I was reading the “Insurance Regulatory Landscape in New Zealand” published by the Reserve Bank of New Zealand (19 March, 2013). (See http://www.rbnz.govt.nz/speeches/5188991.html). There were a couple of statements which made me sit bolt upright. The first – “….Our basic premise is that insurers, reinsurers and property owners should rightly bear the risks of a catastrophe, rather than government whose costs are ultimately borne by all taxpayers.”
And the second statement – “So what does the regime not do? It does not provide for a zero failure regime. It remains possible, if unlikely, that a licensed insurer will fail and policyholders’ claims will not be met in full. If that happens, there should be no expectation of recourse to either the taxpayer or the Reserve Bank.” Well Christchurch has proved categorically that in the event of a major disaster the failure of an insurer is quite possible – AMI and Western Pacific are cases in point.
The New Zealand government has in recent times implemented a financial regulatory regime which has also changed the rules of engagement for insurers in New Zealand. The Insurance (Prudential Supervision) Act 2010 (IPS Act) establishes a legislative framework for the prudential regulation and supervision of persons carrying on insurance business in New Zealand. The Act imposes prudential requirements on insurers and sets up the Reserve Bank of New Zealand as a prudential supervisor. Prior to the implementation of the Insurance Prudential (Supervision) Act, the insurance industry was essentially self-regulating. Can you believe that! Insurers were only required to be members of the Insurance Council (their club) and have capital worth 20 per cent of their annual premiums.
Yet thoughts about the new IPS Act suggest that it will still only:
“adopt a comparatively light touch regulatory approach that will enable a largely self-administering approach for compliant insurers. The Bill contains a strong emphasis on director and senior officer obligations and accountability, and also has a degree of reliance on external input sources such as ratings agencies and actuaries. The model will be one of a risk-based supervisory approach based largely on a principles-based regulatory model, albeit that the approach to statutory fund rules and solvency standards necessarily carry a clear rule-based flavour” (Navigating Uncharted Waters? Prudential Regulation for the New Zealand Insurance Sector, A presentation to the New Zealand Insurance Law Association Conference 2010 Christchurch Town Hall, 5 August 2010, Richard Dean, Manager, Insurance Policy, Reserve Bank of New Zealand).
So the message is – if your insurer should fail in the future you could quite easily find yourself ‘up the creek without a paddle’ i.e. totally unprotected. And interestingly the greater the chance personal protection is needed the more likely you are to find yourself in this position. Nor will the Banks or the Government bail you out.
Understanding how things are, goes toward convincing me even more that removing private corporate property insurance in favour of a public insurer, is the only way to go. Spending thousands of dollars year after year on premiums that provide no certainty and only heartbreak in the case of a claim, is not the kind of insurance system I want. And yet we are told that our insurance regime is designed to underpin confidence in insurers. New Zealand has one of the least regulated insurance frameworks in the world. The spin we are led to believe with respect to regulation goes something like this: “The regulatory environment that we enjoy in New Zealand is successful because the insurance industry has been proactive in developing its own self-regulatory framework“. (See http://www.icnz.org.nz/about/). Yes, the regime is ultimately about ‘insurer self-discipline’, loosely translated as ‘insurer self-interest’… We have been experiencing a lot of that in Canterbury post earthquakes to the detriment of policyholders, haven’t we?
The regulatory environment places reliance on the insurer’s board, senior management and the appointed actuary. “The board and chief executive have to satisfy themselves, and attest to us as part of the licensing process, that the business is being run prudently and that they operate a satisfactory risk management programme….All solvency margin calculations must be either prepared or reviewed by the insurer’s appointed actuary“. No conflict of interest here of course.
Meanwhile the rest of the world is rapidly moving toward a highly regulated insurance framework and not without good cause. Called the Solvency II code, (See http://www.fsa.gov.uk/solvency2) requirements are said to represent what is likely to be the biggest change in insurance regulation for a lifetime, even though its implementation has been delayed. (https://thechristchurchfiasco.wordpress.com/2013/01/17/again-policyholders-miss-out-the-delay-to-the-solvency-ii-legislation/).
To date there have been several insurers fail in New Zealand. The life insurer failure (ACL Insurance) who was placed in judicial management in 1989 with life insurance liabilities of NZD 12.5 million at the time. Then recently there was AMI and Western Pacific Insurance immediately following the earthquakes.
Reserve Bank of New Zealand, Financial Stability Report, November 2011 produced a graph that shows that the private insurance industry picked up only 5% of the costs of damage as a result of the 2010-2012 earthquakes. “The reinsurers …generally have strong financial ratings and the ability to absorb the elevated level of global reinsurance claims from a series of recent natural disasters around the world…” (See http://www.parliament.nz/NR/rdonlyres/44931AD1-8783-405C-9C25-89D1A17C6976/207929/InsuranceandreinsuranceafterCanterburyearthquakes1.pdf.
The reality is that the Christchurch events have not had a massive impact on reinsurance business. In fact according to Aon Benfield in the Reinsurance Market Outlook June and July 2012 Update ,”Reinsurance capacity, measured by capital, returned to its previous record high of UAD470 billion by the end of Q1 2012 -back to 2010 peak level. Lower than average global catastrophe losses through Q1 and increased premiums at January 1 renewals assisted reinsurers in increasing capital. Low catastrophe loss activity in Q2 is expected to result in further increases of capital for half year 2012 results and capacity for global regions renewing at June and July 2012 remained stable.”
The report goes on to say that the New Zealand insurance market has responded very strongly with underwriting changes post-event. “Primary premiums have increased significantly, with fire premium rates increasing approximately 20 per cent for small commercial risks and 40 per cent for large commercial risks. Natural peril premiums have increased approximately 100 percent for small commercial risks and in the order of 150 percent to 200 percent for some large commercial risks. These rates do vary based on geography and perceived natural peril risk. For homeowners’ policies, private insurer premiums have risen between 25 percent to 50 percent from February and the EQC premium rate has increased threefold [to 15 cents per $100.00 insured]. Combined with these price increases, insurers have implemented significant changes in cover, including increased deductibles and sub-limiting some coverages.” (See http://thoughtleadership.aonbenfield.com/Documents/20120706_june_july_renewals_update.pdf). I predict that New Zealand will see a continual increase of premiums from here on in.
So is Government ensuring that New Zealand policyholders have the best protection available? With the introduction of the Insurance (Prudential Supervision) Act, the Reserve Bank said that its analysis showed that about four insurers went into runoff or liquidation resulting from the new regime. (See http://www.stuff.co.nz/business/industries/6576507/Most-insurers-join-new-regime).
In New Zealand, the Reserve Bank is the regulator of insurance companies. The task of prudential supervisor is not to be taken lightly. European experience shows that bank failures in different EU-countries have increasingly led to liability claims being directed against supervisory authorities for alleged negligence or improper conduct in the course of exercising prudential supervision over banks. There is no reason why this could not also extend to the insurance industry. It will be the public, as well as a broad array of other domestic and international observers who will ultimately be the real judges of the new regime.
Overseas based insurers, such as the Australian insurers IAG, Vero and Tower, avoid a double up of compliance obligations in New Zealand as the law and regulatory requirements and nature and extent of prudential supervision in Australia are considered ‘at least as satisfactory’ as those in New Zealand. Otherwise the insurer must abide by New Zealand’s standards. Regulation 5 of the Insurance (Prudential Supervision) Regulations 2010 confirms that “Australia and the United Kingdom are such satisfactory jurisdictions for the purposes of the Act”. So one makes the assumption that the large insurers are not so closely monitored on shore but rather more from across the ditch, which, of course, is also where their profits go.
So, we have no real assurance that if (when) our insurer fails, that either the Government or the Australian/British/whatever parent company will bail us out. We’ll just smack the hands of the Prudential Supervisors and get them to stand in the corner, and perhaps fine them a couple of hundred thousand each, while we contemplate another fifty billion dollar bill to rebuild another city, which no-one is covering. The ‘Banker mentality’ could fix it however. Can’t you hear it?
I know – let’s take 25% of everyone’s savings to get things started – at least with the CBD. We can legislate it. Worked in Cyprus. No need to worry about the suburbs. No one cared about the suburbs in Christchurch, did they.? …….etc.
But seriously – there is a solution which would not cost anyone a penny more than they pay in premiums today, which would cover the whole of the property spectrum and assist New Zealand to build a huge disaster fund and eliminate the repatriation of corporate profits overseas. We’ll look at that in a following post……….