In a recent Feedback statement, the RBNZ indicated that the 42 submissions received gave rise to a number of issues that would be the subject of ongoing attention and consideration over the next 12 - 18 months.
The general tone of the statement suggested that while there were a number of constructive suggestions for improvement, the industry was performing well and that the community is being well served by those subject to the Act.
Mention is made of the IMF Report suggesting a ‘tightening’ of certain aspects, e.g. disclosure of information, audit reporting standards, but the IMF Report was generally reflective of an industry operating within an OECD-style jurisdiction that is largely getting things right.
Of course, there have been aberrations along the way. The seismic activity events in Christchurch caught the industry off-guard, but, to be honest, in four decades of working in the industry in the U.K., Australia, and NZ, these circumstances were unique and the response has been, by and large, favourable.
Of course, there are contentious issues still. Southern Response Earthquake Services will be involved in defending class actions against a group of aggrieved residential property claimants and the courts will decide the outcome.
Unfortunately, there was always going to be a residue of awkward contentious claims – think cross-leases, apartment blocks with different insurers, different Project Management Organisations, different Loss Adjusters and different Engineers – the possibilities for dispute, conflict and confusion are endless.
I sympathise with both sides, having seen the issues from both sides. Claimants feel that they have been poorly served by the process or have received less than their appropriate settlement, and Southern Response has an obligation to be prudent in looking after the public purse from where claim settlements are now coming. So, there is no easy solution and the courts may well be the only place that such cases can be settled to everyone’s satisfaction.
And, of course, this attracts media attention much more than the progress Southern Response has made in settling the 6000+ property damage claims and 20,000+ contents claims the company originally faced in 2011.
But such incidents apart, the IMF report on the industry is largely consistent with the IPSA review findings.
And the review statement is worth perusing as it contains the intentions of the RBNZ to focus on specific issues in Phase 2, including consideration being given to ‘Disclosure and financial strength rating requirements’.
This is an area where some debate should occur.
Back in the old days, a company that obtained a financial strength rating was obliged to publish and publicise that rating with the normal attendant explanation of what the rating meant.
Ratings have been a legislated requirement in New Zealand on the majority of non-life insurers since 1994 under the Insurance Companies (Ratings and Inspections) Act 1994.
This was a sensible and prudent measure in the absence of any effective legislative and/or specific regulatory requirements around insurer solvency and financial stability.
However, with the introduction of the Insurance (Prudential Supervision) Act 2010, the solvency and capital management requirements were defined in specific terms, with the intention of providing comfort to the community that the risk-based regulatory regime was playing its part in preventing insurer failure to meet policyholder obligations.
These measures were generally welcomed by insurers and while the current review suggest some adjustments, the broad thrust of the financial and capital requirements have been confirmed as being robust, appropriate, and prudent.
So, the question then arises as to why, if the measures in the Act are sufficiently stringent and exacting, insurers have to pay what amounts to another audit fee to private rating organisations?
To be honest, the suggestion that such ratings represent “a useful cross-check on the Reserve Bank’s view of the financial stability of insurers” wears somewhat thin when the additional costs of compliance already have a significant impact on expenses.
If the ratings exercise is so ‘useful’, what is it about the IPSA measures that are less useful?
And the other claim that “ratings are a useful independent opinion of the financial strength of an insurer which can assist policyholders and prospective policy holders to assess the risks associated with particular insurers” has no evidential support.
Indeed, in the recent past, examples of ratings being questionable are fairly and squarely in the public forum.
Witness the AA+ rating ascribed by Standard & Poor’s shortly before the US Government bail-out of AIG. Given the annual income S & P received from AIG, is it little wonder this rating stuck around longer than was appropriate?
Also, In the lead-up to the GFC, the ‘Big Three’ credit rating agencies: Moody’s, S&P, and Fitch, which between them held a collective 95% global market share, were giving subprime bonds BBB ratings that implied a 1 in 500 risk of default. Yeah, right.
Numerous commentators have cast doubt on the veracity and independence of the ratings agency since, so their credibility is seriously in question.
Finally, the assertion that buyers of insurance use these ratings as a guide is likewise dubious.
From experience of leading one of the last AAA-rated insurers in NZ, I could find no reliable evidence that consumers even understood the significance of the rating, never mind placing any reliance on the rating to determine their buying decision. At the time, we thought that it was a good marketing strategy; in reality, it had little impact on results.
In summary, compulsory blanket rating for all licensed insurers is a serious financial burden which, ultimately and unnecessarily, the consumer lands up paying for, but which fails to achieve any added value to the prudent regulation of insurers in the market.
If any aspect of IPSA 2010 needs to be seriously reviewed, it is this.
