Any NZ inquiry into the conduct of the financial services sector will require a lengthy and deep probe into the insurance sector, Gareth Vaughan argues

By Gareth Vaughan

Alongside the demand for New Zealand banks to prove their conduct towards customers is better than that of their Australian counterparts, the Financial Markets Authority (FMA) has also indicated it plans to demand the same of local insurers.

And in the New Zealand context, the spotlight falling on insurers might just be more illuminating than what emerges from the banks.

Question: What's the worst systemic conduct by a corporate in the NZ financial services sector that has come to light over the past three years or so?

Answer: Surely the behaviour of Youi, which emerged through a painstaking investigation by freelance journalist Diana Clement published by interest.co.nz in 2016 here and here. Youi was ultimately fined $320,000 for misleading consumers with ambush sales tactics after the Commerce Commission filed 15 sample charges relating to misrepresentations made to consumers. 

As Clement herself put it; "In my 30 years as a journalist, 20 of those writing about financial services, the Youi prosecution is the worst case of mis-selling to consumers I have ever encountered. I have to say, hand on heart, that I have never come across a company whose sales methods were so inappropriate for the product that they are selling." 

Indeed Youi's behaviour stands alongside some of the dire examples of bad conduct exposed in Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Earthquake claims

Elsewhere in the insurance sector there's the issue of the industry's handling of Canterbury earthquake claims, and the painfully slow way these were dealt with in some cases. According to the Insurance Council of New Zealand, 92%, or 25,301, of over-cap properties (over $100,000) had been settled by the end of March this year. Or put another way, over-cap claims related to 8% of quake-damaged properties remain unresolved more than seven years after the devastating and tragic February 2011 earthquake.

In terms of the conduct of insurers towards Canterbury earthquake customers, there have certainly been ugly stories to emerge. For example, a judge ordering Tower to pay a quake claimant more than four times its settlement offer, and finding the insurer guilty of withholding information.

And what of the role of the state owned Earthquake Commission (EQC)? The Minister Responsible for EQC, Megan Woods, is already conducting an inquiry into the organisation following the revelation it has spent $270 million on re-repairs. Also Christchurch earthquake related, is the $1.48 billion of taxpayers' money going down the black hole of failed private insurer AMI, under the guise of Southern Response. To top it off Southern Response has been exposed for spying on customers.

Arguably across the insurance sector it's difficult to assess an overall pattern of behaviour in terms of how insurers handle their customers’ claims because New Zealand does not regulate insurers' conduct. As Jenée Tibshraeny reported last year, this was a key point highlighted by the International Monetary Fund in its Financial Sector Assessment Program on NZ. Encouragingly Commerce and Consumer Affairs Minister Kris Faafoi did recently announce a review of NZ’s insurance contracts law that dates back as far as 1908. 

Let's not forget the issues of insurers paying commissions and offering incentives to financial advisers who sell their products. One example is $95,000 junkets to London.

And what of CBL? 

Elsewhere in the insurance sector there's the case of CBL Corporation, a credit surety and financial risk provider that - among other things - insured building warranties. It was placed in voluntary administration on February 23 - the same day the High Court placed its subsidiary, CBL Insurance, in interim liquidation following an application by the Reserve Bank. As prudential regulator of the insurance sector the Reserve Bank alleges CBL Insurance breached orders it made over concerns around the company's solvency, by paying $55 million to overseas companies in February.

Separately the FMA is investigating CBL Corporation over concerns around the “completeness and veracity” of information the company released to the share market. CBL Corporation also has issues with overseas regulators. Thus it's hard to know quite how this situation may play out.

Meanwhile, an interesting aspect of NZ's insurance sector is just how consolidated it is. When our regulators gave the greenlight to Insurance Australia Group's acquisition of Lumley in 2014, it took IAG, which also owns the NZI, AMI and State Insurance brands, to 66% of the home and contents and vehicle insurance market. That would roughly be the equivalent of ANZ buying ASB's home loan book, and BNZ's as well, - something that it's almost impossible to imagine regulators allowing.

I recently argued that, whilst NZ banks are not saints, there's not enough evidence of systemically bad behaviour to justify holding a Royal Commission into their conduct, - at this point. A Royal Commission is the option for a costly formal government inquiry “reserved for the most serious matters of public importance.” We had one into the Pike River mine tragedy and into building failure caused by the Canterbury earthquakes, for example. And in February the Government established a Royal Commission of Inquiry into Historical Abuse in State Care.

In Australia several years' worth of evidence of dreadful banking sector conduct piled up forcing a reluctant government to hold a Royal Commission. In NZ, as detailed above, there's currently a stronger evidence-based case for a Royal Commission into the conduct of the insurance sector than the banking sector.

But if we don't get a Royal Commission, it's possible we could get another form of inquiry in NZ. As revealed by interest.co.nz's Jason Walls, one alternative could be parliamentary select committee hearings. 

If any form of inquiry ultimately does goes ahead, be sure not to miss the segments devoted to the insurance sector. They may just be the most enlightening, or disturbing.

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