Managed retreat - some basic principles

EDS has put up a lengthy paper on managed retreat.

I have an alternative, shorter proposal. Or at least a starter.

1. People should be able to build where they want.


2. Insurers should be able to set premiums to reflect risk. EQC could make that safer for private insurers by leading the way. They have decades of claims history. 


3. Councils should reserve the right to discontinue services in places that are too expensive or difficult to maintain. In such cases they could offer existing residents a choice:
   
   
   1. Special ratings district that imposes a differential higher levy reflecting higher costs of providing council services in those areas, and a promise that there will be no cross-subsidies from safer places, reminding that that means that if their road washes out and they want it reinstated, the levy will have to go up;
   
   
   2. Setting of a special purpose local board that becomes the owner of local infrastructure, governed by its residents, and able to set its own levy on properties for service. Councils would need to sharply reduce rates for those properties to reflect that council is no longer providing those services.


4. Ability to set those special purpose local boards should be extended more broadly, such that a group of farmers could set one to take on the debt that funds flood protection works and finances that debt through a levy on protected properties, on approval of those properties’ owners.


5. EQC to recognise mitigation works when setting premiums. Private insurers would do similarly so long as that market is sufficiently competitive.


6. Make damned sure that there aren’t regulatory barriers unduly hindering insurance entry, including provision of parametric insurance products.


7. Land values in high-risk places no longer cross-subsidised by low-risk places would drop. If government worries about the equity implications of that, it could provide a one-off payment in compensation. Ideally it would set a cap on such compensation because it will disproportionately go to rich people living in unsafe places who have been cross-subsidised by poorer people living in safer places for ages. 

On that last point, remember the 2018 Motu work that said that cross-subsidies in current insurance through EQC mainly run to the benefit of richer neighbourhoods. 

We find that the northern regions of both islands are the source of most claims, that only a handful of weather events caused a large proportion of EQC’s weather-related pay-outs, that the average property lodging a weather-related claim is located twice as close to the coast as the national average, and that properties with claims usually are cited on much steeper land than the typical property in New Zealand.

We also explore their relation between claims and socio-economic characteristics, finding that higher income neighbourhoods appear to be those most benefiting from the EQC coverage for weather events. 

The usual complaint about abolishing implicit subsidies is around equity issues. But normal equity considerations here run opposite to what you might have thought. It wouldn't stop those concerns from being raised as reason not to do this, but do look behind the curtain. 

Seems simple enough. No need for government or council to decide who's allowed to live where. If you want to live in a risky place at your own expense, that should be up to you. 

Botched repairs

It'll be interesting to see how the EQC debacle plays out now that it doesn't have a Minister committed to covering up the cracks by shifting the carpet around.

Here are a couple things that Minister Woods could usefully have her team check in on. They're my working hypotheses about what happened in that mess, but they're not solid enough to have made it into our report. They're hunches. They're hunches that are difficult to test from outside the system on limited resources. And I hardly expect that the hunches are unique to me - they're kind of the shared mythos of Christchurch as of the time I left in 2014.

Hypothesis 1: EQC was generous after the September 2010 quake. Probably too generous. EQC was sitting on a pile of money. We were going into an election. So everybody on the west side of Christchurch in National electorates (in the west of town, closer to the quake's epicentre) got a home makeover if there was a crack in the paint somewhere. Is this true? We sure had the impression it was true, and there are tons of anecdotes around it. If it's true, how much money was wasted there that might have been put towards later repairs?

Hypothesis 2: After February, EQC systematically downscoped repairs as the extent of the shortfall in its reinsurance relative to its claims became clear. I think EQC saw its main job as minimising cost overruns to central government and the draw on central government resource rather than playing straight with its claimants. Full foundation jobs became jack-and-pack. Leveling floors to as-new became "pretty level" MBIE good-enough standards rather than what was in anybody's insurance contract. What EQC's now blaming Fletcher for (Fletcher project managed a pile of the repairs*) is very likely a consequence of scopes inadequate to the scale of the damage. And blaming Fletcher for accepting crappy scopes of work is a bit off where it was darned hard to fight EQC on the scope. EQC downscoped ours two or three times - and our opt-out builder got some of it back through variances as the project continued. So check back on how final scopes of work varied from the initial scopes. What fraction of them were downscopes? Is that fraction consistent with what we'd expect in the normal course of assessment as you get more certainty about the actual damage? Is there data on the actual qualifications of the folks who did the assessments, and how that correlates with the scopes of work and whether it's now a munted repair job?

With the change in government, we now have some chance of figuring out what the heck all happened in Christchurch.

In related news, I'm still chasing Lloyds of London to see whether they'd sell me a parametric insurance policy that just gives me a pile of cash if there's ever a Wellington earthquake of comparable size to Christchurch's. That's simple to define for a parametric contract, but where it's a market of just me, it's likely not worth anybody's time to build the contract. I'd expect that anybody who ever had to deal with EQC would be interested in purchasing actual insurance instead of the "let's pretend you're insured" product that we wound up having.

And I also hope that Minister Woods will not delay overmuch in flipping the EQC arrangements so that people only have to deal with their private insurer and EQC just writes cheques in the background.




* Fletcher's is one of our members at the Initiative, so disclosure on that. We made a point of opting out of Fletcher's project management when fixing our house in Christchurch because we'd already, after September, sourced a builder who specialised in the kind of 1930s weatherboard place we had. We didn't want luck-of-the-draw builders assigned by some other project manager. In 2011, when Fletcher was given the job (I was at Canty at the time), it smelled funny to me. So I did some quick-style work looking at the effects of the earthquakes on Fletcher share prices and I just couldn't see anything there. I concluded that even if a centralised project management office wasn't the best idea, Fletcher didn't seem to be getting rents out of it.

Assorted links

The Friday closing of the browser tabs brings us a few gems:

• Noah Smith is absolutely correct. The academic mill is partially to blame for declining trust in science. Why? Lots of people who aren't really up to producing great, or even just good work, face strong incentives to publish anything. For similar reasons, I worry about accounting being subject to the same research and publication requirements as other disciplines in New Zealand.


• Danyl Mclauchlan's take on Key is excellent. I disagree with him a bit at the end though. New Zealand's system on emissions trading lets New Zealand automatically get serious about carbon emissions when the rest of the world does too: prices here will lift when international acceptance of dodgy credits ends, which is when everybody else is getting serious, which is when we should be too. 


• Kiwis with American friends have always had friends ship stuff over that's not here available. Great to see some entrepreneurs making this available to everybody. 


• Thomas Schelling died last week. Here is Schelling's explanation of organised crime. See also Ortmann and Cowen.


• The new process for settling Kaikoura EQNZ insurance claims is far better than the one that applied in Christchurch. EQC had told the government before the Christchurch quakes that its job should only be to cut cheques, not to run assessments. EQC had to take on a bigger job than that in Christchurch; it didn't go well. Those with insurance claims in Christchurch will be able to deal instead with their private insurer. Hooray! Meanwhile, Lew Stoddart provides a bit of commentary on Brownlee's push-back against criticism from folks dissatisfied with other parts of the government's response.


• Arthur Grimes and Richard Fabling find that Ultra-Fast Broadband on its own did nothing to improve firm productivity, but that firms that jointly invested in UFB and organisational ICT-based changes did do well. The average effect on productivity's being insignificantly different from zero will not be encouraging for those expecting more than that. 
• Market indicators to watch to tell how Trump's doing: foreign policy edition.


• Diet soda also increases obesity: consumers of diet sodas eat more afterwards. View these results, as all results in this area, with due scepticism. 


• The evidence strongly suggests that the world entered a bizarro-timestream somewhere around June of this year. 


• Brendan O'Neill's celebration of Christmas excesses.


• This headline makes no sense. "Euthanasia debate: 'Those in pain shouldn't have to die like a dog because of ego and conceit of others'. But vets euthanise dogs that are in pain. People don't get that option. I blame Trump for the "like a dog" thing.


• New Zealand's drug laws disproportionately affect Māori 

So endeth the lunchtime closing of the browser tabs. My but they accumulate. 

Disaster recovery is local

Vero de Rugy has a great summary of Virgil Storr's work for the Mercatus Centre on hurricane recovery in New Orleans. There are a lot of lessons there that New Zealand might have found useful in 2010 and in the aftermath of 2011. 

Take a recent investigation by PBS' "Frontline" and NPR into flood insurance and aid distribution in the aftermath of Superstorm Sandy. They found that disaster victims' flood insurance claims were systematically underpaid, while the insurance companies selected by the feds to handle these claims were busy finding ways to increase their profits and limit payouts. Meanwhile, aid programs were slow to distribute funds while punishing homeowners with mountains of red tape and unqualified contractors, which ultimately prevented them from returning to their homes and communities.

Brad Gair, a disaster recovery manager in New York, said during the "Frontline" episode: "Did we put a bunch of money out? Yes. Is everybody mad? Yes. Did people get what they needed to get back into a home? No." These horrifying stories were unfortunately a repeat of previous governmental responses to disasters — for example, after Hurricane Katrina and Hurricane Andrew.

You might have thought that having a government-provided insurance company would solve that problem. That stops working though where the government backstops claims in excess of reinsurance coverage and cares about keeping the budget in order. I'm not sure it would be unfair to characterise EQC as having seen its main job as helping to keep costs down rather than honoring its insurance contracts. At least I've seen an EQC spokesperson rather proudly lauding successes in keeping costs down.

In a recent book titled "Community Revival in the Wake of Disaster," three of my colleagues at the Mercatus Center — Virgil Henry Storr, Stefanie Haeffele-Balch and Laura E. Grube — explain in detail why we shouldn't be surprised that governmental responses to disasters lead to high administrative overhead costs and little relief to those who need it the most. They also show how entrepreneurs, "conceived broadly as individuals who recognize and act on opportunities to promote social change," end up filling this critical role.

They reveal how in general, these entrepreneurs promote community recovery by providing necessary goods and services and restoring and replacing disrupted social networks. The entrepreneurs also provide signals to indicate that a community is rebounding. These signals are essential to incentivize people and businesses to stay in the community or, in the event they deserted it during or after the hurricane, come back.

Just as importantly, they argue that creating space for entrepreneurs to act after disasters is essential for promoting recovery and fostering resilient communities. They tell many uplifting stories of communities that didn't wait for the various government agencies to rescue them and instead took matters into their own hands, finding ways to obtain funding, clean up and rebuild — which resulted in getting people back into their homes faster.

The same thing happened in Christchurch. Lots of fantastic community initiatives for helping. The government tried to stop the student volunteer army from helping. Gap Filler was great, and did receive some government funding as well. But, overall, locking downtown up for years while the planners planned didn't make it easy.

Vero concludes:

Storr and his co-authors link the success of these local entrepreneurs to people's knowledge of one another's needs, which allows them to find creative ways to overcome adversity. As opposed to the top-down approach of a distant government bureaucracy, the best knowledge is local knowledge. Those who have lived and worked in these communities know them best and are paramount to revival.

When it comes to the recovery after Hurricane Matthew, policymakers should remember that when social networks are broken by disasters, local knowledge is particularly powerful and holds an even bigger advantage over bureaucrats than usual, no matter how well-intentioned the public officials are. In fact, bureaucratic red tape will only cause more people more pain.

Hard to disagree with the broad thrust, but there are important things government can do to help. Quickly funding some test cases through the courts for declaratory judgements where the event reveals previously unknown uncertainties in contracts - that can provide a substantial benefit.

Quirky EQC self-insurance

Hoisted from the comments, here's some sensible comments from one of my former students, Tom Quirk, on the National Disaster Fund:

Hi Eric,

Part 1 – on the NDF and sovereign risk management
I wonder whether you’ve framed your analysis on sovereign catastrophe risk management in the wrong light. Let's start with a bastardized-but-useful adaption of your summary:

"Suppose that your wife tells you that you could save a lot on house insurance if you just paid her the premiums every month and she'd pay you if the house burned down. Seems like a good idea - keep the money in the family. She invests the premiums you pay her in getting the kitchen redone.....

[insert my bit]....

But before you tell her to put away new the kitchen plans and to think carefully about her risk-management shortcomings, you realize that it’s you who have forgotten something important: your wife is extremely wealthy - she owns 100 houses! Each house has its own, reasonably independent, risk (most of the houses are in different neighborhoods).
Now you could put the premiums towards offsetting the specific risk on your current house, which may now seem expensive (do you really need insurance given your enlarged portfolio)? Or you could put the premiums into an account to cover losses and risks across your wife's (and your) whole portfolio, which may sensible and efficient. Or, if the kitchen is going to save you a bunch of money in the long run, and your wife's housing portfolio has been performing well, maybe you should just spend it. [finish my bit]"

My point is that we need to take a “helicopter perspective” when thinking about government risk. The government’s comprehensive balance sheet is exposed to a plethora of risks and possible shocks: potential government losses from biohazard shocks (foot and mouth), bailouts of non-bank deposit taking instructions (South Canterbury Finance), bailouts of banking institutions (hopefully not!), leaky buildings, solid energy - and the list goes on. We should factor in all of these risks when managing and financing any individual specific risk.

It would be silly to have a large build-up of assets in a bio-hazard risk fund while at the same time the government has to finance costs from bailing out South Canterbury Finance. It would be equally silly to have the NDF busting at the seams while at the same time that the government is heading to international markets to finance huge costs stemming from a serious foot and mouth epidemic. The idea is that an NDF-type fund invested in real, non-NZ government assets will ignore diversification across the government's portfolio, unnecessarily ring-fencing risks.

What you really want is a pool of assets on hand to cover the potential losses from all shocks/risks across the government’s entire portfolio. And luckily, the government has one of these - its call the fiscal anchor (net debt, or whatever you want). Would you care if the government did not have NDF if, when it came to funding the EQC’s earthquake liabilities, net debt was at 10% of GDP? (maybe you’d want some liquid cash to finance immediate expenditures and avoid f/x crisis. But taking the Canterbury earthquakes as one data point, the exchange rate and Govt debt YTM dynamics weren’t that bad post February 2011).

So when we talk about sovereign risk management we need to keep in mind that the level of net debt is probably what matters most at the end of the day. The NDF and other asset accumulating instruments are, at best, a good political instrument that encourage people to compensate government for the risk it assumes (think of the NDF as a vehicle used by the government to convince people that the EQC levy it collects doesn’t go directly to the government coffers and government expenditure). At worst, NDF type instruments constrain governments’ ability to efficiently manage risk.

We should be asking government to explain and justify whether its net debt target builds in an adequate and appropriate buffer for the risks to which it is exposed, and not whether the NDF’s asset allocation is appropriate. My personal view is that the NDF actually matters diddly-squat, even if it holds tons of real assets. This is because the government can always increase its debt in line with NDF asset growth, nullifying it the net impact of the asset accumulation, while still at the same time still achieving the net debt targets it actually cares about. The NDF holding non-tradable NZ government assets is a cleaner and more efficient way to achieve this global optimal debt level.

Now there could be a good political economy justification for the existence of a real–asset NDF. If the MoF is worried that she/he is not going to be able to constrain her/his colleagues’ expenditures in the future, then the NDF – actually quite like the NZSF - could be a good way to put the money into a safety deposit box, politically and maybe even legally out of reach of prying hands. But let’s be clear, this is not the usual financial risk management argument for having a real asset NDF.

So in summary, what’s my point? It is this: you can have an NDF, and you might actually want one for political economy purposes. But don’t kid yourself that you should have one based on vanilla principles of efficient risk management.
There are a few caveats and alternative strategies that would justly refute what I’ve said so - asset-liability matching is a good example. But I’m lazy ad will leave these for another day.
Part 2 – on the EQC

I wonder whether our views of Govt earthquake risk management may also stem from differences in our views of the EQC.

The EQC is not a private entity where the residential risk it assumes through its Act is ring-fenced, insulating the government from losses. In other countries EQC equivalents do follow a more private model. In such countries your arguments re holding appropriate real assets would have some fair bite.

But the EQC act clearly places the Minister of Finance (or maybe now the EQC Minister? - can't remember) with ultimate power concerning the EQC's finances. From purchasing reinsurance and deciding on the strategic asset allocation of the NDF to pricing the EQC's levy premium, the MoF “wears the pants” relative to the EQC's board and CEO. And because the government is guaranteeing the whole thing at the end of the day, this is exactly the way you'd want it.

The heuristic I use to think about the EQC is that it is really just an acknowledgement that in the wake of a disaster the government would not be able to turn down a bailout of badly damaged and uninsured residential property (and that without the EQC buffer, for a number of commercial and behavioral reasons, levels of domestic catastrophe insurance penetration would likely be much lower). Instead of simply dealing with this problem after the fact – and its likely to be a much bigger problem after the fact - the EQC lets the government collect some money and compensate itself in advance.

Part 3 - some thoughts on the government’s procurement of reinsurance

If you assume the government is the final funder of the EQC, all but the most tail-risk target reinsurance will be relatively expensive. From a value-for-money perspective NZ citizens should be wary of huge reinsurance premiums.
Reinsurance layers/tranches are generally priced based on the expected value of losses (with adjustment for risk preferences and tail risk, operating costs, market conditions, returns/costs of capital, etc). As a result, lower layers with low excesses will be highly priced, and higher layers with large excesses will be priced relatively lower. (The price metric used is the “rate-on-line”, the premium costs as a per cent of the total risk transferred).

Should the government pay high rates-on-line for relatively to get coverage at a low excess level? I think this would be silly: the government has a deep and diversified portfolio; it has buffers and financing flexibility. Paying NZD 100million+ per year to cover the EQC risk (or other earthquake risks) at a low excesses (less than a good few NZD billion) is crazy.

The government can also likely finance losses at low excesses at a far lower rates than reinsurers, especially over the long run. Self-insurance would seem to me to be the first option government should examine in its risk management, especially given its risk profile, likely risk preferences, funding costs, revenue stream variability, etc. Governments can take a long-term time horizon that reinsurance business models simply cannot match; I imagine that Government financing costs across the entire yield curve will be lower than even the gargantuan reinsurers.

If the government can buy reinsurance attaching at a level high up the EQC loss distribution, it might make sense as a “tail-risk” management strategy. But, eeeekkk, I’d need to see some pretty good CBA to justify it. You’d need a strong argument as to why we’re not better putting the financing into building a bigger buffer in the net debt anchor.

It’s hard to be scientific around what appropriate reinsurance purchases might look like without doing the modelling or analysis. But I’d say - very unscientifically, and given NZ’s current debt levels - a reinsurance program attaching at over NZD 6-7 billion and going up from there might be worth considering. At least in a huge earthquake this might make a difference to our financial position. But how many years of forgone accumulated premiums, and consistent and building self-insurance, is this risk transfer worth? We’d need some modelling that I’m not sure has been done.

I do accept, however, that reinsurers may have some cost advantage compared to government; for one example, they can achieve cross-country diversification that governments cannot achieve. But I’m just not sure that these advantages outweigh the government’s self-insurance capacity and inherent diversification. It’s an empirical question for someone smarter than me to answer.

I agree with much of this as far as it goes, but think of the incentives then created.

Every homeowner taking out house insurance is forced to take on EQC insurance as well. In small events, all's well - the government's self insurance for the excess prior to reinsurance kicking in covers things without imposing noticeable burden on public finances. And the same holds if it is reinsurance all the way up.

Large events like the Canterbury quake, or a future Wellington one, strain government finances appreciably. There is no actual NDF on which to draw, as it all comes out of government borrowing. Under Tom's proposal, there might not be reinsurance on which to draw either; in the Canterbury quake, the government was on the hook for anything above the reinsurance draw.

EQC behaved, after the February earthquake, as though its purpose were to minimise costs to the Crown rather than to make good on its contracted commitments to policy holders. It is difficult otherwise to make sense of the numerous claims where EQC believed the house was well under-cap but the private insurers called it a complete rebuild.

And as good as the proposal from the Crown has been to increase the EQC cap to reduce the coordination failures between private insurers and EQC, that also makes it less likely that you'll be able to trigger assessment from your private insurer where you might get a fair shake.

Correlated risks re-re-revisited: worse than I'd thought

Glenn Boyle draws my attention to the National Disaster Fund.

Loyal readers will recall that a substantial proportion of EQC's investments have to be in government securities. They need to be in assets that can be liquidated quickly in the event of an event. But the odd bit is that they needed to be in New Zealand Government Securities. As I'd summarised back in 2010:

Suppose that your wife tells you that you could save a lot on house insurance if you just paid her the premiums every month and she'd pay you if the house burned down. Seems like a good idea - keep the money in the family. She invests the premiums you pay her in getting the kitchen redone. Yup, the insurer's asset base looks good now. But come the fire...

Hopefully it's not as bad as all that. If they're clever, the reinsurance picks up everything beyond some minimal amount, so the Earthquake Commission's asset base only needs to cover what would effectively be a deductible. In that case, heavy domestic investment in government assets is silly rather than reckless.

I worried too that the value of any NZ government securities being sold-off post-event would be lower: if government is selling debt at the same time to rebuild, and there's a higher risk premium on the country as a whole, these things will sell at a discount post-event.

And then I found EQC is forbidden from having a properly diversified portfolio.

But it's worse than that:

Direction to the Earthquake Commission pursuant to Section 12 of the Earthquake Commission Act 1993. 
i. This direction comes into effect on 1 November 2001 and as of that date the direction dated 2 June 1998 is hereby revoked.
ii. The Earthquake Commission (the Commission) shall invest the Natural Disaster Fund (the Fund) in:
     a. NZ Government securities comprising Treasury bills and/or Government stock and/or Inflation-Indexed Bonds tradeable only through the NZ Debt Management Office [emphasis added];
     b. global equities; and
     c. New Zealand bank bills. 

It later notes that the NDF can have up to 35% in global equities and up to $250m in New Zealand bank bills. The rest is non-tradeable government securities.

It's one thing to be heavily invested in NZ government bonds that could trade at a discount post-event. It's another to be invested in ones that can only be sold back to the government. Isn't that basically equivalent to the government not having a disaster fund at all (for the 70% in nontradeable government securities) and just having to go to the debt markets to cover the costs of the quake?

If you wonder why EQC took such a hard-nosed approach to costs, and prided itself on keeping the rebuild costs to the government down, well, this might be part of it. If I'm reading this correctly, both the NDF and any overruns above NDF that weren't covered by reinsurance would come out of the government's pocket.

I get the point of having something like EQC. The reinsurance scheme seems worthwhile. Is the NDF that different from self-insuring though?

Notched Bearers

My oh my would it be interesting if the courts decided that EQC's insistence that cutting holes in bearers as a floor-levelling strategy was not, in fact, repairing the building to an "as new" standard as required by those clients' insurance policies.

There's a class action suit seeking declaratory judgement:

In addition, they argue EQC’s liabilities are not met merely by compliance with MBIE guidance.
EQC has been arguing it only needs to repair in a reasonably sufficient manner rather than to as new.
An example is the way EQC uses MBIE guidelines on floor levels, which were created after the earthquakes.
This has allowed EQC to repair to a lesser standard by adopting the liberal foundation level tolerances in the guidelines.

...

He says the group action is seeking three sets of declarations from the High Court around EQC’s interpretation of the EQC Act.
“EQC’s interpretation has left many outstanding claims in dispute, and potentially many settled claims now in doubt,” Mr Woods says.
“This is not a class action for damages. These proceedings cover serious issues and will have far-reaching implications for all New Zealanders.
“Where the EQC Act states the definition of ‘replacement value’ being ‘when new’ and compliant with the building code, EQC has chosen to consider only the pre-earthquake condition of a building.”
“The MBIE guidance document does not set out the standard required by either private insurance or the EQC Act, though EQC insists it can meet its obligations merely by complying with these guidelines. 

If you insure your house to be repaired to an as-new standard, and EQC provides the first cover under that policy, and EQC agreed to that, and EQC then insists after the insured event that "as new" means something entirely different from any plausible reading of "as new", and EQC is basically the government and they lean on you hard saying that folks who make trouble get trouble, well, it starts making you a bit of a sceptic of the value of government insurance.

I really hope that the cohorts outside of Christchurch who all see this as just more Christchurch whinging never ever ever have to deal with EQC. The schadenfreude utility isn't big enough.

A missing insurance market

I wonder if I'd be the only customer for this one.

Imagine a bolt-on to your existing home-owners' insurance. It specifies that, in the event of a substantial earthquake,* the insurance company immediately buys your house from you for a pre-specified price. No inspections, no claims adjustment, nothing. Big enough quake, they own your house as-is where-is. Maybe you could set it as an option for the policy holder, maybe you could set it as an automatic thing. Take the option, and you have a big deposit in your account to let you start over somewhere else. The insurance company then has, say, six months after the roads to your house are passable by truck and the port or roads out of town are open to get the contents packed into shipping containers and delivered to the nearest functioning port facility.

Advantages for the insurer:

• No messing around with finicky owners. The insurer runs the repairs that they think are necessary to on-sell the house afterwards with no hassles. The timing of repairs is entirely up to them. They can contract with larger scale firms to run rebuilds over larger parcels if they want too. Owners are often picky about who they want as builders (we were!). The insurer owning the house has no worries about whether an owner is trying to fix things to as-new or whether he's trying to correct pre-existing damage.
• The insurance on-sold home would be a sure-thing for future policies: everyone would know that it was fixed to insurer standards, so there would be no issues about the house's future insurability. 
• Instead of a bunch of fragmented owners arguing over things like red-zoning, with flow-on consequence for the insurer, the insurer gets to have those conversations with the government. 

Advantages for the insured:

• A certain fast payout for anybody who wants to flee. No hassles, no arguments, no waiting, no living in limbo. 

This seems an easy product to provide. I bet there'd be a lot of takers - or at least anyone who's experienced Christchurch would give it a good look.

I would want a clause in there that this part of the insurance contract - either terms or premiums - cannot be changed by the insurer except with two-years' notice: you wouldn't want foreshocks leading to policy cancellation.

* This would have to be legally defined, but anything Christchurch 2011 scale upwards: substantial parts of downtown ruined, town a nightmare, services shut down for weeks... you know the drill.

Morning roundup

Today's roundup of assorted worthies, from the Great Closing of the Browser Tabs. The past week's been rather busy, and rather a few things deserving of their own posts didn't quite get there.

• Raf Manji is doing great stuff at Christchurch Council. He'd previously tweeted in support of per-unit water pricing in Christchurch using a refundable quota allocation system: you get x units for free, with additional units costing some amount, and Council buying back any unused quota allocation at that same price. It's a great way of framing things. I also appreciate his support for getting rid of the property tax exemption for religious land. The Press's online poll had 73% support for that churches pay Council rates. 


• The Press misses the point in their story on pay rates for EQC loss adjusters. Much of this is buying an option to pull these guys in full time in case of emergency. 


• The University of Canterbury is betting on sports partnerships as a way of getting students. I'm pretty pessimistic that that will work, but it could be part of a longer game. I used to think it a great advantage of Kiwi academia that there were no campus sports entanglements. And then, with the earthquakes, I also saw no real facility for ongoing engagement with alumni to get their support. If this then led to stronger campus sports franchises, and from there to greater alumni support - it seems worth a punt.


• Should EQC only serve as reinsurer? I generally agree with Farrar here. But does anything stop the major insurers from contracting for that kind of arrangement with EQC currently? In that world, they could then advertise that it's their loss adjusters, and not EQC's, that would handle all claims. I'd be willing to pay a strong premium for any insurance plan that meant I never, ever, ever, EVER had to deal with EQC in the case of another earthquake. It seems... surprising... that Brownlee's office would find the EQC model to be generally sound. There are good reasons for having EQC. But I do hope that the review document they produce honestly lists the very substantial problems encountered in Christchurch and why they think only minor changes are necessary to avoid a repeat.


• Franks and Beans. Franks and Beans.

• Sky City. Again: if the basic deal isn't "You get gambling licences and in exchange the public gets no ongoing cost risk" but rather "You get gambling licences and pay most of the cost of a casino, but the public bears ongoing cost risk", then it's really important that the business case for a convention centre stacks up. Has one even been released? C'mon, National. You're making Labour and the Greens look fiscally competent here. One suggestion: Joyce can have his convention centre IF he finds the money in his own existing budget?


• Australia allows 'granny flats' as a way of increasing housing supply. Shame they remained banned in Christchurch post-quake.


• I'm late to the party on this one, but I disagreed mildly with Oliver Hartwich on Varoufakis's sartorial approach. Oliver found his attire entirely inappropriate. I think that was the point. Here was my reckon on it from last week Wednesday (on the NZ Initiative internal discussion forum):

  Varoufakis needed to convince the Europeans that he's happy to default and just crazy enough to do it, he needed to placate a domestic audience by pissing off the Germans, he needed to stay in the Euro to avoid monetary policy going absolutely nuts, and he needed to achieve massive structural reform.
  
  So the play is this: either default or come so close to it that nobody will lend to Greece any more. Do it in an obviously arrogant and "screw you Germans and Brits" way that gets all the Greeks really happy with him. Then when he cannot borrow (because of it) and cannot inflate (still in Euro), he has to go for structural reform but has an external constraint to blame it on. Since he'd already laid the groundwork by saying "Yeah, I've got no respect for those foreign jerks either", he's then allied with the populist crap there while saying "Hands are tied, have to reform."

  Maybe it was just wishful thinking. But the ECB's fairly rapid blocking of the use of Greek bonds as collateral is consistent with it.

So endeth the closing of the browser tabs.

EQC and flood risk

As we're still awaiting the Treasury review of the EQC legislation, which will be followed by proposed legislation, now seems the time to be thinking about premiums, risk adjustment, and flood damage.

As reminder, EQC provides cover for natural disasters like flooding or earthquakes. EQC coverage is compulsory when you're taking out home insurance; it's a levy attached to your insurance policy providing natural disaster coverage.

EQC coverage, as it stands now, has a few issues apart from the one about which I bang on continually here. The main one for present purposes: failure to risk-adjust premiums.

In a perfect world, we'd have perfect risk adjustment of EQC premiums, in the way I'd set out here a couple months ago:

Wouldn't it make more sense simply to have EQC set risk adjusted insurance premiums? Zoning changes mandating higher floor levels only really apply on new builds or, potentially, on substantial-enough building redevelopments. While new buildings will then get the higher floor levels, some older ones will have replacement or refurbishment delayed because the relative cost of a new building's gone up. If EQC set actuarially fair rates for their disaster insurance, the distortion would be gone. We'd also then avoid all of the fights and rent-seeking that will result when Council starts deciding where people will be allowed to build in future due to flood risk, arguments about how seriously we should take the upper-limit projections on sea level changes, and the like. Let the insurers set the premiums, then let individuals sort out whether they like current beachside property. And let EQC's premiums basically reflect the incremental effects of insuring different types of properties on EQC's reinsurance costs. If Swiss Re won't provide reinsurance for my house except at additional charge, I should be paying the costs of that. Where EQC's trying to minimise its reinsurance costs and where the international reinsurance markets are at least somewhat competitive, this knocks the political fights around global warming out of the mix.

Tim Harford comments usefully on distortions caused when government subsidises living on flood plains. EQC premiums are scaled by value at risk, but not by the likelihood of adverse events. The country varies in seismic and flood risk; buildings vary in robustness to those risks. But nobody pays more than $150 per year for their EQC cover. While you might think the distortion can't be that big as EQC only covers the first $100,000 in damage to your house, with insurers charging actuarially fair premiums taking on the bigger part, EQC also covers land remediation.

Now suppose we add in that the Government could be worried that actuarially fair rates might have some folks abandon taking out insurance altogether. For some now very low-lying parts of Christchurch, subject to regular flooding, it's not inconceivable that risk-adjusted premiums would be sufficiently high that everybody in the neighbourhood drops their insurance coverage* and hopes for a bailout should a flood happen. Then the government's got all of the payout risk but none of the premium revenues.

Now that could be an argument for setting some upper bound on the potential risk-adjustment, and especially for lower-value homes in lower-income neighbourhoods, but it isn't really an argument for having no risk adjustment. And, as I understand things, EQC premiums scale only with the value insured, not with the risk.

EQCover costs 15 cents (+ GST) for every $100 of home or contents fire insurance that you have. You pay this amount to your private insurance company, who pass it on to EQC.
The most you can pay, per year, for one home and its contents is $180 (+ GST). This would give you the maximum cover of $100,000 (+ GST) for your home, $20,000 (+ GST) for contents, and cover for your insured residential land. This amount of insurance is available for each event of natural disaster damage.

This has a couple of effects:

• Because the maximum EQC payout is capped at $100,000, the maximum premium is capped at $180. But consider two houses. The first is worth $100,000; the second is worth $1,000,000. Both purchase insurance and both pay the maximum levy to EQC. An earthquake or flood hits both of them; repair costs are proportionate to the value of the house. Say it costs half the value of the house to fix it. So the first one gets $50k in repairs; the second gets $100k, with the rest paid for by the private insurer. The insurance scheme is then somewhat regressive: where we expect greater repair or replacement costs for more expensive homes for any given-sized event, and where the premiums cap out in the way they do, more expensive homes effectively get more coverage for a premium of a given size.
• Because there is zero risk adjustment other than the bit that comes through the value of the house, people who live in safe areas provide a large subsidy to those who live in dangerous areas. And then all of the distortions Harford pointed out apply.

Why not start risk-adjusting the EQC premiums? Even just putting a small surcharge on spots known to be flood-prone would be a start.

* If their mortgages are paid off: the banks kinda make you have insurance if you have a mortgage.

These are the people in my neighbourhood

Neighbours around the block frustrated with EQC spray-painted their cement fence back in October.

It reads:

"Too dangerous to work on. But safe enough to live in. Look at my roof. Be aware! This is a finished EQC Repair. Can't sell it. Too dangerous to live in."

The Christchurch Star explains what's happened.

This house was repaired six months ago by a Fletcher EQR contractor - a plumbing company.
The plumbing company told Mr Walkinshaw it was out of its expertise to fix the roof - and it was too dangerous to try.
The Walkinshaw family is now stuck on an Earthquake Commission and Fletcher EQR merry-go-round to get the roof and other repairs fixed. 

EQC says the roof damage was pre-existing; the Walkinshaws have an engineering report from 6 December 2010 (post-September, pre-February) with no evidence of cracked beams. EQC told the Star they hadn't received the engineering report; Walkinshaw tells the Star that he'd never heard that from EQC. A typical EQC SNAFU. Meanwhile, the family's worried that the roof will fall in on their kid's bedroom.

The full Star report is here, or go to their website and find the issue of 12 February 2014.

No repair for home too dangerous to live in, Christchurch Star, 12 February 2014

For those who've forgotten: The Earthquake Commission (EQC) is the government-run insurance scheme handling natural disasters. Anyone buying insurance on a house pays a levy for EQC coverage. In the event of natural disasters, EQC handles land remediation around the house and the first $100,000 (plus GST) in damages to the house. If you have minor damage to your house, EQC is your first port of call. If you have damage in excess of $100,000, you'll have to deal with both EQC and your private insurer.

The general principle of the scheme is good. Absent compulsory natural disaster coverage as part of your homeowner's insurance, a lot of people would be sorely tempted to simply bet on that the government would bail everybody out in the event of a natural disaster. With EQC, anybody with private home insurance, which is pretty much compulsory for anybody wanting to get a mortgage, has coverage for natural disasters. It's then way easier for the government, post-disaster, to refuse to bail out those who didn't buy insurance. Alas, the execution's been rather disappointing in the Canterbury quakes.

Our own frustrating but still happier situation? When last we reported in, we thought repairs would be coming soon. Alas, we're still waiting for EQC to approve our builder's quotes. Fortunately, our house is safe and liveable while we wait. We had an AMI Premier Home Insurance policy which specified that repairs must be undertaken to an "as new" standard. Since we have less than $100k total damage, EQC is handling the claim on our house. EQC won't sign off on the builder's quotes, as best I can tell, because our builder won't come down to Fletcher's rates.

Fletcher's is the project management company that the government is using as first port of call for earthquake repairs under EQC; we opted out and chose a builder specialising in older character homes. We heard too many horror stories in Fletcher's managed projects: shoddy workmanship, repeat repairs, and poor project management where one set of subcontractors gets the job half-finished and the next set aren't booked in until months later.  Read the comments thread here, for example. EQC seems to be trying to force the opt-out contractors down to rates inconsistent with the quality of job specified in homeowners' insurance contracts. There's talk of a class action suit on it.

Our private insurer had a look at the out-of-scope damage* and will be sending us a quote for fixing the paths and driveway; we're waiting on their specialist engineer to come look at the pool.

After all of our home repairs are finally completed, I will be shopping around for a new home insurance company. I will also be asking whether I can pay extra to have actual real coverage for under-cap damage in any EQC event. I can't avoid paying premiums for EQC's near-fraudulent-but-still-mandatory insurance coverage, but I hope that I'm able to buy actual real insurance that will pay out in the case of an adverse event. Many of us in Christchurch thought we were paying for insurance contracts with a $5,000 deductible; where EQC won't honour the terms of your contract, the effective deducible is rather higher than that.

For those Wellington readers in positions to change things: These messes will happen to you and to people you care about when Wellington gets its quake if you don't fix EQC. EQC shouldn't be involved in house assessment for a major event: they just can't scale up to do it properly. Homeowners should only have to deal with their private insurers. The insurer would then bill EQC for repairs up to the EQC-covered amount. Couple it with audits to make sure the insurer isn't just providing $100k home-improvement gifts to its policy-holders. This will be more expensive than the current system, so increase the EQC levies and risk-adjust them.

I wonder whatever happened to the promised review of the Earthquake Commission Act. The 2009 Review of EQC's Catastrophic Response Capability also had suggestions worth looking over, although that document seems to have disappeared from EQC's site (still available at the Wayback Machine).

Update: In response to my emailed query, Treasury tells me that the Government is still working on the review, that things have been complex, and there is no new target date for the release of the public discussion document.

* EQC covers damage to your house and buildings; paths, driveways, swimming pools, and fences are out of EQC scope and are handled directly by your insurer.

Previously:

• Flood risk
• EQNZ lessons for Wellington: fix EQC
• Minimising liabilities
• EQC redux
• Pecuniary and technological externalities, and EQC

Flood risk

Christchurch Council's starting to worry about sea level rises and global warming. As much of the land on the east side of town sank with the earthquake, these risks are a bit bigger than they'd previously been.

There's been a bit of speculation about how this will affect zoning in future, with some recommendations of higher minimum floor heights above sea level. Here's the Tonkin and Taylor report; Cresswell has a skeptical take.

Wouldn't it make more sense simply to have EQC set risk adjusted insurance premiums? Zoning changes mandating higher floor levels only really apply on new builds or, potentially, on substantial-enough building redevelopments. While new buildings will then get the higher floor levels, some older ones will have replacement or refurbishment delayed because the relative cost of a new building's gone up. If EQC set actuarially fair rates for their disaster insurance, the distortion would be gone. We'd also then avoid all of the fights and rent-seeking that will result when Council starts deciding where people will be allowed to build in future due to flood risk, arguments about how seriously we should take the upper-limit projections on sea level changes, and the like. Let the insurers set the premiums, then let individuals sort out whether they like current beachside property. And let EQC's premiums basically reflect the incremental effects of insuring different types of properties on EQC's reinsurance costs. If Swiss Re won't provide reinsurance for my house except at additional charge, I should be paying the costs of that. Where EQC's trying to minimise its reinsurance costs and where the international reinsurance markets are at least somewhat competitive, this knocks the political fights around global warming out of the mix.

Tim Harford comments usefully on distortions caused when government subsidises living on flood plains. EQC premiums are scaled by value at risk, but not by the likelihood of adverse events. The country varies in seismic and flood risk; buildings vary in robustness to those risks. But nobody pays more than $150 per year for their EQC cover. While you might think the distortion can't be that big as EQC only covers the first $100,000 in damage to your house, with insurers charging actuarially fair premiums taking on the bigger part, EQC also covers land remediation.

Conflicts disclosure: Our house in South Brighton, two blocks from the beach, is a couple of meters above road level. The road's a meter or two above sea level. I expect that, as we're at least a meter higher than neighbours down the road, the regulatory changes likely aren't binding on us. But I sure wouldn't be happy about any zoning designations saying that the spit south of Bridge Street needed to go back to bush and sand because of worries about sea level rises a century out.

Southern Response and Arrow Bleg

Tomorrow marks 1016 days since the February 2011 earthquake. It will also be the first day we will have had a visit from our insurance company.

New Zealand's insurance regime around earthquakes splits liability for earthquake damages between the Earthquake Commission and your private home insurer. Every home insurance policy comes with a mandatory EQC levy. EQC handles claims resulting from natural disasters, covering damages to your house up to about $120,000 and any necessary land remediation. They also cover outbuildings like garages. Damages to your house above $120,000 are called "over-cap" and require complicated negotiations between EQC, your insurer, and whatever builder you might wish to use. This substantially slows down the rebuild. We would do better to have private insurance companies handle everything and bill EQC for the amount up to the $120,000 cap, with some ex post audits to make sure this didn't just result in insurers providing free gifts to their clients on EQC's dime.

Damages to paths, sidewalks, driveways, swimming pools and fences are called "Out of scope" claims. These are handled by your private insurer as they do not come under EQC's coverage.

We might have expected quicker assistance from our private insurer on our out-of-scope claims than we've received from EQC. We're now on our fourth round of quotations going back and forth from our builder to EQC - this one on a newly revised EQC scope-of-works. I don't know when they'll get that sorted out. But at least we've had a half dozen visits from EQC. This will be the first time we see Southern Response.

Southern Response is the company formed out of AMI after the earthquakes. AMI was Canterbury's largest insurer. We signed up with them because their rates were reasonable and, with their name plastered all over everything in Christchurch, we expected there to be close to zero chance they'd ever fall over - no chance an insurer that's that prominent would be allowed to fail. Turned out that they hadn't bought enough reinsurance and so the total claim liability was a bit higher than their coverage. And so the government split out all their earthquake liabilities along with all their reinsurance assets and a bit of a government top-up into a new company, Southern Response. Southern Response has been very very slowly visiting everybody.

In September 2012, they told me:

At  this instant, I am not able to give you a specific timeframe as to when Arrow will move into the South New Brighton area; they are currently working mainly in the TC1 Grey suburbs where land remediation is not required. Currently Southern Response is estimating that the projected timeframe to have all out of scope claims assessed is approximately 3-5 years.

And so our visit is coming a bit ahead of when I'd expected it. There is no land remediation necessary at our house. But we have substantial heaving on one footpath (broken heaved cement), some broken cement on the drive, a damaged wooden boundary fence, and damage to the in-ground swimming pool.

Tomorrow comes with a bit of trepidation. There have been lots of angry stories about Southern Response and their affiliated contractor, Arrow. The stories suggest that Southern Response has been under cost pressure because the government is on the hook for anything above the reinsurance bundle. It's not at all implausible.

I wish that the government had taken a different approach to the AMI bailout. A better alternative would simply have had all of us take a haircut. Suppose that on a quick assessment total liabilities were 10% over total reinsurance and other assets. Give everyone a 20% haircut on the total value of their claim, then later distribute the remaining funds proportionately. Instead of chiselling costs down by dragging out the assessment process and giving everybody a rough time, they could have just been upfront about things, told us they only had enough money to cover a fraction of our total insurance claim, and paid us our fractional shares. The total amount each of us would have been paid out would not have been much less, but it would have been faster. And because we all would have known that we were getting a fractional payout, we'd move from the combative "I paid for full as-new replacement so dammit give it to me" to a recognition that we paid a discounted premium for a discounted product and that we all need to take our proportionate lumps. Assess each claim relative to its full value as though the insurance company hadn't failed, then pay out the fractional shares instead of pretending that some cheap repair job constituted full and fair replacement. In that world, it doesn't matter if quantity surveyors are highballing all the estimates: everybody's claim gets inflated by say a quarter, then everybody takes a bigger haircut relative to the highballed claims. Highballing can only affect your proportion of the fixed pool of money, but if everybody does it, it's neutral.

I welcome advice about dealing with SR and Arrow from those who've already been through the out-of-scope process.

Update: The surveyor measured up the paths and pave that need replacing, will book in somebody to come and look at the pool, reckoned the fence damage mostly not earthquake [it wasn't like that pre-quake, but damage also consistent with wood twisting over time so hard to prove either way], and will send through by February some quotes for cash settlement. I'll run those by our contractor to see if they make sense. Stay tuned.

Thursday updates

Blogging has been light; I spent the last two days catching up with folks in Wellington and attending the National Drug Policy Summit run by the New Zealand Drug Foundation, about which I'll blog properly later. A few bits of interest in the meantime:

• Westpac notes that LVR limits can have short term effects on house price inflation, but only short-term effects.
  • Duh
  • There are sensible justifications for this kind of policy based on prudential regulation and avoiding any situations where banks take on too risky a loan portfolio and downside risk winds up being borne by the government. Justifications based on curbing house price increases don't make any sense to me, whether or not it's the RBNZ comms team or the Governor making them. In that sense, it's no damning of the policy that it only has transitory effects on house prices. But it still reinforces the NZ econ blogosphere's "it's just dumb trying to justify LVR on the basis of house prices being too high." consensus position.


• Scott Sumner praises Finance Minister Bill English. Agreed. Some credit could go to Minister English's truly excellent economics adviser as well. 


• The New Zealand Police have decided that despite GCSB's having acted illegally in the DotCom surveillance, they will not press charges because there was no intent to act illegally. But:

  Intent to break the law is not an element of the charge of illegally intercepting private communications.
  — Graeme Edgeler (@GraemeEdgeler) August 29, 2013

  The government, through the new GCSB and TICS legislation, is giving us an expansion of GCSB's scope with increased nominal oversight, but no expectation that GCSB would ever be prosecuted for doing anything that was in fact illegal. Lovely. Big slow clap here for everyone involved. Meanwhile, here's Ars Technica on some of this mess.


• The insurers here argue for something sensible, and something for which I've argued before: have EQC effectively cover a large excess in case of natural disasters, and otherwise stay out of the darned way.

So endeth the closing of the browser tabs, so closeth the day.

Update: note that Edgeler also argues that lack of intent to break the law could be a decent reason not to go ahead with prosecution in this kind of case and reminds us that criminal penalties are not the only form of accountability. That's all true; I hope that everyone who has illegally been spied upon knows that it has happened so that they can launch civil suits.

EQC Redux

If EQC can mistakenly send out a spreadsheet containing most of the relevant details on most of the Christchurch earthquake claims, why are they unable to provide those same details to homeowners who request them?

News reports yesterday said that the EQC data breach included only addresses and claim numbers. I had a hard time thinking of potential exploits using that data until I started thinking of the homeowner as the mark instead of EQC. But non-instrumental privacy concerns seemed pretty trivial. 

Today we learned a bit more.

Here's The Press:

The row first erupted on Friday after an EQC senior staffer sent an email with the Excel data attachment to Christchurch businessman and persistent EQC critic Bryan Staples.

He deleted the information and signed a statutory declaration that he did not copy it.

Staples, who owns Earthquake Service Ltd, went public yesterday saying he wanted EQC to disclose the information to the individual householders.

"This is stuff everyone has a right to know," he said.

...

Staples said he was not the only person to see the email which listed the household's claim number, asbestos rating, EQC tolerance approval, which aspects of the claim were on hold, land information, whether the address was awaiting assessments, engineer's report, the EQC supervisor, the contractor's name and quote, and EQC's value of damage estimate.

...

Staples also said he looked up the information for one of his clients on the list for whom his company had done repair work, costing $55,000.

EQC had said $55,000 was too much and had cash settled for $30,000 with the homeowner. But the spreadsheet showed EQC has allocated $59,000 for repairs.

Now that's a bit different from addresses and claim numbers.

If this were released for our house, I still would have only instrumental privacy concerns rather than intrinsic ones: I'd worry that somebody might start sending in fraudulent claims on our number and try redirecting payment to their own account, but it wouldn't bother me otherwise. We're opt-out, so we're not in the .xls file.

I know other folks put more value on particular aspects of privacy and might have intrinsic privacy worries about these details being released. I go entirely the other way here: this stuff should have to be attached to the LIM for all houses in Christchurch so that future buyers can tell what repair work was ordered and what repair work was done. It'll harm those who take the cash settlement, don't undertake the repairs, and don't fully disclose to potential buyers. Boo-hoo.*

But if there's a single spreadsheet out there with all this information on it, why in seven hells does this happen:

Since the Christchurch earthquakes, EQC has been inundated with OIA requests, as homeowners have resorted to statutory mechanisms in the face of bullshit from officials. Their response? Don't answer anything for five months

Frustrated Cantabrians hunting for information on their broken homes have swamped EQC with thousands of Official Information Act requests, pushing the 20-day response deadline out to an unprecedented five months.

Christchurch homeowners say waiting almost half a year for crucial information on their properties is "inexcusable" and the chief ombudsman says the current waiting list is "not satisfactory".

[...]

[Andrea Laws] filed her first request in early August 2012 and said she received only part of the information in mid-September.

EQC refused to send Laws any more information for months until she complained to the ombudsman, she said.

"They really didn't want to do the OIA. I had to ask them two or three times where my response was and when it came through there was email correspondence that said: ‘Do not provide the claimant with information or time frames'," she said.

This is unlawful and it is unacceptable. On the first front, the OIA requires a response " as soon as reasonably practicable, and in any case not later than 20 working days" after the request is received. While the twenty-day limit can be extended, that cna only happen if it is for or requires searching a large volume of information, or if required by consultations with other agencies. Being flooded with requests and just not feeling like doing them is not an excuse. Any agency faced with such a situation should be hiring extra staff to cope, not ignoring requests.

It looks like answering at least some of these OIA requests would just require 5 minutes in an .xls file. Say five minutes to extract the data, five minutes to clip it into a reply email: one EQC agent could be answering 400 of these a day.

There are potentially innocuous explanations for the discrepancy between the cash settlement Bryan Staples cites and EQC's cost estimate: it's not implausible that EQC budgets include padding in case the repairs are more substantial than expected, and that the cash settlement did reflect the real damage. Or it could be that they're just screwing down costs.

Here's an interview with Bryan Staples.

What the heck is EQC doing if it can't get basic information out to homeowners, but has it all sitting in a darned Excel file?

At our little opt-out, EQC continues trying to screw down cost estimates provided by our builder. Hopefully they'll soon come to some agreement.

Update: Here's Chris Hutching at The NBR (gated) making a similar point.

As a government department, EQC simply is not accountable in the way a private company would be.

I agree. But the private insurers have hardly been providing stellar customer service either.

* You can get around this, for now, if you're an honest seller, by keeping all the files and making them available to potential buyers. But in 10 years time, there are going to be a lot of people on-selling earthquake-damaged homes that they purchased after the quakes and who will claim that the earthquake paperwork was lost. Get it on the LIM.

EQC data - Updated

So EQC accidentally released a spreadsheet matching claim numbers to physical addresses for most people in Christchurch with an earthquake claim. The breach didn't have names. [Substantial update at end]

I appreciate privacy concerns, but I'm far more worried about whether any privacy breach can yield instrumental harms.* And here, I'm having a hard time seeing it.

Imagine that you had the spreadsheet listing the claim number and home address for each house in Christchurch, but nothing else. How could you profit from that knowledge?

• Send fake invoices to EQC for payment. Claim to have done work on particular addresses and cite the EQC claim number. 
• But: you're probably going to have to give EQC a bank account for transfers. If the homeowner catches wind of it, the fraudster would likely be found out fairly quickly. So your best bet would be to drive around looking for houses where construction work was already underway and to invoice for those addresses, hoping that the receipt would be paid in the confusion and that you could just switch to a different fake company every week. I doubt this would work out, but there's random draw chance that EQC might pay out on any individual invoice. Enough of these and you might get a bit out of it.
• You could try calling into EQC to redirect payments that should have been going to the homeowner, but this is really unlikely to work. 
• You'd need to know enough about the claim to be able to make a plausible case;
• Name of the main claimant and enough identifying details to pass the first hurdle;
• Whether the house is Fletcher's or opt-out - if it's Fletcher's, I think EQC pays them directly. If it's opt-out, you'd need to know enough about the repairs to tell them something about the outstanding invoices you want sent to your new bank account.
• I bet you could get a lot of this out of Facebook pages for anybody listing a real address in Facebook.
• You'd need to be able to get through to EQC on the phone (hard), or send them letters with your new account information. In the latter case, they might notice a pile of letters all asking that payment be sent to some particular account. If you're phoning, you can always hang up if things aren't working out, so they only get the account number for the small set that work.

Bottom line: it's hard enough for legitimate claimants to get anything done through EQC; I doubt fraudsters could get much out of this kind of data breach. But maybe I underestimate their patience for sitting on hold, or their creativity.

* People shout a lot about privacy, then happily hand over massive amounts of private information in exchange for lollypops. If you're complaining about EQC privacy violations on your Facebook page, and you're doing it because of privacy per-se rather than because of fraud exploits, you're exactly the kind of person I'm talking about.

Update 1: Chatting with Paul Walker on the way out the door yesterday, I realized that the best mark is the homeowner rather than EQC. He suggested calling the homeowner to pry out more details that you could use with EQC. I then reckoned it made more sense to call the homeowners pretending to be EQC and saying the only thing left before final claim resolution was for them to wire over the deductible on their insurance claim so that EQC could pay the whole thing to Fletcher's at one go.

Update 2: There was way more information in the data breach than first reported:

Staples said he was not the only person to see the email which listed the household's claim number, asbestos rating, EQC tolerance approval, which aspects of the claim were on hold, land information, whether the address was awaiting assessments, engineer's report, the EQC supervisor, the contractor's name and quote, and EQC's value of damage estimate.

In the wrong hands, this could be rather damaging.

But wouldn't it be nice if homeowners could get their own files:

Staples also said he looked up the information for one of his clients on the list for whom his company had done repair work, costing $55,000.

EQC had said $55,000 was too much and had cash settled for $30,000 with the homeowner. But the spreadsheet showed EQC has allocated $59,000 for repairs.

EQNZ Lesson 1 for Wellington: Fix EQC

It's too late for policy changes to do much for Christchurch. But the Alpine Fault's pointed straight at Wellington. The quake's hitting there will be bad enough; a few policy changes could avoid exacerbating the damage.

Lesson One from Christchurch should be that EQC really should never have had the job of assessing house damage. It should have no role in repairs, in project management, or, really, anything other than writing cheques.

When #EQNZ Wellington hits, from the homeowner's perspective, it should be as though EQC doesn't exist. Instead, the private insurer should simply send its assessment to EQC for coverage of the below-cap damages: EQC then effectively simply covering a high deductible. EQC could do some random audits to check if any of the private insurers were making a habit of getting all their clients a house tidy-up where there wasn't really any damage, but it really oughtn't otherwise be involved.

Here in Christchurch, because EQC and Fletchers are severely competence-constrained, they decided it was too complicated to let homeowners add at the homeowners' own cost insulation into the walls when the wall linings were already being torn out for repairs. In the last month they've reversed that decision, rightly outraging those homeowners lucky enough to have completed their repairs but who missed out on getting other repairs done.

Asbestos isn't uncommon* in houses of a particular age here. Where the quakes damaged the asbestos, the home repairs have it taken out as part of the insured claim. But where homeowners wish to have the rest removed at the homeowners' own cost, they're being barred from having it done with the rest of the repairs. EQC is right that while the material is undamaged, it is entirely harmless. But the marginal cost of removing this stuff is much lower while everything else is opened up, some future quake could release asbestos fibres, and having any asbestos in a house makes other home repairs more complicated - you don't particularly want to drill into an asbestos sheet by accident.

The constraint seems to be EQC's worry that asbestos contractors' taking an extra day or two on minor jobs holds them up from hitting other jobs. Alternatively, letting asbestos contractors' wages be bid up with demand induces more asbestos contractors' to move into town to get the job done.

This kind of nonsense was one reason we went for an opt-out builder; we're still hoping to get our work done in May-June.

It's much too late to get this part fixed for Christchurch. But hopefully somebody's doing it before Wellington gets its shake.

* I'm still hoping 3-d bioprinted lungs are available in 40 years' time. I'd be pretty surprised if there weren't an #eqnz mesothelioma hit waiting for folks who were here through the dusty times post-quake.

So far so good

Experiences at the tails of the distribution tend to get disproportionate weight because they're usually the stories worth telling. So here's my boring EQC story for balance.

After the September 2010 earthquakes, we saw an EQC adjuster (sometime early December) who said our house needed a new coat of paint inside and tightening up the weather boards outside. That seemed about right; we weren't in any big rush to get anything done.

After February 2011, we didn't see an EQC adjuster until June. The damage was far more substantial; the adjuster noted that the foundation and piles need re-levelling in addition to more substantial internal fixes. We made arrangements with Character Homes to handle our rebuild. The EQC procedures around specifying your own contractor rather than going with the one assigned by Fletcher's Project Management changed a few times. But, by July 2012, we had a Scope of Works document from EQC that would allow us to take the next step and have our contractor check whether EQC's specified Scope of Works seemed to match the job that needed to be done. We submitted Character Homes's revised Scope of Works in August 2012.

On 18 October, the EQC adjuster and Guy from Character Homes showed up at our place, went through the two Scope of Works documents, and agreed on the stuff that needed doing and how much it was likely to cost. Everything went pretty smoothly. In three or four weeks we're likely to get the works order from EQC that will let us sort out with our contractor when the work will be done; we're likely to be out of our house for 4-6 weeks' worth of repairs sometime between December and April. Our contractor seems pretty flexible on dates so we'll time things to match when we can find suitable rental accommodation, which ain't exactly easy in Christchurch these days. We'll have to empty the house as if we're moving out, so we'll have to sort out a couple of shipping containers and a place to put them. But, we should be able to get it done over the summer when I'm not teaching and the costs of disruption are lower.

EQC tells me we're likely to see an adjuster come by sometime in the next six months to a year to look at the land: there's a retaining wall that needs repairing. Our private insurer, AMI/Southern Response, tells us they'll be around sometime in the next couple of years to sort out our out-of-scope claims. What's out-of-scope? Things that aren't covered by EQC: a fence, some paths, and our swimming pool, the lining of which twisted and the bottom of which is now awfully uneven. I expect that if it takes two years to assess the damage to the pool liner, it's going to be in need of total replacement rather than minor repair: its having pulled away from the pool in a few spots isn't good for longevity, but that doesn't seem to be hurrying Southern Response. But at least they started answering my emails in the last month.

So, 20 months after the big quakes, it looks like our main repairs will be handled sometime in the next four months. It's taken a while to get there, but doing it earlier likely wouldn't have been a great idea - substantial risks of large aftershocks have only recently abated. Our house is comfortable and liveable while we await repairs. Filling the gaps between weatherboards before next winter should reduce our heating costs a bit.

Experiences vary considerably. Bill's not been having a great time. It's more confusing if you're in TC3 rather than TC2. The folks in Avoca Valley seem to have been being shafted. And we should put a lot of weight on the experiences of those most badly put upon by the bureaucracy. But not everywhere is doom.

I do hope they get moving on buying up, demolishing, and turning to parkland the houses around Bexley. The commute home through there gets more depressing every day as abandoned homes become burned-out houses, or graffiti-tagged and broken-windowed. Obligatory note for potential international students at Canterbury: Bexley is a half-hour away from Uni on the East side of town. Nothing like that on the West side near campus.

Kafka likes earthquakes

Fortunately, our dealings with EQC haven't been quite as disheartening as Islay McLeod's. Read that one and despair.

We received our Scope of Works document in June and it largely matches what our private engineer found, with a couple of minor omissions. We're still going to have the mess of dealing with EQC's revised rules for those who want to choose their own builders rather than go through Fletcher's lottery. Our private insurer hasn't returned emails about our claims for damage to the sidewalks, paths, pool and fencing, but we're not going to start pushing AMI / Southern Response until we've sorted out the timing of the rest of the rebuild.

The next national election, for those in Christchurch, could turn pretty easily into a referendum on the earthquake response. If Islay's story is pretty typical... well, I've a small short position on National winning re-election.

EQC warned the government back in 2009 that it really wasn't able to handle this kind of thing. I don't blame National for failing to get that sorted in the year and a half they had between the report's coming out in the middle of the financial crisis, just a few months into National's term of office, and the September 2010 earthquake. But this really ought to be sorted out before the Alpine Fault opens up for Wellington.

I guess I'll need a bridging loan [updated]

I'm a bit lost for words about EQC's latest rule change.

The Earthquake Commission charges a levy on all home insurance policies in New Zealand and covers the first hundred thousand dollars in damage to properties in the event of an earthquake, landslip, or other such event. There were warnings ahead of the Christchurch earthquakes that EQC was not charging enough to cover its potential liabilities and that it certainly was not well placed to manage any kind of major event; nobody paid much attention.

So anybody with home insurance in Christchurch has to deal with EQC. There's no obvious way of contracting around EQC to have a private insurer take on the things EQC normally covers. Where damage to a house is less than EQC's capped limit, you have a choice. Either you can project manage the rebuild yourself and submit the bills to EQC for payment, subsequent to their approval of a plan of works and costing, or you can have Fletcher's serve as project manager; Fletcher's is the default. While you can ask that Fletcher's use your preferred contractor in your repairs, some contractors now refuse to deal with Fletcher's. Where you let Fletcher's choose the contractors, there seems to be pretty high variance in outcomes.

We own an old weatherboard house with lots of character features; we wanted a contractor that specialises in that kind of home. We have full replacement insurance coverage. When our preferred contractor told us that he would not take on any more Fletchers-managed projects, we decided to go for an opt-out and let that contractor handle project management.

Now, EQC has changed the rules. Instead of our submitting the plan of works and proposed costings to EQC, followed by having the contractors bill EQC for the approved work directly, EQC has decided that opt-out owners have to pay their contractors directly then submit the bills to EQC for reimbursement.

EQC has a very bad history for paying on time. And if they decide, unilaterally and arbitrarily, to change the rules again mid-process, the homeowner is then stuck with costs.

We're now likely to need a bridging loan from our bank so we can handle our repair costs. And we'll have to hope EQC doesn't shaft us. But EQC is likely to shaft us.

At least we're likely to be able to get that kind of a loan. Or I expect we'll be able to; I'll have to talk with the bank.

This system stinks.

Update: Somebody called "EQC" in the comments at the Press site writes:

EQC has a number of changes to the Opting Out process with the aim of streamlining the process for customers and making it easier for them to take control of their own repairs, if they choose to do so. The flipside of EQC’s more hands-off role in these repairs is that we need to be clear about the customer’s responsibilities once they take on the role of project manager. To reflect this, EQC has produced some new customer information which including misleading wording relating to “reimbursement”. The revised wording places an emphasis on customers having the responsibility to manage invoices and EQC payments to ensure their contractor is paid on time. This is a standard part of the project management role, and it’s important customers know what is involved before taking the step to opt out of the Canterbury Home Repair Programme. As project manager, a customer running their own repairs takes on the risk that if invoices are incomplete, late arriving with EQC, or if some other complication arises, they may be required to pay a contractor upfront and be reimbursed. EQC pays on the 20th of the month following recpeit of invoice. As for Steve Brooks' comments that people not opting out will add years to the repair timeframe, the Canterbury Home Repair Programme has so far completed 18,000 full scope repairs - cusomters project managing their own repairs have completed a few hundred. But then Mr Brooks makes money when he persuades people to opt out, so he would say that.

I can't find anything on the EQC site discussing any of this.