The RBNZ has failed its own report card as New Zealand’s insurance regulator. It lacked the experience and resources needed to carry out its role over a five year period.
These are a couple of telling insights from what is otherwise a self-serving 144-page review commissioned by the RBNZ to review (justify) its decision to apply to the High Court to send CBL Insurance Ltd (CBLI) into liquidation.
In spite of the criticisms, particularly around resources, insurance experience and capability, the review blankly concludes that the RBNZ acted ‘properly within its powers’ in putting CBLI into liquidation.
In doing so it unfortunately provides little insight into the reasons why the RBNZ moved to take liquidation action in February 2018 on a company that had cash on hand in excess of $500m, 540 employees, a market value of more than $750m and $100m plus of annual foreign exchange earnings to New Zealand. Nor does it say why the RBNZ failed to consider alternatives to such action.
The former Managing Director of CBLI’s parent company CBL Corporation, (CBL), Peter Harris, says: “The various stakeholders, and the public, deserve better from what the RBNZ had billed as a ‘thorough independent review of CBLI’.
“It is anything but that. 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. 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 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.
“As a consequence of these and other flaws, in our view the review falls dramatically short of being a document that would provide confidence to the public and international financial community that the regulation of NZ’s insurance market is in capable hands,” Mr Harris says.
“The elephant in the room is: Did this country’s only insurance regulator get the basics wrong? The issue here was the RBNZ’s concern over the reserving for our French business. The sale earlier this year of those French liability reserves to the European group Elite Insurance – at a value reflecting the level of reserves held in our books – is evidence that the RBNZ and its adviser McGrathNicol did get it wrong. PwC (NZ) our independent Appointed Actuary would have been able to shed revealing light on this to the reviewers if only it had been asked! In any case, the RBNZ seem not to have taken account of the fact that even excluding the French construction business the CBL Group FY17 unaudited results showed NZ$326m in revenue and NZ$75m in net pre-tax profit.
“There are many questions left unanswered. For example, why didn’t the RBNZ let CBL raise capital and divest its French liabilities reserves and businesses, and carry on? CBL had already publicly announced it would do this, and had mandated two internationally recognised and competent advisers, to act for it.
“And why have we, our auditors and independent actuaries never seen the 90-page RBNZ internal report prepared in August 2017 which RBNZ says concluded at the time that CBLI was regulatory insolvent and RBNZ had doubts as to whether CBL could raise the capital to bridge the gap? This report remains secret from the directors of CBLI. And where is the McGrathNicol investigation report that was being completed for the RBNZ during the eight months leading up to the RBNZ application to liquidate CBLI? We have been told by McGrathNicol that their report was abandoned in April 2018, without it being completed, or any outcomes arising from it. The review however, simply accepts that the decision by the RBNZ to liquidate CBLI was correct.
“The review found deficiencies in communication at the RBNZ. But it then fails to explore the consequences of this. Why, for example, was the RBNZ telling offshore regulators that we were insolvent in August 2017 when it did not tell us? Instead, the RBNZ’s comments came back to us via the same offshore regulators. And a total gag was then placed on CBL.
“Then after undertakings by the RBNZ in December 2017 that CBL would be allowed adequate time to present and work through an agreed solution, the RBNZ took liquidation action giving CBL less than a day’s notice of its intention to do so. It also applied for RBNZ consultant McGrathNicol to be appointed an interim liquidator on the basis there had been breaches of financial directions by CBLI without consultation – a matter that is hotly disputed and has never been independently examined or determined.
“To actually understand the motivations and dynamics around these questions a proper, independent inquiry is needed. It needs to be broadly-based, with access to information and perspective from all relevant parties – even more so given the review’s findings about the RBNZ’s lack of resources and insurance experience.”
“Did the RBNZ therefore get it wrong? The effective answer is yes, but the review is silent on this matter – again… this is cold comfort for all those who have suffered financial loss as a result of the liquidation.
“There is no scrutiny (or even question) as to whether CBL could have been saved. With a market capitalisation of $750m there was certainly significant headroom to raise capital, which was already under way and publicly announced when the RBNZ took its action. Then even after the fateful decision of 23 February 2018 there were other opportunities to salvage CBLI – all of which were actively skittled by both the RBNZ and McGrathNicol. Was it appropriate for the insurance regulator to act in this way? Its job as a model regulator is to enforce regulation, protect NZ policyholders and uphold New Zealand’s reputation in the international arena.
“So who was the RBNZ actually trying to protect? Certainly not the NZ policyholders who are still left in the lurch. Not one of them has been paid by McGrathNicol in 16 months. Certainly not the shareholders of CBL or its 540 staff, or its many international customers and clients. Certainly not NZ taxpayers, given that CBL was profitable and paid significant tax here. (CBL’s 2017 loss was its first in 13 years – an accounting book-loss reflecting adjustments to its in-force French policies for future claims stretching out up to 10–12 years, with those adjustments being expensed through the single FY 2017 year.)
“The efforts taken by us to pay out NZ policyholders in full and to produce a DOCA and underwrite the solvency of CBLI throughout 2018 were consistently opposed by the RBNZ and McGrathNicol.
“In summary, the review has not shown that the actions taken by the RBNZ and McGrathNicol were correct. We will have further comments to make once we have taken further time to consider the implications of the review and all the relevant circumstances,” Mr Harris says.