Independent review finds the RBNZ had concerns about CBL Insurance's solvency from the time it was licensed, but never intervened with any real force; Says the regulator should've deterred the company's parent from floating on the stock exchange

A review of the Reserve Bank’s (RBNZ) oversight of collapsed company, CBL Insurance, has found the regulator had concerns about its solvency from the time it was licenced in 2013, but didn’t act until it was too late.

The 144-page report, commissioned by the RBNZ and written by John Trowbridge and Mary Scholtens, showed the RBNZ spent years going back and forth with the insurer over its finances until a Gibraltar regulator rung alarm bells in 2017, when a company CBL Insurance provided reinsurance for was found to be under-reserved.

While this kicked the RBNZ into action, the review found the regulator had been particularly “lenient” with CBL Insurance from mid-2014 to mid-2015.

The RBNZ was concerned about CBL Insurance’s solvency, but gave it “the benefit of the doubt in relation to its explanations and the actuarial advice that the Appointed Actuary was producing”.

The review said the RBNZ should have used its powers to “deter” CBL Insurance’s parent company, CBL Corporation, from listing on the NZX in 2015 until its concerns were resolved.

“Indeed, we note the Bank was hesitant to take critical action until it had a high level of confidence that CBL was materially under-reserved,” the report said.

It noted independent investigators that looked into CBL Insurance’s affairs in March 2018 concluded: “Irrespective of which set of figures is used, it was now evident that CBL had been consistently under-reserved since before licensing in 2013 and the scale of under-reserving was being exacerbated by continuing growth in the volume of premiums written each year up to and including 2017.”

RBNZ’s caution ‘less than prudent’

The review coined the RBNZ’s “cautious approach” to investigating CBL Insurance more closely when suspecting under-reserving as “less than prudent”.

It essentially concluded the RBNZ lacked capability, experience, resource and judgement.

CBL Insurance was placed into liquidation in November 2018 and CBL Corporation in May this year.

CBL Corporation had a market capitalisation of $747 million before the trading of its shares were suspended in February 2018. It owes creditors $179 million.

Trowbridge and Scholtens characterised the failure of CBL Insurance as a “major regulatory event”, with Trowbridge saying in a media conference he had never seen such under-reserving before.

The pair was satisfied the RBNZ acted appropriately in keeping its investigations into CBL Insurance’s reserving confidential.

Even though they criticised the RBNZ for not getting to the bottom of CBL Insurance’s solvency position sooner, Scholtens said it was “prudent” for it not to go public until it had all the information it needed to confirm its concerns.

Governor: The failure is ultimately CBL’s

In the RBNZ’s defence, the review recognised that because CBL Insurance’s business was almost entirely done offshore, the RBNZ saw its impact on the New Zealand insurance sector and the economy as low.

This, coupled with the fact it was focused on insurers impacted by the Canterbury earthquakes, meant the resources it allocated to CBL Insurance had to be “balanced against other priorities”.

While Deputy Governor Geoff Bascand saw the situation as one of “disputed information”, Governor Adrian Orr said it was still ultimately CBL Insurance's failure, not the RBNZ's. 

“It’s not a zero-failure regime that we run," he said, noting the need for market discipline.  

Nonetheless, the RBNZ accepted all the recommendations, saying they would strengthen its regime. 

"We are reviewing key regulatory requirements to boost the resilience of our banking and insurance sectors, and we are intensifying our supervision of financial institutions. In short, we are recalibrating the rules and our enforcement of them,” Bascand said, noting the Government was reviewing the RBNZ’s regulatory tools as a part of Phase 2 of the Reserve Bank Act review.

He expected this to “support investment” in the RBNZ.

Former CBL director: The company was 'commercially viable'

Former CBL Corporation managing director Peter Harris strongly refuted the review. 

"In the end we have got a report that was restricted to interviews and inputs from the RBNZ itself, capturing the views and suppositions of its staff and using information it provided," he said.

"Some of it is simply wrong. It makes criticisms of many parties – including me, the CBL Board, AM Best and PwC (NZ) in its role as the independent Appointed Actuary. But to my knowledge none of these parties were interviewed to provide their side of the story or their analysis.

"And some of the criticisms of CBL are based on undefended and unproven allegations, and are completely rejected...

“There is no scrutiny (or even question) as to whether CBL could have been saved. With a market capitalisation of $750 million there was certainly significant headroom to raise capital, which was already under way and publicly announced when the RBNZ took its action...

“There is a dearth of robust analysis in the report to justify the RBNZ using its unimpeachable position as statutory regulator of the insurance industry to take such a radical step to effectively destroy a company that, on anyone’s watch, was commercially viable."

Recommendations

In short, the review recommended the RBNZ:

• Act decisively, making full use of the powers available to it when in doubt about a company’s financial soundness;
• Strengthen the governance obligations of insurers through greater scrutiny and accountability of boards, management and appointed actuaries;
• Increase resources to the supervisory team and the policy team to a level consistent with the Bank’s goals, priorities and risk appetite;
• Modify the Solvency Standard and, if necessary, seek to modify the Insurance (Prudential Supervision) Act 2010 to strengthen the capital management and solvency framework for licensed insurers.

Interest.co.nz is awaiting a response from Finance Minister Grant Robertson. 

Here is Trowbridge and Scholtens' summary of the RBNZ’s overall performance as prudential supervisor:

2012 – 2013: pre-licensing and licensing

During pre-licensing and licensing in 2012 and 2013, when the Act was new and being applied for the first time, the Bank's processes were sound and the Bank made a sound decision in granting CBL a licence despite concerns over some aspects of the company's affairs. These concerns were to be followed up after licensing.

2014 – 2016: "business as usual" supervision phase

Soon after Bank supervision commenced in 2014 following licensing, the Bank had some misgivings about CBL's claims reserves and solvency. Its efforts to resolve these misgivings encountered some difficulties in both 2014 and 2015 that were not resolved during this period, mainly for reasons internal to the Bank. Lessons from this period form the major part of our findings and have resulted in a number of recommendations to strengthen the hand of the Bank in future through some regulatory changes and modifications to the Bank’s supervisory arrangements.

2017 – 2018: international interest and insolvency

CBL's largest single source of inwards reinsurance business was Elite of Gibraltar. In mid-2017, the Gibraltar FSC raised the alarm with the Bank on Elite’s solvency. The Bank responded strongly at that time, appointing investigators and two firms of actuarial experts to examine CBL's claims reserves and solvency. CBL’s Appointed Actuary and the investigating actuaries all saw the need for substantially increased claims reserves at that time (late 2017 and early 2018), demonstrating that CBL was not meeting the Bank’s solvency requirements.

During this period the Bank acted firmly and decisively and, in our view, properly within its powers, leading ultimately to interim liquidation in February 2018 and full liquidation in November 2018.