By Andrew Hooker*
History suggests that a state run insurance company will do little to improve the position of the consumers.
Ask the people of Christchurch how they feel about the state run EQC or many of the “customers” of ACC and you might get an idea about whether a state run insurance company may solve this problem.
What is needed is more regulation of the current insurers.
The Government seems to be disinterested in regulation of the activity of general insurers with one of the most important pieces of regulation languishing for years without being passed into law.
Many years ago our Law Commission made some recommendations in relation to some well overdue reforms to the insurance sector.
The draft legislation languishes without being enacted.
There are a number areas of insurance law that need to be regulated. The first is that strange and archaic doctrine peculiar to insurance law, that dates from the 18th century – utmost good faith.
For some reason known only to historians of insurance law, insurance companies can get out of paying claims and can terminate policies if you forget to tell them something that they never even asked you about. Mr and Mrs Jones from Wainuiomata are expected to know what their insurer wants to know about their life, their assets and their finances. And if they get it wrong them their policy can be void.
The Law Commission recommended that this be changed, but nothing has happened, and every day people have their insurance invalidated because of an innocent mistake or oversight.
The other area relates to the way that insurers stick together and refuse to insure people.
If you have ever had a policy declined or cancelled whatever the reason, you will find that almost no-one will insure you.
Insurers can’t be forced to insure you, and they seem to forget that insurance is a necessity not a privilege.
There needs to be reform in this area so that the circumstances in which insurers can refuse to insure people is regulated. Insurers need to accept some social responsibility, and provide this essential service to people who need and deserve it.
In the claims area, it would be simple to put in place statutory codes of practice or rules about timing and handling of claims.
Other sectors such as real estate agents, financial advisers and the legal profession are governed by statutory based codes of conduct. Other countries have insurance commissioners who have real teeth to control the industry. But in New Zealand, the industry is almost unregulated in terms of its handling of claims and customers. This is what needs to change.
Don’t worry about the insurers losing money.
Premiums are high and insurance companies report spectacular results, with the huge Australian group that owns State Insurance, NZI and AMI reporting that for the 2013 financial year in New Zealand, premium income increased by 26.8% and the business delivered an underlying margin of 11.1%.
So when the big overseas insurers threaten to pull out if they are regulated, there will undoubtedly be others who will fill this gap.
There needs to change.
But the experience of many New Zealanders with the two state owned insurers – EQC and ACC - suggests that a state owned insurer is not the answer.
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*Andrew Hooker practices as a specialist insurance lawyer in Albany on Auckland's North Shore. He is also director of Claims Information Specialists Ltd, an insurance information website.
7 Comments
Gah, all these industry shills coming out denounce this idea is so predictable.
Comparing Kiwiassure to ACC or EQC is erroneous. In both of the former cases NZers don't have a choice about opting out. With Kiwiassure, there is no compulsion to join or be a customer - what on earth is the problem with that?
Kiwibank, is a good example of providing a government-backed alternative to the foreign-owned companies. If the service from Kiwibank was so terrible or their product offering was so limited, they wouldn't have any customers and the market would take care of it.
I would normally expect all these right-wing commentators to say that a new competitor in a 'free' market is a great thing. Funny how since it's not owned by a large corporate that they declare it's a terrible idea!
The market for insurance like many markets tends towards consolidation- fewer and fewer players as mergers and takeovers are allowed under our strange and baffelling understanding of competition.
An interesting thought mentioned previously by someone on the site was to ask how many participants control 80% of the market. The number across a great many parts of New Zealand commerce is worryingly few. Most obvious in grocery there are only two players. Banking only four. The private sector - large corporates of course- hate competition and work very hard to minimise it. A dose of creative destruction is the best medicine.
I have been trying to get insurance for a new propty, but found the process incrediably difficult, the insurance very expensive to get. Most I tried looked to be owned by the same parent, so had the same terms. The others I tried needed me to get and pay for a valuation report, and they still couldn't confirm that they would cover me. So I would welcome more competition, especially since the EQ's.I wouldn't normally vote for labours policies, but this is a good idea, and I don't think anyone would say that kiwibank hasn't been good for competition in the banking sector.
History suggests that a state run insurance company will do little to improve the position of the consumers.
If that were true, then the current insurers have nothing at all to worry about. Indeed their business model, instead of being suspect, would be validated by a government entity providing a similar service at similar prices.
It seems more than plausible that in fact consumers will benefit in this case; hence a bit of teeth gnashing by the current industry.
Andrew, the two approaches are not mutually exclusive. I would support the regulatory proposals you refer to. However, there are also merits in Labour's proposal as well, if implemented intelligently and managed prudently.
We were red-zoned in Christchurch and know full well the shortcomings of EQC (and don't get me started on ACC!), but remember, EQC is in a monopolistic position, not subject to the disciplines of the marketplace, not really accountable to anyone, and was mismanaged by politicians, including the incoming Key regime who ignored sound Treasury advice, that, if followed at that time, would have gone a long way to avoid the current debacle.
Given that private insurers are unlikely to want EQC's role, do you see a future for it? If so, what reforms would you propose to make so as to give EQC a viable and useful role in the future insurance landscape?
For the good of all Kiwis this industry needs Govt regulation.
At the time of the quakes, Vero had a small part of the ChCh business and had $6 billion in reinsurance cover.
AMI had most of the Canterbury business and had 800 million in reinsurance.
AMIs low policies attracted the business and were achieved by gambling on the reinsurance cover.
This was fraud pure and simpe and the perpetrators walked away from the AMI collapse.
The AMI management was as guilty of fraud as any of the Finance Company thieves.
And you, the tax payers of NZ are paying for their fraud.
At the very least the industry needs oversight to ensure the reinsurance cover matches the business sold.
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