all contents claims by the end of December 2011.

"The Government is committed to rebuilding Christchurch and supporting the people of Canterbury," Mr English said.  "Today's announcement will not affect homeowners' claims, which EQC will continue to pay in full. And it will not delay rebuilding in Christchurch.

Mr English said EQC can meet most of these increased costs through the Natural Disaster Fund, which held about $6 billion before the first earthquake. The Government, through its guarantee under the Earthquake Commission Act, will meet any shortfall. EQC also has reinsurance in place to help meet the cost of any future events.

"Despite the increased liability, which will have a one-off impact on the Government's operating balance for the 2010/11 year, the Government remains on track to meet Budget forecasts of a return to surplus in 2014/15 and to keep net debt below 30 per cent of GDP," Mr English said.

EQC's initial liability estimates were based on international models for calculating damage from single events. While these hold for the 4 September earthquake, they were not designed to calculate the effects of multiple events.

"Quite clearly the scale of residential damage from the 22 February earthquake has been worse than initially thought, with more claims, more damage on a house-by-house basis and greater land damage than expected.

"For example, it was initially thought 12,000 houses would have more than $100,000 in damage. As EQC has completed more detailed assessments, this number is now estimated to be about 30,000 houses.

"Damage to land was initially estimated at between $300 million and $600 million. This has increased to $1.8 billion."

The new estimated liability will be reflected in the 2010/11 Crown accounts, which will be published in October. Current indications suggest the higher EQC liability will be partially offset by higher than forecast tax revenue and lower than forecast costs in other areas.

Combined, these factors are likely to push the operating deficit before gains and losses up to about $18 billion - $1.3 billion higher than the Budget forecast. However these figures have not yet been finalised or audited.

"We need to remember these are still estimates and EQC and the Treasury will continue to periodically revise the expected liability as more claims are completed and more information becomes available.

At the time of the Budget, Treasury put the total earthquake damage bill – to all property owners and insurers - at $15 billion, or about 8 per cent of GDP, making it the worst natural disaster in recent memory to hit a developed nation – relative to the size of its economy.

"The Government has asked Treasury to update this estimate based on new information available since the Budget.