FENZ levy 'outdated, unfair'

New Zealand's Fire & Emergency Services Act levy is "totally outdated, unfair and unsustainable", Insurance Council of New Zealand CEO Tim Grafton told the NZILA conference.

The battle against the FENZ levy was lost, but the war would continue, he said. "Not only is it wrong and unfair, it is unsustainable. This will be partly due to the types of insurance product that will come on the market making it all but impossible for FENZ to collect the levy. Just think of life-time insurance built in by an offshore original equipment manufacturer; or autonomous vehicles; or a single life-health and general insurance cover."

Mr Grafton said a major concern was if FENZ grew to include ambulance services and civil defence, further shifting its revenue requirement up and away from taxpayer funding. "Such moves though would have the advantage of highlighting the inequity of the levy and might even force insureds to become politically agitated."

He said commercial property owners felt the most pain. "Some property owners, as a result of the 40% increase in levies from 1 July, are now paying more in levy than their premium. The next levy change, which under the new Act applies to all policies that cover material damage, will be problematic as FENZ will not, with any precision, know what its revenue will be. So either the levy will be too low or too high, with further adjustments required later."

Mr Grafton said the NZ Government's decision to exempt travel insurance from the levy was wise. "We are now urging to have liability policies exempted, because there is a view that if a liability policy compensates the insured for damage it has caused a third-party property, the policy broadly speaking relates to property and can be levied.  It was never the intention to levy liability insurance and we need it to be exempted for absolute certainty."

ICNZ was concerned about FENZ's "aggressive culture" in pursuit of the levy. FENZ should be reasonable about innocent errors and reserve its full powers for deliberate levy evasion. 

Mr Grafton outlined problems with s9 of the Law Reform Act 1936, which was "drafted well before claims-made liability insurance was dreamt of, so its wording is awkward when applied to that insurance".

It was "the headline issue insurers have identified that ICNZ would take into an insurance contracts law review".

He said insurers only provided claims-made insurance to provide certainty for all parties at the period of insurance. "Once the period of insurance has ended, both parties know if there are claims liabilities or not. But the s9 charge attaches retroactively ‘on the happening of the event giving rise to the claim'. This means a claims-made policy that expired in, say 2010, could be charged by a plaintiff who does not suffer a loss and file a claim until 2017. This defeats the purpose of claims-made insurance."

Mr Grafton said another major issue was determining priority of claims where multiple claimants had an aggregate claim that exceeded the sum insured. ICNZ asked for review of s9 in 2015 after McCullagh (a case that found s9 did not apply to sums insured offshore) and has continued a campaign, to no avail, since.

In that time, the New South Wales Law Commission conducted a full review of its equivalent – s6 of the Law Reform (Miscellaneous Provisions) Act – and repealed that law by replacing the statutory charge with a right for an aggrieved plaintiff with a claim against the liability insured to issue proceedings directly against the insurer.

Mr Grafton said the NZ Government had announced some changes to the Earthquake Commission scheme and ICNZ was supportive.

"Shifting contents to insurers reflects the need to focus the scheme on what it is there to do – help rehouse people after a disaster. A standard $1,000 excess simplifies the current approach and aligns more closely with private insurance practice. Lifting the cap by 50% partially reflects the fact there has been no change for nearly 25 years, but signals the desire to see private cover remain the principle source of funds for the most damaged properties. Raising the cap off-sets the price impact of transferring contents to the private sector," he said.

The move for all claims to be lodged with insurers, as is happening with the Kaikoura quake "does not go far enough".    

"Insurers should act as agents of EQC so we take responsibility for assessment of loss and settlement of claims on [its] behalf.  EQC would retain full audit rights in the same way as reinsurers exercise them over insurers world-wide. Such an approach is logical. Customers deal with their own insurer as opposed to an entity they have never dealt with before. Insurers know from the get-go which are the most damaged properties instead of receiving over-cap claims from EQC [more than] seven years after the first of the Canterbury earthquakes."

Mr Grafton said claims management was an insurer's core competency, so EQC did not need to be on the scene managing claims because having two entities on the ground could confuse customers. Unless the government provided clearer direction about where responsibilities lay, "insurers may be reluctant to invest in the systems and infrastructure needed to manage claims for EQC".

"Another necessary change will be to ensure EQC's standard of reinstatement is the same as that of the private insurer. This would remove many of the grounds for dispute that arose in Christchurch and frictional costs between EQC and insurers.   Loss adjusters would only need to refer to the policy for the standard, that is, the policy homeowners chose to buy as opposed to an Act of Parliament they will be oblivious of. Any concern the insurer's policy would fall below the minimum standard  could easily be addressed by giving EQC the ability to set minimum standards."  

Mr Grafton said the Insurance Prudential Supervision Act's 2018 review would be an ICNZ focal point. "It is disappointing the review is not being conducted independent of the Reserve Bank that administers the Act, as occurs elsewhere across the public sector.

"We don't see the review radically overturning the three pillars regulatory framework of self-discipline, regulatory discipline and market discipline. The review's overall intent is to ensure the Act supports a cost-effective, sound and efficient insurance sector that the public can have confidence in."

Mr Grafton said ICNZ believed RBNZ would prioritise its focus on the scope of who the Act should apply to, treatment of overseas insurers, the regulatory tool-set it has available, and the disclosure framework. "It's quite possible the next iteration in the review will be the release of separate consultation papers on each of those areas followed by an overarching consultation document later in 2018 that wraps up all the issues."

He said the terms ‘insurer' and ‘insurance' should be used only by licensed insurers. "Consumer detriment arises when what they think they bought as insurance isn't that at all."

He said NZ was absolutely dependent on offshore insurers and reinsurers, so the bank had a tricky balancing act about "how onerous it chooses to make it for offshore insurers, for instance, in considering holding assets in NZ, while ensuring NZ-based insurers are not operating at a disadvantage in terms of solvency requirements".

ICNZ did not favour statutory funds to meet insurer collapses. "Good regulation, specially with a 1:1000-year solvency threshold should minimise the risk of collapse. However, we expect to see greater clarity from the bank on how it will attend to insurer distress management."