The New Zealand Bankers Association (NZBA) says proposed changes to the Earthquake Commission’s (EQC) natural disaster insurance scheme are not in the best interests of homeowners or banks.

Proposals under consideration feature in a discussion document released in July.

In its submission to Treasury, the NZBA focuses on two proposals of particular concern: extending EQC building cover to include additional site works associated with repair or reinstatement of a building; and limiting land cover to situations where rebuilding is not “practically or economically feasible”.

The NZBA says the EQC reforms would transfer the risk of “remediating the building platform” – currently the eight metres of land surrounding a home – from the EQC to the homeowner.

People would have to consider the cost of remediating land and property substructures when calculating their sums insured.

The association believes this is unreasonable and warns the proposals will “significantly exacerbate the levels of underinsurance facing New Zealand homeowners and banks as mortgagees”.

“The NZBA believes it is unrealistic to expect a homeowner to know or understand the cost to reinstate their land and foundations in a wide range of possible natural disasters.”

The association predicts homeowners will simply renew at current levels with an “it won’t happen to me” attitude.

“NZBA members believe [underinsurance] is caused by a lack of understanding around the actual cost to repair or rebuild,” the submission says. “Any proposal to further increase the likelihood of customer unawareness and, consequently, underinsurance is concerning.”

The impact of adding to the country’s underinsured housing stock could be “devastating to customers and in turn lenders, and the financial stability of New Zealand”.

If the Government proceeds with the proposed reforms, the NZBA recommends it establish an independent bureau to provide information about residential property insurance.

“Banks can engage in meaningful conversations with customers who are significantly underinsured using information from the bureau,” the submission says.