Failed insurer Western Pacific asked for NZ$5 mln govt guarantee for 5 years to "manage financial impacts of earthquakes"

By Amanda Morrall

The fate of 155 commercial earthquake claims with failed Queenstown-based Western Pacific Insurance (WPI) look to be in question according to official documents released outlining Government reasons for declining WPI's request for a NZ$5 million bail out.

Three weeks before the company went into voluntary liquidation, WPI approached Finance Minister Bill English and asked for the return of a NZ$500,000 deposit that enabled it to go into business and also a NZ$5 million bail out to cover an over-run in claims requests caused by the two earthquakes in Christchurch.

Treasury records show the request was declined on several grounds including:

• officials' assessment that WPI does not have a sound business model and there are no reasonable prospects for the business to continue as an unsupported going concern in the future 

• that WPI was likely to breach its reinsurance cover by a substantial amount

• the company's shortfall is not just in reinsurance recoveries but also in amounts above the reinsurance ceiling
•  
• and based on the assumption that the reinsurance contracts were valid and effective , the reinsurance recoveries would be available upon WPI's liquidation

In his March 11 bail-out request letter, WPI director Jeff McNally (black-listed in Australia for unscrupulous business practices in the insurance sector) noted the company was unable to pay an excess of NZ$1 million to qualify for reinsurance necessary to make claims pay-outs totalling more than NZ$12 million.  View a summary of WPI's  liabilities at the end of this article.

See Amanda Morrall's article here on how Jeffrey McNally, a director Western Pacific, was sanctioned in Australia before setting up Western Pacific in Queenstown.

 To read Western Pacific's NZ$5 million bail out request to Government, click here.

To view Government's bail-out decline letter click here

'Not enough money to cover excess'

Liquidator David Ruscoe of Grant Thornton, told interest.co.nz that the company's insolvency meant that reinsurers would have to fulfill their obligation, but confirmed that WPI did not have sufficient money to cover the excess.

While details were still being worked out, Ruscoe said the likely implications for WPI's customers with claims, is that it's unlikely they would receive the full amounts they were claiming. He said the excess that needed to be paid out would be deducted from pay-outs.

"We still have to do a full assessment of the losses and determine how much they'll cost.''

Ruscoe said the assessment process faced two major impediments: 1) the majority of the claims related to businesses located in the CBD which has been inaccessible until recently and 2) assessors have only just recently agreed to start making valuations having quit on WPI when it became apparently to them it was insolvent.

Between on-going negotiations with reinsurers, the backlog in assessment and the financial complexities of the case, it was unclear how much longer WPI customers would have to wait to have the fate of the claims resolved.

"Until we get directions on how the funds are able to be paid out we can't give any estimates,'' said Ruscoe.

"We are looking to get out a report in the next week or so, letting them know the steps that have been taken and where to from here.''

At the time it went into liquidation, Western Pacific had 7,000 customers on its books with a larger exposure to Christchurch.

In addition to the 155 claims from the two earthquakes, there were an unspecified number of other claims.

Ruscoe said he could not give an average amount on the earthquake claims but said the bulk related to insurance on commercial buildings and also business interruption.

Gary Young, chief executive of the Insurance Broker Association of New Zealand, said he was dismayed by the situation particularly as it didn't bode well for customers.

"It’s clearly a concern if an insurance company fails but you'd have to say we've been pretty lucky for a long, long time.''

Young said new solvency ratings requirements for insurers being introduced by the Reserve Bank were aimed at raising standards in the industry and protecting the public.

Western Pacific Insurance was well known (in the industry) as a black-sheep. It was on at least one occasion turned down by the Insurance Council of New Zealand for professional affiliation.

The company went into business back in 2005 on the strength of a NZ$500,000 deposit and on the back of a poor credit rating from Standard and Poor's. See Amanda Morrall's initial article on Western Pacific going under here.

Christchurch Earthquake 04/09/2010

Exposure to this event is $12,500,000

· To date $1,115,000 in claims have been paid. $888,000 from reinsurance recoveries and $227,000 contributed by

Western Pacific.

· $827,000 in claims have been settled and are awaiting payment.

· $10,560,000 in claims have yet to be settled.

· Total losses are in the final stages of settlement with immediate payment demands.

· Western Pacific has paid $167,000 in GST on these claims, as all reinsurers are based offshore.

· Until now Reinsurers have been operating on an industry protocol whereby Western Pacific and its Reinsurers pay

out on a proportional basis. Since the February 22nd earthquake Reinsurers have indicated that there will be no further

payments until Western Pacific has paid its $1,000,000 excess. Western Pacific does not have the cash to operate this

way.

 

Second Christchurch Earthquake 22/02/2011

At this very early stage with no access to the CBD we have limited knowledge of our losses; we have reserved $12,000,000 for this

event.

· $1.2 million in claims already lodged.

· $10.8 million in expected damage in the CBD.

· Claimants are requesting provisional payments for Business Interruption Insurance already.

· More total losses are expected than the first Earthquake, with immediate demands for settlement and payment.

· All indications are the Reinsurers will not make any payments to Western Pacific until it has paid its $1,000,000

excess, and that they will take a hard line in establishing, assessing and approving claims given the amount of money

involved.

 

Other Liabilities

· NZ General Claims - $56,000 awaiting payment and $626,000 reserved.

· Pacific Islands Claims - $115,000 awaiting payment and $200,000 reserved. The reserved amount is legal fees

relating to litigation from Yasawa Island Resort & Spa in Fiji. We are denying this claim on two reasons, nonpayment

of premium and arson exclusion in policy wording.

· Australia Claims - AUD $100,000 awaiting payment and AUD $1,900,000 reserved. The reserve includes $1,200,000

in claims relating to Cord Consultants Pty Ltd.