Submission to the Public Inquiry into the Earthquake Commission

24 May 2019: Our submission to the Public Inquiry into the Earthquake Commission.

Dame Silvia Cartwright
Public Inquiry into the Earthquake Commission
Private Bag 4999
CHRISTCHURCH 8140

Dear Dame Silvia

AUDITOR-GENERAL’S SUBMISSION TO THE PUBLIC INQUIRY INTO THE EARTHQUAKE COMMISSION

Thank you for the opportunity to submit comments to the Public Inquiry into the Earthquake Commission.

My Office carried out two performance audits on how the Earthquake Commission (EQC) managed the repairs to homes during and after the Canterbury earthquakes:

We also carry out annual audits of EQC, which focus on the financial and other performance information in EQC’s annual reports. Each year, we report our audit conclusions to Parliamentary select committees, as well as suggest lines of inquiry for Parliament’s annual reviews of EQC. Our high-level audit findings and briefing papers are on Parliament’s website.²

In our performance audits and other work, we acknowledged the extremely difficult circumstances that the public of Canterbury and EQC faced during and after the Canterbury earthquakes. Not least of these was the challenge of repairing homes while damage was being caused by further earthquakes. Obtaining continuing reinsurance during this time was another significant challenge for EQC, and it managed that challenge well.

We summarise below the main observations and conclusions drawn from our performance audits, annual audits of EQC’s financial and other performance information, and advice to Parliamentary select committees.

It is important to recognise that the mandate of my Office does not extend to evaluating government policy. Our comments are therefore limited to how well EQC managed aspects of its work. We did not comment on the Government’s policy decisions underlying that work.

1. Preparedness and scenario planning

We consider that EQC could have been better prepared to settle claims from large-scale events. Examples of such preparation include scenario planning, including how it would settle claims under each scenario.

At the time of the first Canterbury earthquake, the scale of the earthquake series was not anticipated or planned for. There were no government expectations or contingency guidance to indicate which of the range of responses, available under the Earthquake Commission Act 1993 (the Act), were preferred for different scenarios.³

Before the Canterbury earthquakes, EQC considered that its first settlement option under the Act was to consider a cash payment to claimants. Its plan for responding to a large-scale natural disaster was to outsource the services it would require if it was settling claims in cash, even though EQC could settle claims through replacement, reinstatement, or relocation. In the case of the Canterbury earthquakes, EQC’s Board and Minister agreed to set up a home-repair programme to settle claims for damage that were estimated to cost between $10,000 and $100,000 to repair. This programme was called the Canterbury Home Repair Programme (CHRP).⁴

The objectives of the CHRP were to:

manage inflation in the cost of repairs;
manage the quality of repairs;
avoid the loss of equity in Canterbury’s housing stock; and
avoid depopulation and social distress.

At the same time, the CHRP was expected to provide emergency repairs to 47,391 homes and install heating to 18,740 homes, which diverted resources away from home repairs in the first year or so of the programme. Nevertheless, EQC had some success in achieving its objectives, including containing the potential inflationary pressures on the cost of repairs.

Regarding preparedness, we also concluded that EQC could have foreseen some of the issues and challenges in the CHRP. For example, EQC could have anticipated that there would be asbestos in residential buildings and the implications that would have for repair work. EQC could also have anticipated the difficulties faced by vulnerable citizens.⁵

2. Quality of data and information

EQC had problems with data quality, which limited its ability to provide reliable and relevant information to people and its ability to plan effectively. Examples of these problems and subsequent effects include:

poor-quality data about interactions with homeowners in EQC’s contact centre;
inconsistent data between EQC and the Fletcher Construction Company Limited (Fletcher Construction) business unit responsible for the CHRP about vulnerable people;
an initial lack of a centralised database containing all relevant information about contractors;
Fletcher Construction needing to check claims after receiving them from EQC because of poor-quality data;
inaccurate initial assessments of damage; and
inconsistencies in the information recorded in repair files.⁶

After carrying out our performance audits, problems continued with the claims management data and information, including inadequate controls over the data warehouse and constraints in the claims management information system’s reporting capability.

3. Performance measurement and reporting

EQC has had difficulty setting appropriate performance measures for management monitoring, and decision-making, and for external accountability purposes.

In our 2013 report on the CHRP, we highlighted limitations in its key performance indicators. Some indicators were not reported consistently, some had no targets or comparative data, and some were of limited value.⁷ In 2015, we reported that EQC had made improvements to its key performance indicators for the CHRP. The performance reporting was more consistent and complete. There were measures for cost, timeliness, quality, and safety; and targets for the performance measures.⁸

One of the lessons we identified in 2015, was that setting broad and potentially competing programme goals made it difficult for the programme operator, Fletcher Construction, and the public to assess the programme’s performance.⁹

After carrying out our performance audits, we continued to identify problems through our annual audit work. Problems included a lack of quality control over performance information (resulting in some under-reporting), inconsistencies with how measures were defined, incorrect customer complaint data, and using incorrect data sets. We found some of EQC’s performance reporting lent itself to misinterpretation, which EQC responded to by providing more explanatory information.

During our 2017/18 annual audit, we were unable to rely on the completeness of claims data because of a lack of controls over the data warehouse and claims management information systems.

We continue to find a lack of key performance indicators for the outcomes that EQC seeks to achieve. We understand that EQC management is responding to our recommendations for improving this aspect of its performance reporting.

4. Relationships with the insurance industry

We observed that EQC’s relationship with private insurers has been negatively affected by issues with assessing Canterbury earthquake claims and deciding who has responsibility for managing them. This in turn has affected the waiting times for house repairs.¹⁰

EQC took a different approach to managing claims after the 14 November 2016 Kaikōura earthquake and aftershocks. In December 2016, EQC signed an agreement with private insurers whereby the insurers received, assessed, and settled all claims for damage to dwellings and contents. EQC managed land claims. We suggest the Public Inquiry into the Earthquake Commission might want to consider the risks, as well as the benefits, attached to this more devolved model of claims settlement.

5. Communicating and managing expectations

EQC struggled to provide affected homeowners with reliable information about their particular circumstances quickly enough. Long periods without specific information from EQC about their claims left homeowners with uncertainty while waiting for repairs. When information was provided it was often inconsistent.¹¹

In our view, EQC needed to set realistic expectations. For example, its original target date for ending the CHRP was December 2015. EQC brought the date forward to December 2014 but did not meet this target. We understand that the December 2014 date was a “stretch target”, but EQC did not make this clear in its communications to the public, who might have had different expectations.¹²

The effects of this is best summarised by what Fletcher Construction told us in 2013:

… stress levels rise from uncertainty as to timing, or a lack of information from which to make decisions, more so than stress relating to the effects of damage from the under $100,000 nature of this programme.¹³

I trust these reflections from our work are useful to your inquiry. My Office is happy to provide further clarification or briefings where required.

Yours sincerely

Signature - JR
John Ryan
Controller and Auditor-General

1: Both reports are available on our website at www.oag.govt.nz.

2: Available at www.parliament.nz/en/pb/sc/submissions-and-advice/.

3: Office of the Auditor-General (2013), Earthquake Commission: Managing the Canterbury Home Repair Programme, Wellington.

4: Office of the Auditor-General (2013), Earthquake Commission: Managing the Canterbury Home Repair Programme, Wellington.

5: Office of the Auditor-General (2015), Earthquake Commission: Managing the Canterbury Home Repair Programme - follow-up audit, Wellington.

6: Office of the Auditor-General (2013), Earthquake Commission: Managing the Canterbury Home Repair Programme, Wellington; Office of the Auditor-General (2015), Earthquake Commission: Managing the Canterbury Home Repair Programme - follow-up audit, Wellington.

7: Office of the Auditor-General (2013), Earthquake Commission: Managing the Canterbury Home Repair Programme, Wellington.

8: Office of the Auditor-General (2015), Earthquake Commission: Managing the Canterbury Home Repair Programme - follow-up audit, Wellington.

9: Office of the Auditor-General (2015), Earthquake Commission: Managing the Canterbury Home Repair Programme - follow-up audit, Wellington.

10: Office of the Auditor-General (2015), Earthquake Commission: Managing the Canterbury Home Repair Programme - follow-up audit, Wellington.

11: Office of the Auditor-General (2013), Earthquake Commission: Managing the Canterbury Home Repair Programme, Wellington; Office of the Auditor-General (2015), Earthquake Commission: Managing the Canterbury Home Repair Programme - follow-up audit, Wellington.

12: Office of the Auditor-General (2015), Earthquake Commission: Managing the Canterbury Home Repair Programme - follow-up audit, Wellington.

13: Office of the Auditor-General (2013), Earthquake Commission: Managing the Canterbury Home Repair Programme, Wellington.