COMMENT: An aftershock for NZ's supervisor?

COMMENT: An aftershock for NZ's supervisor?

A series of aftershocks has hit the New Zealand city of Christchurch causing the evacuation of shopping centres, office blocks and the airport. Several buildings collapsed, adding to the 10,000 houses and 1,000 commercial buildings that are having to be demolished.

Most of the people affected will be able to claim on their insurance and start to rebuild their properties and lives. For some however, there is more uncertainty following the collapse of New Zealand insurer Western Pacific.

The report from the liquidators of the failed company makes interesting reading. (You can find it for yourselfhere).  It details the company’s precarious financial position and makes you wonder how the company was allowed to stay in business up to the point the ‘quake brought it down.

The reasons for the insurer’s failure according to Grant Thornton’s David Ruscoe and John Thorn  are as follows: “Our initial assessment of the Company’s affairs indicates a significant lack of capital and an aggressive approach to winning market share may have led to the failure of the Company.  It was simply incapable of meeting the claims from Christchurch earthquakes.

“We have some key preliminary observations in the way the insurance business was structured which if correct, are likely to have contributed to its difficulties.

“The cost of reinsurance was costly and given the size of this business it amounted to approx 40% of total premium income (reinsurance is where insurers take out insurance policies with specialist insurers to cover certain claims of the Company).

“Coupled with commissions paid to Brokers, which were often between 20% and 25%, the Company only had 40% of its premium income to cover operating costs and meet claims not covered by reinsurance.

“Premiums were priced low possibly in an attempt to gain market share and grow the business. However, in some instances the premiums were too low with some policies in Christchurch written at a price significantly lower than what is being offered by other insurers.

“The Company accepted risks outside the scope of its reinsurance policies and chased premium income in numerous countries, including: Australia; Abu Dhabi; Chile; Fiji; Rarotonga; Samoa; Singapore; and Vanuatu.”

Leaving aside the liquidator’s remarks around the high cost of reinsurance, Grant Thornton did manage to renew its reinsurance cover by fronting up NZ$430,000 ($353,000). They believe that puts WP’s reinsurers on the hook for NZ$32.7m of WP’s estimated claims totalling $41.2m.
 
What they don’t know is if the reinsurance will only pay out on claims related to Christchurch’s  ‘quakes – or to all claimants on WP different policies, effectively diluting the funds available. That question will be answered in due course by the Courts.

You can see WP’s reinsurance panel here.

It isn’t in the liquidator’s remit to ask the question, “Why didn’t anyone notice that WP was an insolvency waiting to happen” – so I will.

Specifically, why didn’t the NZ supervisor raise question marks over the insurers’ viability?

It is embarrassing for the supervisor  that they weren’t aware that WP’s CEO Jeffrey McNally didn’t have a great record before he arrived in NZ to form WP in 2005. In 2002 The Australian Securities and Investments Commission (ASIC) “acted to protect consumers” by securing an undertaking to the Federal Court that Mr Jeffrey Ronald James McNally of Templestowe will not arrange or hold out that he is able to arrange insurance policies with a company called Atlantic and Pacific Insurance Limited.

The undertaking given to the Federal Court also applied to two companies associated with Mr McNally, Allied Asia Holdings (Aust) Pty Ltd and Allied Asia Underwriting Agencies Pty Ltd (together, Allied Asia). 

McNally didn’t hide his background and happily mentions his time with these companies on WP’s website.

Never mind about due diligence, surely the NZ supervisors’ office could at least have googled these names before issuing him a licence back in 2005?

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