The lunchroom a few days ago discussed price gouging, among other earthquake related topics. Seamus proposed a very nice solution to a few linked problems; as he's been rather quiet here of late, I figured I might as well write it up on his behalf. All errors in the proposal as interpreted by me are, of course, attributable to him.
First, we know that the Earthquake Commission invests stupidly heavily in domestic assets - in particular, government securities. The appeal of investing these things domestically seems insurmountable, regardless of how much downside risk it exposes us to.
Second, we know that people hate profiteers. They get angry at the idea that anybody might earn excess profits because of somebody else's suffering, even if that's the most efficient solution to the problem and is most effective in making everybody better off in the long run. Better, they reckon, that everyone starve equally than that prices adjust to give an incentive for folks to bring food into the region, with richer folks potentially first in line. This gives governments a derived demand for stupid policies.
Seamus's tidy solution: get the Earthquake Commission out of government assets and reallocate investment to a portfolio of domestic stocks that we expect to jump in case of an earthquake. We could identify those reasonably easily just by looking at NZX data from the past couple weeks.
Now, who earns the rents when prices jump in the wake of a disaster? The folks who owned stock in the companies getting the rents prior to the price move. If the government's earthquake compensation portfolio is weighted towards assets that are likely to increase in value after an earthquake and are likely to increase most if nobody mucks around with prices, then government has stronger incentive not to give in to populist pressures to interfere with prices.
Problem with the solution: we have a very thin stock market. Total capitalization of the NZX building-sector stocks was about $5 billion end August (about $6 billion now) - not far off from the total purported value of the Earthquake Commission's holdings. And we'd hardly want EQC having more than a minority stake in anything lest we start seeing political interference in private companies through government stock holding.
But EQC taking a 5-10% stake in the building sector, across the board, to replace other parts of its domestic exposure, doesn't seem crazy. At least it's far less crazy than having those assets in the parts of the domestic sector expected to drop in value if the insured event transpires.
To be clear: I still can't see any case for EQC holding domestic assets, and I don't get why this isn't all just handled through reinsurance anyway rather than by having EQC hold an asset portfolio. But this would be better than status quo.
