Headline: Speech to Insurance & Savings Ombudsman’s Scheme Annual Meeting, September 11 2013, Pullman Hotel, Auckland, 6pm
Speech to Insurance & Savings Ombudsman’s Scheme Annual Meeting
Thank you for inviting me to speak. I am giving my valedictory next week and squeezing 23 years into 15 minutes is challenging. This is an opportunity to say something about two aspects of my time in Parliament – one relating to finance service providers – the other the insurance impact of the earthquakes.
The collapse of the finance companies at the time that I was Minister of Commerce will always haunt me. People lost vast sums of money that they had no idea was at so much risk. I remember one commentator saying it would have been better that there was no regulation of the finance sector rather than inadequate regulation which gave people a false sense of security.
But it was more than that. People invested money in finance companies not fully appreciating that a return on investment is based on risk; that there is no such thing as a safe bet; that people shouldn’t put all their eggs in one basket and that property values do not always increase, sometimes they drop. Many of these people thought that their investment was ‘safe as’ because they had heard one of their heroes say that on television and given that the interest rate wasn’t much more than what the bank was offering, what was the risk. But how would they know that the product was under-priced and they were getting less than they should have, because of the size of the risk they were taking? These products were deliberately made to look like secure bank deposits.
The collapse of the first three finance companies happened in 2006 while I was consulting on the discussion documents, known collectively as the Review of Financial Products and Providers. I announced the government’s decisions on the RFPP in June 2007 just three weeks before Bridgecorp collapsed and the domino effect began its devastating run.
In hindsight I have asked myself whether we could have prioritised our approach better. I also ask whether the early warning signs were not treated seriously.
The Reserve Bank was providing advice to the Minister of Finance on this sector, but didn’t see it as a threat to the money supply. The Securities Commission was issuing warnings about products that it had no jurisdiction over and expressing concern about finance companies. News media were being pressured into silence by threats of law suits. I remember people involved in the capital markets warning that under-priced risk was highly dangerous in an unsophisticated market with poor financial literacy. The expression the perfect storm fits this scenario well.
No one had a helicopter view and that is a lesson we can learn.
I started the RFPP and a National Minister, Hon Simon Power, completed the work. I had the privilege of chairing the select committee that was able to fix some of the things I didn’t get right as Minister. And the Minister took it a step further with the establishment of the Financial Markets Authority.
Is everything that was done perfect? I doubt it. Should we review it? Yes. I believe we need to regularly review whether what we have done has achieved our goals and whether it remains fit for purpose. Every two or three parliamentary terms would be good.
There were two elements of the Financial Service Provider legislation – registration and consumer dispute resolution.
The Insurance & Savings ombudsmen preceded the legislation. It was already a voluntary organisation that insurance companies funded. It was not set up for minor disputes as it had a $200,000 threshold and there had to be a ‘deadlock’ before the matter could be dealt with by the ISO.
Was this organisation prepared for the kind of shock that the earthquakes would impose on the insurance industry as well as the people of Canterbury? No, but then again no one was. Did it review its structure to ensure that it was fit for purpose going into one of the largest insured events in world terms? It would appear not and again in this ISO is not alone.
I suspect ISO has no real idea about the extent of the issues facing Canterbury. Sadly again they are not alone.
This is another case where there is no helicopter view; another perfect storm.
It’s also a case where hindsight is much more instructive than foresight proved to be. But this was unprecedented, not because of the scale of the damage alone, but because of the level of insurance. Full replacement policies abounded. It probably wasn’t an issue for the odd fire, but this was thousands of houses. Somebody surely should have been asking whether the existing structures were fit for purpose.
EQC employed 22 staff on 4 September. That went to more than 1000 very quickly. Any business organisation expert will tell you that it is not possible to scale up to that extent without consequences. That has been obvious with the benefit of hindsight. But no one stopped and asked whether that was the right approach.
Hindsight (along with some former staff) tells us we should not have used EQC as a frontline assessor. That should have been left to the insurers, with EQC essentially being billed for the first $100,000 for the house and $20,000 for the contents.
They could have scaled up to be the quality assurance body to review the insurers’ work on a random basis and they could have been the advocates for the policy holders. That’s something that people don’t get about Christchurch. People expected the government agency to be on their side.
The decision of the government not to seek leave to direct the reinstatement question to a higher authority than the High Court or to appeal the decision is beyond me. The earthquake sequence did damage to these properties in the year of cover. The need to apportion the damage between events reinstating EQC cover each time is not what EQC thought its legislation required. They certainly did not arrange their reinsurance on this understanding.
But leaving that aside, even with the decision there was no need to make this a stressful, reassessment process for people. The houses should have been fixed and the apportionment sorted out between EQC and the insurers. Homeowners have been caught in another minefield and they feel they have no one on their side.
Does this matter to the industry? Yes it does. The insurance contract is based on utmost trust and confidence.
That works both ways. And there are now thousands of Cantabrians who now think that the insurance industry wants to abandon them. Many have been easy pickings for international ‘claim farmers’, who have added another layer of complexity. Local companies have been set up, but how do can people know if they can trust them? That’s why I asked the Minister to look at how this could be addressed, but that hasn’t happened.
Parliament has had to vote additional Ombudsmen to be appointed largely off the back of complaints about EQC from Christchurch. This is crazy. We should be tackling the problem at source.
I believe we should sit down together and write up all the questions that need answers. We should agree the process for determining the answers in individual cases and agree to take the rest to arbitration or court so there is certainty.
We shouldn’t be abandoning the people to take on the insurance companies alone – people are fundraising to cover the costs – this is while they are under enormous stress.
This is holding back the recovery.
I believe that it is vital that the council, CERA, MBIE, EQC & insurers meet and settle this.
If there are outstanding flooding issues that need to be resolved then we need to work our way through that.
There are people in Christchurch that think this is a deliberate decision to transfer future risk to homeowners, letting the insurers, the council and government off the hook. We urgently need to find solutions.
This may not be the message that you were expecting to hear from me. It is not a criticism. In fact it is a plea for a partnership so we can work together on these issues and turbo-charge the recovery in the residential areas that have stalled, which is not just in the east.
I have been attending conferences, visiting places that have experienced disaster and meeting with experts in a range of fields. I have come to understand the connection between disaster risk reduction, climate change adaptation and sustainable community development. I know that building resilience is the answer to all of these.
I also know that the reinsurers are just as concerned about these issues as are governments. They cannot price risk any more than governments can prepare for everything.
Understanding risk – mitigating risk – mitigating losses – they are our mutual interest. Although the return on the financial investment may be the reinsurers’ driver, what they want and what government’s want are the same.
We are absolutely on the same page and that is why I believe that if we in Christchurch define clearly what we need to resolve and develop workable solutions, we will help to contribute answers to a worldwide challenge that we all must address. And the people of Christchurch will be able to repair and rebuild their houses with confidence in the future.
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