Reserve Bank's concerns as the new prudential regulator of insurers largely ignored by policyholders and court as earthquake-hit church insurer winds up NZ business

By Gareth Vaughan

The Reserve Bank's first public intervention as prudential regulator of the insurance sector has seen it unable to convince either the policyholders of insurer ACS (NZ) Ltd, formerly Ansvar, or a High Court judge of shortcomings it saw in ACS's scheme of arrangement that's intended to effect a managed withdrawal from New Zealand by the church, heritage building and rest home insurer with its directors remaining in control.

Policyholders backed ACS's scheme at a June 12 Christchurch meeting and Justice Geoff Venning approved it in the High Court at Auckland on June 19.

Justice Venning's approval came despite Reserve Bank lawyer Scott Barker telling him ACS has not provided information to demonstrate it will meet solvency requirements by June 30 this year, which is a condition of a provisional licence granted by the prudential regulator.

Barker also said Ecclesiastical Insurance plc, ACS’s ultimate parent before a recent ownership structure change, hasn't committed to providing further capital if it turns out that claims are unlikely to be met in full.

"RBNZ questions whether it is right that Ecclesiastical Insurance should shut the door now or whether it can review the need for, and its ability to, contribute further capital as events unfold over the coming months and years," said Barker. See Barker's full memo to the court hearing here and Justice Venning's oral judgement here.

Pulling out

Ansvar announced a complete withdrawal from New Zealand last November, with the cancellation of all policies from December 31, after suffering NZ$700 million of losses from the Christchurch earthquake and citing the "prohibitive cost" of reinsurance. At the behest of the Reserve Bank, ACS commissioned KPMG  to independently value outstanding claims, reinsurance and expenses ahead of the policyholder vote on the Scheme.

Among its findings, KPMG said earthquake claims were likely to exceed reinsurance coverage, with a 10% chance claims are at least NZ$80 million higher than reinsurance. And in its report on the ACS scheme  provided to policyholders ahead of their vote, the Reserve Bank said there was greater than 25% chance of a shortage in assets to cover costs, and a "higher likelihood" that insurer solvency requirements, which come into effect from June 30, won't be met.

However, Justice Venning said ACS wasn't currently insolvent and he was satisfied the Scheme was one an intelligent and honest person in business might reasonably approve. He also noted NZ$22 million of additional support pledged by Ecclesiastical Insurance upon approval of the Scheme.

"Having considered the matters raised by the Reserve Bank I am still satisfied that it is a fair and equitable arrangement in the unfortunate circumstances that the claimants and ACS find themselves in as a consequence of the earthquakes in Canterbury."

Reserve Bank to continue supervising ACS

A Reserve Bank spokeswoman told interest.co.nz the regulator had worked to ensure all creditors and the Court had full information for their decision-making process and will continue in its role as prudential supervisor of ACS. The central bank took on the prudential regulation of insurers from March this year. See more on the regulatory regime here.

Meanwhile, in court Barker also raised concerns that unlike in a liquidation, the Scheme doesn't provide for the "pari passu", or equal footing, principle. Although the Scheme vote was carried by 139 votes for to 7 votes against, there are 2100 individual earthquake claims implying the proportion of creditors voting was very low, he said.

However, Justice Venning noted that by value, policyholders - or creditors - claiming NZ$888 million out of a total of NZ$934.6 million, or 95%, voted in favour. Or, put another way, those voting in favour represented NZ$417.7 million of a total reserve for claims of NZ$445.8 million, representing almost 94% support.

Barker said the Reserve Bank acknowledges creditors voted in favour of the scheme and doesn't want to stand in the way of a democratic process, but its concerns about the Scheme remain.

ACS hits back

In a response to the Reserve Bank's concerns ACS said distributions will be made to creditors relative to the reinsurance in place for each event causing the insured damage on which a claim is based. If there is insufficient reinsurance to go around, payments will be made on an equal, pro-rata basis amongst entitled claimants. It said a fundamental difference between the Scheme and liquidation is that the Scheme will result in a faster, less disruptive settlement of outstanding claims and will maximise the value of claim payments to creditors.

It said the Reserve Bank's claim that Ecclesiastical Insurance was distancing itself from ACS because Ansvar had changed its name from Ansvar Insurance Limited and because ownership of the company was transferred to the Canterbury Church and Heritage Charitable Trust, was incorrect.

"The name change was for practical reasons. First, to avoid confusion between Ansvar Insurance Limited in New Zealand and the company of the same name in Australia. Unfortunately there were no distinguishing features in either company names when set up, and this was potentially problematic for the Australian business, particularly when the Australian Ansvar Insurance Limited was offering to provide from Australia the balance of New Zealand policyholders’ insurance after 1 December 2011."

"Secondly, the name change was made to more accurately reflect the company’s business which, following cancellation of policies, is entirely focused on claims management. ACS is an acronym for Ansvar Claims Services," the insurer said.

Furthermore it said Ecclesiastical Insurance had no legal obligation to contribute to ACS.

"Nevertheless, as ACS’s ultimate parent, it has made a significant contribution to relieving this stress and in supporting claimants in New Zealand. As noted in the Scheme documents provided to creditors, this has amounted to a commitment in excess of NZ$70 million. This is eight to nine times the value of Ecclesiastical Insurance's asset in New Zealand. This is a level of commitment any other international insurance company is unlikely to have made," ACS said.

See ACS's full response to the Reserve Bank's concerns here.

This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.