9/6/11
4:04 PM
Page 25
NZ Herald
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Underpriced, undermanaged, under administration: The death of New Zealand insurer Western Pacific has raised questions and old history By Ben Oliver
Relying on their insurer: Simon and Erin Nicol move out of their suburban Christchurch home after it was “redstickered”, meaning it will be demolished. Thousands of the city’s residents would have been left broke and homeless if AMI had been allowed to run out of money
ownership of racehorses in the latter category”. AMI Chairman Kerry Nolan fired back, saying he didn’t fully subscribe to the view that directors needed to be experts in the field, and that “in our case, we have… John Balmforth, who, of course, has extensive insurance experience”. But Mr Westlake says Mr Balmforth’s career “was mainly in corporate banking, not insurance”, and that some board members had been “long entrenched in their positions”. While AMI’s directors and executives seem relatively sanguine about their skills, scrutiny of the composition of insurance company boards will be one of the new regulatory roles taken up by the Reserve Bank of New Zealand after October. Reserve Bank officials will also be keeping a close eye on two other insurance companies that are said to be at “at high risk of failure”. The companies in question have not been named. The documents released last month say the New Zealand Government feared “contagion effects” and “massive disruption” to the industry if AMI failed. Finance Minister English says there may be companies which are financially stressed, [but] “they have owners or other ways of raising capital” – suggesting that the insurers in question could have Australian-based parents.
insuranceNEWS
THE SHORT LIFE OF Western pacific Insurance has come to an abrupt and foreseeable end. Amid a surge of earthquake-related claims that eventually swamped the niche insurer, Western Pacific was placed into voluntary liquidation in April, leaving 7000 New Zealanders and an unknown number of Australian and AsiaPacific policyholders scrambling to find alternative cover. Pundits are now discussing if the company’s collapse is a failure of prudential regulation, underwriting principles or corporate management, or a combination of all three. The collapse of the company is, sadly, yet another case study in what happens when risks aren’t priced appropriately and regulators don’t have the tools to act decisively. While mutual insurer AMI Insurance – likewise routed by earthquake insurance claims – has been given a $NZ500 million Government bailout to ensure its survival, no such largesse has been extended to Western Pacific, leaving a $NZ3.8 million hole owing to unsecured creditors and $NZ1.9 million in unsettled claims [see side story]. Since launching in 2005 and receiving its first credit June/July 2011
rating of a “B-” from Standard & Poor’s in 2006, Western Pacific has styled itself as a niche insurer offering a specialised and competitive service to SMEs. The company was founded by Queenstown business identity Graham Smolenski and his brother-in-law Jeffrey McNally, a Melbourne-based former broker who provided the insurance nous. From the start, offering low premiums in specialised sectors was apparently Western Pacific’s modus operandi. But what the company called competitive prices is now being referred to by competitors as price-gouging. “Generally speaking, where clients opt for a cheaper product and inferior coverage they do so because they don’t value their insurance coverage and take out insurance only because it’s necessary,” Sydneybased SRS Underwriting Agency Director Paul O’Leary told Insurance News. Over the past few years, SRS Underwriting, one of Australia’s major Lloyd’s coverholders, has consistently lost business in Australia to Western Pacific “at prices less than half our terms and excesses”. “Clearly this business was 25