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.
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6 Comments
How could insurers be allowed to market their products in NZ when they do not have the assets or backing to fulfill payouts for what was not an unexpected or unlikely event.
What stops the major insurers from ringfencing NZ operations (like Ansvar has), soaking up premiums for decades and paying most as dividends to their parent companies then letting the NZ subsidiary go bust in a major event?
The whole insurance situation is a complete shambles in NZ, and the RBNZ and Govt just turn a blind eye.
Someone needs to ask "Ecclesiastical Insurance" just where their GOD stands on this issue - or are they just the usual BS artists who always prey on the weak minded ??? But of course they will just brush any such questions aside saying "He works in mysterious ways "....Greed, avarice, moral turpitude et al ...
Insurance is a mind trick, .........makes you feel good cause you have some, .... it keeps the lenders off your case too as that's how come they gave you the loan in the first place (insurance companies & banks are one & the same) , but when push comes to shove, the truth of the fundamentals of how the insurance game is enginerred will always show up - - - - - - in a big loss scenario for example insurance will always be exposed for the financial game it is ......in much the same way as if all bank depositors were to hit the ATMS on the same day, .........the money is simply not there ........but we always forget, ........... fact is, the money the insurers say they have to payout is a total scam, .......no insurer makes any money from insurance, ..........nor do their reinsurers, ......they all play the share market with you premiums & in this day in age , they have all lost their/your money, ..... their books of account are as about as trustworthy & solid as the big American's banks ...........another ChCh EQ & NZ is toast!! ......God help us all.
uh.....I think you have more than a few facts wrong here. Insurance is regulated against the reasons you state......However as in AMI's case its backed by reasonable assumptions that rare cases should never happen. Everything comes down to a judgement of risk and what is acceptable.... Certianly if you go to Lloyds of London the ppl in that are liable even for the shirt they wear....
Chch is probably one such case where statistically it was unlikely and the on going shocks even more unlikely. If you wanted to cover every single possible event then your premiums would reflect that....and most ppl wouldnt pay it or be able to.
You are right to an extend on the "mind trick" it certianly has been an eye opener for me.....
Chch is toast already IMHO, it will or has lost business "mass" and the ppl it can least afford to lose are the most mobile....(professionals) so their incomes will be sorely missed...it will slowly bleed to death for many years if its lucky. If however there is another major event youe are right, I suspect we will see many re-insurers quit NZ. At that point we have to consider that houses would be un-insureable and hence not mortgagable for anything more than the land value.....at which point our housing market will collapse, no one will have the ability to buy or even keep....bye bye NZ economy.
regards
Face Facts - your are not wrong - Warren Buffet has been playing the 'float' he receives from his insurance operations into the stock market for a generation or more. It worked for a while and he garnered an undeserved moniker - The Sage of Omaha. - when in fact it was the genius of his long standing float manager who offloaded the worst risks to the re-insurance market to make that float a secure and substantial slug of readies every year.
When all is said and done insurance companies are no different than race horse bookies, but most lack the skills to nuture the float and invest it wisely or raid it for personal gain.
Insurance companies write premium just like stock/futures/CDS options traders and they cannot resist helping themselves before someone else does. The premium payer (the creditor/option buyer) has as much right as does an MF Global client. None unfortunately.
Here is area in society where access to easy liquidity exercised corruption ahead of moral integrity.
This out from AM Best this week:
HONG KONG, JULY 17, 2012
A.M. Best Co. has downgraded the financial strength rating to B- (Fair) from B+ (Good) and issuer credit rating to “bb-” from “bbb-” of ACS (NZ) Limited (New Zealand). Both ratings have been placed under review with developing implications, which reflects the company’s near-term regulatory risk.
These rating actions acknowledge ACS’ risk-adjusted capitalization and its separation from Ecclesiastical Insurance Office plc (EIO) (United Kingdom) as well as the potential vulnerability of ACS’ capital position.
Following the recently approved Scheme of Arrangement, EIO has strengthened ACS’ capital position. Also, EIO is providing additional reinsurance cover (to extend the cover up to NZD 570 million) to extend reinsurance protection for the February 2011 earthquake event.
However, ACS’ current risk-adjusted capitalization remains stressed as reinsurance recoverable risk remains a significant drag. Adverse development to the February 2011 earthquake cost estimates and slower than anticipated claims settlements during the first half of 2012 have resulted in a higher than anticipated level of reinsurance recoverable risk as of June 30, 2012. ACS’ Scheme of Arrangement and the transfer of its majority ownership away from EIO remove the likelihood of any further financial support from EIO. This leaves ACS’ capital position vulnerable to any further increases in claims estimates, especially if these develop beyond ACS’ extended reinsurance coverage (NZD 570 million), which could weaken ACS’ ability to fully meet policyholder claims. The company faces near-term regulatory risk. A.M. Best was informed by ACS that it has yet to submit its final solvency calculations as of June 30, 2012 to the Reserve Bank of New Zealand (RBNZ). It remains to be seen whether the RBNZ will view ACS’ final solvency calculations as compliant. A.M. Best has sighted the draft calculations the company has lodged with the RBNZ. While these show a positive regulatory solvency margin, it is thin and the RBNZ has publicly voiced concerns on ACS’ regulatory solvency.
Partially offsetting these negative rating factors are anticipated cash settlements by ACS of major claims by December 31, 2012, since the company’s management recently informed A.M. Best that it reached agreement on cash settlement amounts (totaling around NZD 366 million) with major policyholders. This could lead to a significant reduction in reinsurance recoverable risk by December 31, 2012 and an improvement in risk-adjusted capitalization. Also, an agreed cash settlement of major claims would reduce the impact and likelihood of any further adverse claims cost development and would help to protect the company’s capital position.
Developments that could result in negative rating actions include negative regulatory action, a slower than anticipated reduction in ACS’ reinsurance recoverable risk and erosion of its capital position.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Understanding Universal BCAR.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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