By Amanda Morrall
The ministry responsible for overseeing the insurance industry at the time an insurance broker blacklisted in Australia jumped across the Tasman to set up business in New Zealand has tried to quash suggestions of any regulatory failings.
The regulator said Western Pacific and its director Jeffrey McNally met the requirements of the day because it had a credit rating from an approved agency and had lodged a NZ$500,000 deposit. Ratings agency Standard and Poor's, which has been criticised since the Global Financial Crisis for giving AAA ratings to toxic mortgage bonds, said it had analysed the quality of Western Pacific's management and given the company a B minus rating.
According to a written statement issued by the Ministry of Economic Development, two prevailing pieces of legislation continue to govern the insurance sector pending the Reserve Bank assuming full responsibility in March 2012: The Insurance Companies' Deposit Act of 1953 and the Insurance Companies (Ratings and Inspections) Act 1994.
Western Pacific, with 7,000 policy holders, was placed into liquidation last Friday after McNally and his brother-in-law and business partner Graham Smolenski signalled concerns about the company's solvency following the February 22 earthquake in Christchurch. (For details see article by Amanda Morrall here).
Under the terms of Insurance Companies' Deposit Act, insurers are required to lodge a NZ$500,000 deposit with the Public Trust, which Western Pacific did. The company also fulfilled a second legislative requirement for a rating of the company and its directors by an approved agency; in this case Standard's and Poor.
According to a rating agency official, the company received an original rating of B- back in March 2006, which was upgraded to a 'B' "denoting weak financial security" in January 2009.
S&P's director of financial services ratings Michael Vine told interest.co.nz that an ''assessment of management and governance'' was part of its analysis.
According to Australian Securities & Investment Commission (ASIC) documents and records released by the Australian Prudential Regulation Authority, McNally's irregular business practices led to several consumer warnings about his company Allied Asia.
The Commission, in March 2002, refused to renew McNally's license for acting in a "false and misleading manner in dealing with clients" and for failing to "discharge the ordinary obligations of an insurance intermediary."
Insurance Council turned down Western Pacific
Chris Ryan, chief executive of the Insurance Council of New Zealand, said that the professional group had on at least once occasion turned Western Pacific down for membership but declined to specify why.
"We just said we didn’t want them to become a member. There was no particular reason. The board can decline membership for its own reasons."
McNally could not be reached for comment but Smolenski earlier told interest.co.nz that McNally's history with ASIC in Australia had been overstated on the public records and that subsequent events had vindicated his reputation. He refused to elaborate any further and deferred questions to McNally.
Here's an unedited version of the Ministry of Economic Development's position on Western Pacific.
The Insurance Companies’ Deposits Act 1953 places certain minimum solvency requirements on general insurers, such as Western Pacific Insurance Limited. It requires every company or person carrying on any class of insurance business to deposit $500,000 with the Public Trustee. The Public Trust holds all deposits as security for the policyholders.
In addition, the Insurance Companies (Ratings and Inspections) Act 1994 provides a rating system for the ability of insurers to pay claims. Every insurer that does business in New Zealand, and every director of that insurer, must ensure that the insurer has a current rating from an approved agency. These agencies are approved by the Registrar of Companies on the recommendation of the Insurance Council of New Zealand. An insurer must also register their rating with the Registrar of Companies and, before entering into or renewing any policy, disclose their current rating to the insured.
Limited an insurer financial strength rating of “B” (stable) on 8 January 2011.
The responsibilities placed on insurers by the Insurance Companies’ Deposits Act 1953 and the Insurance Companies (Ratings and Inspections) Act 1994 remain in force until 7 March 2012 when these Acts are repealed by section 240 of the Insurance (Prudential Supervision) Act 2010.
The Insurance (Prudential Supervision) Act received Royal assent on 7 September 2010. Different parts of the Act apply from different dates – the key parts and key dates are:
5 January 2011 – existing insurers (as defined by the Act) operating prior to 7 September 2010 needed to return a completed Notice of Intention form to the Reserve Bank by 5 January 2011 to be entitled to a provisional licence.
1 February 2011 – any entity that carries on insurance business in New Zealand (or proposes to) may apply for a licence from 1 February 2011.
7 March 2012 – all insurers must have a full or provisional licence by 7 March 2012.
7 September 2013 – all insurers must be fully compliant with the requirements of the Act, i.e. be fully licensed, by 7 September 2013.