Insurance, Potentially One Of Mankindís Greatest Inventions!

- Sarah Miles

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Whilst I have much to say about the private insurance industry after the Canterbury quakes; I also believe that New Zealand has much to learn about the insurance product, and how to “successfully recover” from a natural disaster. Certainly what we are seeing take place in Canterbury after the 2010-2011 earthquakes can be called many things but “successful” is certainly not one of them. On the demand side we have an obligatory and mandated system whereby households are required, and in the most part are willing, to pay the actuarial cost, and perhaps more if necessary, to purchase insurance against the loss of their most valuable asset - their home. Then on the supply side there are several large insurance firms, predominantly international, who are in the business of underwriting insurance risks. This is a standard “market” scenario. Nevertheless, what we have experienced after the earthquakes is a highly imperfect market for catastrophe insurance.

True, insurance companies are in the business of making money; however they are not normal businesses. They have particular fiduciary duties (both in statute and case law) which require them to protect their customers. Those duties are the duty to deal fairly and to act in good faith. With these duties in mind, insurance companies must act in a manner which transcends “normal” business. Once upon a time insurance companies were primarily mutual companies, meaning that they were owned by policyholders, for the benefit of the policyholders and profits were distributed to the policyholders. There was little incentive to defraud or cheat the client. However, since the 1970s there has been a move toward for-profit corporate structures, with insurance companies, often foreign, being owned by shareholders. This necessarily places the company in the position of deciding whose interests to serve, that of the shareholders or those of the policyholders. The difficulty arises in that they have a fiduciary duty to both their shareholders and their policyholders. 

Breach Of Faith

In watching how matters have proceeded in Canterbury the only conclusion one can come to is that the current profit-driven model not only leads to a breach of the fiduciary duty of good faith to the insured but also to the company’s duty to its shareholders. The current low-principled behaviour of the insurers leads policyholders to seek justice at the courts and we are seeing the industry perpetuate bad behaviour which in turn may ultimately affect both the profitability and the reputation of the insurer, which has the potential to cause long term damage to the shareholders by lowering the overall value of the corporation. Having seen what we have seen, it may be a difficult stretch, but perhaps it is reasonable to say that those holding positions of power within the insurance industry want to believe that they are doing the right thing - that they are pursuing the public interest. But their beliefs are quite malleable and it does not take much for them to be convinced by certain “special interest entities” that what they are doing is in the public interest.

It has long been seen that the industries and economies that have flourished are those in which a man's word is his bond and a handshake an unbreakable deal. Without that trust, each participant to the deal looks at the other with great suspicion - and in this case, insurance is the deal we were forced to agree to, not one that we voluntarily chose - it's a deal required by institutional arrangements e.g. the banks. Yet it is social capital that holds our society together and if we do not believe that the product they peddle is fair or that the economic and political system that espouses it is fair, then the glue does not work and society ceases to function well. Let us not forget that our perceptions of unfairness do affect our behaviour. Let us also not forget that the confidence in a country's insurance system depends on the confidence in the ability and willingness of Governments to ensure that the system functions as it should. However, when Government believes that insurance should function in favour of the corporates, at the expense of the people, then it is time for change.

Yes, insurance is one of mankind's greatest inventions and when it works as intended it provides a level of protection to individuals which is second to none, but when it does not, wide scale misery ensues. Certainly, the power of insurance is enormous but it is also true that it has no inherent moral character. Yet what is critical to citizens post-disaster, when they are at their most vulnerable, is the importance they attach to fairness – but the current political system is so clearly amplifying the voice of big insurance corporates and Big Business generally. The Government has done little or nothing to call them to account, neither has the Opposition - leading to a failure to protect the ordinary citizens against profit hungry and often dishonest foreign-owned corporates and in turn to the enrichment of the wealthy at the expense of New Zealand society. Any sense of social justice would have led this Government to prohibit these activities. Yes, the legal system enforces certain aspects of "good behaviour" based on contract or convention. How people in organisations perceive those obligations as laid down in their contracts and conventions differ and are the source of differences of opinion and interpretation. 

Let us not forget that it is politics that has shaped the market, and has shaped the ways in which corporate power now has great advantage at the expense of the citizen. Any well functioning economic system must have rules and regulations. I am of the opinion that society and Government must operate within a fair and reasonable legal framework. We require behaviour by regulators that prevent political pressures from dictating policy. The legal framework for the protection of policyholders in this country is all but absent. Making myopic decisions based on the short-run political considerations of the party in power when it comes to insurance behaviour and regulation, is not wise policymaking. Public policy relating to insurance must be built on principles, not expediency. Only a structure based on a well-designed principle will lead to a better outcome for those at risk and add an improvement in social welfare. These principles would require that the insurance industry not take advantage of short-term profit opportunities by changing premiums dramatically such as the introduction of fixed sum insurance (without any discussion with its policyholders), abandon some of its customers and/or leave the market entirely (e.g. Ansvar).

Let us not forget that the focus of the insurance business community is not to enhance societal well-being as broadly understood, or even make markets more competitive: their objective is solely and simply to make the markets work for them, to make them more profitable. In order to achieve this - making their product less transparent is a favourite tool. The more transparent the product is, the more competitive they are likely to be. That's why insurers take advantage in relation to asymmetries of information; they take on excessive risk - with the Government holding a lifeline, bailing them out and assuming the losses (e.g. AMI). 

Modern capitalism has become a very complex state of affairs and those who do well at it have more than a “few smarts” - but they also possess many less admirable characteristics: the ability to skirt the law, or shape it to fit their own agendas; the willingness to take advantage of others, even the poor; and to play unfair when they choose. Our economic system rewards profits, no matter how they're made, and in a money-centric economy it is no surprise that moral scruples get set aside, supported by a Government which is always looking the other way.

Should Be Consequences For Unscrupulous Insurers Who Exploit

The Government on our behalf, can and should more stringently regulate the insurance industry and hold them accountable for their fraudulent practises and punish them for abuses of monopoly power. However we have seen a different trend, deregulation or minimal regulation has played a central role in the instability that we are experiencing which in turn increases the risk in times of disaster. Giving corporations and, especially the financial sector (including insurers), free rein is a short-sighted view held by the wealthy - it is they who have used their political weight to shape ideas and push deregulation. Regulation is there to define the rules and designed to make the system work better - ensure competition, prevent abuses and most importantly to protect those who are unable to protect themselves. The Government’s job is to set the basic rules of the game and enforce the law as well as providing the soft and hard infrastructure to enable an economy to function. Most would agree that this is sorely lacking in the insurance landscape of Christchurch today.

A modern society requires collective action, the country acting together to make decisions for the good of all. Our failure to make these choices is the result of a lopsided wealth distribution in society and a population that has lost sight of the fact that Government works for us, we do not work for it. The more divided the society becomes in terms of wealth, the more reluctant the wealthy are to regulate or legislate  in order to enhance common needs - as they don't need to rely on Government for education, medical care or personal security. Yes, greed is inherent in the human condition but it can and should be tempered.

For many Cantabrians the insurance industry's credibility has gone: instead we are seen to have an industry in which one party tries to disenfranchise the other all in the name of profit. There is, and there must be, a role for Government in providing a safety net, in "social protection" - protecting individuals and families against the risks they face, particularly against those situations over which they have no control. They should not be protecting corporations from facing the consequences of bad business practice.

Maintaining the kind of society, and the kind of Government, that serves us all, does not happen by itself. We have to do that for ourselves. One of the ways we can do this is by democratising access to justice and in so doing we can judge a system by its results. In Christchurch today we have to give the insurance industry, particularly the larger players, a failing grade. And to those who claim that we have done as well as expected in light of the enormity of the event and under the circumstances - I say “no” we have not. The slowness of progress has nothing to do with the enormity of the event - but with the internal processes of an industry whose sole focus is on profit at the expense of the policyholder. Do you really think it takes three years to settle a valid claim? It is for these reasons I believe we need to return to the public insurer model.

The Absolute Need For An Effective Public Insurer - KiwiSure

A “time of crisis” is not the time to be “leaving it to the market”. The whole Canterbury fiasco demonstrates that catastrophe insurance is simply too important to be left to the private insurance industry. I envisage instead, a Government-operated insurer which would provide us with a passive conduit, which issues policies, holds capital, and purchases reinsurance, all in the best interests of its policyholders. I have written about this extensively in Chapter 9 of my book “The Christchurch Fiasco: the Insurance Aftershock And Its Implications For New Zealand and Beyond” (reviewed by Jeremy Agar in Watchdog 132, May 2013, Ed.).

The Earthquake Commission's current performance leads one to question whether in fact the Government would be capable of doing a better job. Certainly an entire restructure and new management of EQC would be necessary. The Government does have the ability to reduce risk through aggregation and provide more cost-effective pricing as well as diversification of risk. Given the exit of private insurers, KiwiSure would be more cost-effective and efficient than any current system. The figures prove it. But only we can make it happen.

"The democratic ideal is that Governments are elected by their populations to carry out the will of the people and govern in their best interests. If democracy were functional and politics honest, it would be a fair assumption that Governments of the day would move to correct situational perpetuities which were not in the interests of the welfare of the citizens. Some such issues transcend party politics in the mind of the populace and should do likewise in the thinking of Governments of any persuasion. Effective disaster recovery management must be one such issue. Regardless of the voters' political colours, it is in everyone's interest to ensure that disasters are managed effectively and equitably. The Christchurch experience highlights a substantial conflict of interest between the public, the Government and private insurance corporations" (p174 “The Christchurch Fiasco”).

Beware New Zealand - the higher the cost of processing claims incurred by insurers in Christchurch, the higher the optimal deductible - you'll be paying this in your new fixed sum insurance* policies (using Canterbury as the justification for massive future profit). It is not uncommon after large scale events for insurers and reinsurers to belatedly recognise the risk and raise premiums even when there is incomplete and inconclusive evidence that points to the risk having changed. This despite the fact that the likelihood of a series of extreme events repeating themselves in the next few years is extremely low so there is little reason for the rise in premiums particularly if the cost of capital has not increased to reflect the concern of investors in committing funds to insurers. Governments do not have these capital constraints and can function as reinsurers should another large scale event occur. Insurers exhibit very erratic behaviour post-catastrophe - they exit the market temporarily in our case and those that re-enter charge very high premiums difficult to justify on actuarial grounds.

*Fixed sum insurance or “sum insured”. This is the cost to rebuild a home to the same size with similar materials at today’s rates. Any additional specifics of the home will also have to be taken into account - such as the cost of demolition, architect’s fees, retaining walls, planning and council consents etc. So if you have a retaining wall, landscaping, or a high end Italian kitchen, then you will have to inform the insurer. This will mean that the householder will not be able to rely on its Quotable Value calculation nor on the market valuation of their property but on the actual costs of replacing their home. The square metreage and quality of the building becomes critical. The onus will fall squarely on the property owner to ensure that they have adequately assessed the value of their property and update that value regularly.

The value of a rebuild can be carried out using an online building calculator which will produce a standard calculation based on average property values – for those with anything other than a bog standard property this methodology is no doubt inadvisable. The details provide the insurer with a general estimate of the rebuild cost. A “general estimate” leaves open the possibility for disagreement. A more certain method is for customers to provide their own valuation from an independent quantity surveyor, valuer or builder, but policyholders will have to bear these additional costs. A valuation can cost around $900, and if the homeowner has these done once a year, it is not an inconsiderable sum. How often do these valuations have to be calculated - every six months, every year? See my blog on

 Time To Think Seriously About Insurance, New Zealand!

If the current system remains in place - the question we seriously have to ask ourselves is "are we adequately insured?" My experience of having to fight tooth and nail for the equity in my home with IAG* as my adversary for the last three years, would leave me answering a categorical “NO” to that question. Is this an experience you want to subject yourself and your family to? If your answer is “NO” then let us - the citizens, band together to change the system. I hate to think of the consequences if the same event happened in Auckland!  Time to think seriously about insurance, New Zealand. The politicians won’t move unless we do. Our current natural disaster strategy can only be described as failed public policy, business practice and politics with the disastrous impact on the single largest group - the middle class. Our politicians are viciously and vacuously partisan and show absolute contempt toward their constituents - if this is not the case they would be seen to be doing something about the deadlock in Canterbury. In Canterbury many of us are finding this out the hard way! *IAG was a finalist in the 2012 Roger Award For The Worst Transnational Corporation Operating In Aotearoa/New Zealand. The Judges’ Report can be read at


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