I.A.G.’s insurance earthquake has implications for N.Z

I.A.G., owner of New Zealand Insurance, A.M.I. and State has announced that a more conservative approach will be taken in allowing customers to take out new insurance policies. The announcement from New Zealand’s largest insurance group means that insurance premiums are likely to increase as a result of a decision to turn some Wellingtonians away from new policies due to the high seismic risk in the area.

From I.A.G.’s perspective it might not be so surprising. As the largest player in the Wellington market, they have about 65% of all insurance customers, which leaves them spread rather thinly in terms of coverage and in an attempt to correct that exposure, perhaps we should not be so surprised.

And yet, I am sure many people will be. It was not a physical earthquake as such, but it might just as well have been as far as the wallet and insurance premiums are concerned. Despite two large earthquakes causing billions of dollars in claims, there are still complacent customers who have purchased insurance and probably locked the documents away thinking that they are all covered, as well as non-customers on a wing and a prayer hoping nothing of consequence happens in their life time.

One thing that needs to be pointed out is that the E.Q.C. cap of $100,000 has not been raised in its existence and even though it is going up to $150,000 later this year, that is only really a half hearted increase. An ideal cap would be $300,000+ – or completely removed altogether.

So, where does all of this leave New Zealand and New Zealanders in the long run? Will it encourage other companies to have second thoughts about who they insure; whether they too, are over-exposed in the market; can they meet their obligations in an emergency? Is it possible that perhaps these insurance companies are trying to pay nice, and are really only doing this because big international insurers refuse to take on any more risk in New Zealand? These questions and others will be demanding answers that might not be to the public’s liking.

I do not know the answer to any of this. However I am aware that the Institute of Geological and Nuclear Sciences discovered that the Wellington Fault, widely thought to be the highest risk fault in Wellington, is actually less frequently active than thought and that the last event on it was more recent than previously thought. The quake risk to Wellington, whilst still significant is from other faults such as the Hikurangi Trench, the Alpine Fault and whatever is lurking under Cook Strait.

I would like to see the methodology of how I.A.G. and other insurance companies calibrate their risk assessments. When doing the risk assessment for say a particular fault line, do they look at the entire known palaeoseismic record of the fault line or just a small part? When new research is released do they revise the risk component for that particular fault?

The blind rage against the Capital Gains Tax


Ever since the Tax Working Group’s findings were released, I have listened to the rage, the unrelenting anger at the possibility of a Capital Gains Tax. And the more I listen, the more I think it needs to happen.

Parties such as A.C.T. are blinded blinded by their ideological fury about the Capital Gains Tax. Be rid of it they all say: it costs the businessman and the landlord, the entrepreneur and the real estate agent, the industrialist and the farmer.

How dare you take away our wealth making means!

But hang on a minute. As Sir Kerry Burke, former Labour M.P., noted in The Press the other day, what about those who have acquired property simply because they could and not because they needed it or because they had any reasonable plans for them? Mr Burke gave the example of a person who had acquired 80 properties.

I believe a C.G.T. is needed, and that a good case can be made for one. The basics of it are that one would need to be simple but fair. So far people agree that the family home should be exempt for obvious reasons. I have given another reason above for going ahead – people who acquire property simply because they can stoke an overheated market and the distrust of the many who are literally priced out whilst the lucky few go about making millions.

There is another reason for wanting to do this. That is quite simply at some point it would be implemented anyway for better or for worse. We should try to implement this now with a fresh set of recommendations in front of politicians than try again at a later date.

If we on that basis proceed, then the questions should be about the rate at which it is set; what it covers and and when to make it law.

There is one final point that also needs to be made. The Capital Gains Tax is just a PROPOSAL. Neither it or any of the other 100 recommendations are law yet. And not all of them will be – although unlikely, the C.G.T. might be among them.

Capital Gains Tax lightning rod means significant other recommendations ignored

Nau te rourou, naku te rourou, ka ora ai te iwi

With your contribution, and mine, the people will prosper

The Tax Working Group’s final report has been out for a week now. Even after all that time, the politicians seem to have forgotten that Capital Gains Tax was just one recommendation in more than 100 made. So bent have they been on attacking/defending the recommendations, that the media coverage has been dominated by National Party leader Simon Bridges, A.C.T. Party leader David Seymour on the attack, Prime Minister Jacinda Ardern and Treasurer Grant Robertson on the defence. But what about the other 100+ recommendations?

This report, to be clear is not a compulsory check list of things that the Government needs to do. They are just recommendations based on a nation wide attempt in 2018 to gather from the public what would make a fairer and more just taxation system, that included a two month public consultation.

Those recommendations covered:

  1. Capital gains and wealth
  2. Environmental and ecological outcomes
  3. Taxation of businesses
  4. International tax
  5. Retirement savings
  6. Personal income tax
  7. Future of work
  8. Integrity of the tax system
  9. Administration of the tax system
  10. Charities
  11. G.S.T. and financial transaction taxes
  12. Corrective taxes
  13. Housing

I shall cover in the next few paragraphs a selection of recommendations from #2-13 – due to the heavy coverage elsewhere, there shall be none on Capital Gains Tax.

Environmental taxation is a regulatory tool that can be used as an incentive or disincentive in order to achieve certain environmental outcomes. The T.W.G. recommendations cover greenhouse gases, water abstraction and pollution, solid waste and transport. Interestingly, it does not appear to cover air pollution, despite aerial dispersal of dioxins and so forth being a significant issue.

Retirement savings are a constant concern, particularly for lower income earners who have to work longer in many instances in order to afford retirement. The recommendations include refunding the employers superannuation contribution tax for those earning less than $48,000; increasing the member tax credit from $0.50 to $0.75 for every $1 of contribution.

G.S.T. had concerns raised about it by the public. These were acknowledged by the T.W.G., but drew the conclusions that the existing rate should not be lowered on the grounds that the reduced rate would not target as lower income earners as welfare transfers or personal income tax changes (lower and middle income earners). Nor does the report recommend the removal of G.S.T. of certain items such as food and drink.

Housing is an area that one might have expected to come under C.G.T. However, this concerns residential land. There were two recommendations pertaining to vacant residential land. One was to recommend that the Productivity Commission inquiry considers a tax on residential land. The second was that vacant residential land be a local tax rather than a national tax.

This article is just a very brief look at a few of the range of taxation concern areas that were addressed by the T.W.G. – and which the politicians ignored, quite surprisingly given that several addressed some of the wealth that they were arguing over.



Learning from the Mainzeal collapse

Today several former Mainzeal company directors were ordered to pay N.Z.$36 million in a high court ruling. The ruling is the latest phase of a long running saga that started with Mainzeal going into liquidation in 2013 owing $110 million.

At the core of the problem is the fact that the boardroom directors of the company knew full well that it was in a parlous state, yet they continued to allow it to trade until it imploded. Four directors have now been ordered to pay $36 million in damages including former Prime Minister and National Party leader Jenny Shipley.

So how did Mainzeal get to this point and what lessons does it have for those in corporate positions of responsibility?

A Richard Yan was working for Mainzeal during the school holidays in 1981. In 1996, after completing a business degree, he oversaw the takeover of Mainzeal and the creation of Richina Pacific Group to manage his business assets. During the pivotal year of 2004, several things happened:

  1. Dame Jenny Shipley was asked to join
  2. Capital was extracted from the company to prop up business assets in China
  3. Mainzeal made a small profit that was wiped the following year, and then see-sawed in 2006-07

In 2009 PriceWaterhouseCooper had concerns about the solvency of Mainzeal. The following year Dame Jenny Shipley raised concerns about the worsening balance sheet. By the end of 2011 the working relationship between Mainzeal and the rest of Richina Pacific Group had deteriorated to the point that Ernst & Young were commissioned to do a governance report on Mainzeal.

And all this time fresh attempts to recapitalize Mainzeal were being attempted using various means, such as a pre-paid goods agreement, getting money back from China based assets and setting up entities in New Zealand to distract claimants.

Perhaps the death knell was a spat with Siemens in 2012 that saw them withhold payments over work upgrading the electricity links between the North and South Islands. Coupled with leaky building claims targetting Mainzeal work and the possibility Mr Yan’s wife might be made bankrupt if the company collapsed – leading Mr Yan to warn he would walk if his wife was not released from a guarantee she made to B.N.Z.

The final blow was struck when an emergency meeting in January 2013 saw a motion passed to invite B.N.Z. as the major bank involved to appoint receivers. It immediately suspended loans and shortly after the company caved in.

For years until being liquidated in 2013, it continued to trade, during which time it racked up $110 million in debt that will largely never be recovered.

The directors might have been ordered to pay $36 million, but as holders of liability insurance, it will come out of their company and not their personal pockets. Clearly not smart enough to realize that Mainzeal was in trouble, but smart enough to make sure their pockets were protected by insurance.

For me this is not good enough. If a person or company continues to trade and rack up debt despite knowing it is not in a position where it can realistically trade, then when balancing the books – or what is left of them, the creditors should be able to require the forfeiture of luxury assets to make up the difference.

Of course this would bring howls of rage from the defendants, highly expensive attempts to get the case thrown out in court and warnings of doom and gloom. With similar certainty, the allure of a directorship on a corporate board and the opportunities to make significant money would be enough to overcome the doom saying.

Historic examples of collapses make me wonder if New Zealand has learnt anything from corporate failure. Based on those examples, which include Bridgecorp in 2007 owing $490 million, Equiticorp in 1989 with $1.4 billion in assets and $550 million in debt, among others I think the answer is a resounding no. Whilst not as big, public expectations around the application of the law, the need for greater accountability and the Global Financial Crisis of 2007-2009 have all focussed the spotlight on these types of businesses in ways I think some with influence do not like.

E.Q.C. plunder example of New Zealand corruption

When one thinks of the Earthquake Commission (E.Q.C.), s/he might think of a body that has failed Cantabrians and New Zealand at large miserably. New Zealanders might look at the politics of it over the last 8.5 years and wonder why we still have it. But what if I told you at least in the 1990’s institutional ineptness was not the cause of the problems, so much as politicians using it as a lending body for their big projects?

This is a rare moment in time when one might have a shred of sympathy for the E.Q.C., which many New Zealanders viewed, perhaps incorrectly as a rainy day fund for natural disasters. The incorrect perception would stem from the fact that on the day of a major disaster, a substantial chunk of the rebuild fund comes straight from Government coffers, and usually at the expense of other major projects – roading, hospitals, schools, new social welfare initiatives and so forth.

E.Q.C. did not ask to be “plundered” as one commentator put it, but thanks to a decision taken by the fourth Labour Government in 1988 to privatise E.Q.C., it was left to control its own finances, appointments in processes in accordance with the Earthquake Commission Act 1944. In other words it was basically told it could do what it wanted. And during the 1990’s that happened, with the billions of dollars that was meant to be under their control in case of a major earthquake, being used to fund Government budgets for non related stuff.

Perhaps too, the public were a bit lazy in terms of paying attention to E.Q.C.’s problems. Perhaps they did not understand what was going on, or simply adopted that damaging New Zealand attitude “she’ll be right mate”. After all no big earthquakes exceeding magnitude 7.0+ would strike on land at all in the 42 year period between the Inangahua earthquake of 1968 and the Darfield earthquake in 2010. Memories were short, complacency was setting in. Why bother about something that has not happened in my life time, many asked.

On 04 September 2010, the magnitude 7.1 Darfield earthquake and its aftershock sequence put the E.Q.C.’s 22 permanent staff and 2 part time staff to the test. Very quickly – within a couple of days – it was very obvious that the magnitude of the disaster was in excess of anything that they could handle. Over 100,000 individual claims from businesses and private owners alike were in bound. The internal filing system was swamped and staff did not know where to start.

Worse was to follow. E.Q.C. were still struggling with these 100,000 claims and the attendant problems that went with them when Christchurch was slammed by the 22 February 2011 aftershock. Whilst an aftershock technically, it was an event in its own right by virtue of the damage done, lives lost and vastly more complex problems now arising.

Now, having had three major earthquakes costing New Zealand billions of dollars and the very real knowledge that in the future there will be more, one has to wonder whether E.Q.C. can be built back up in time. With faults in north Canterbury having been stretched by the Kaikoura earthquake and the Alpine Fault waiting in the wings with a magnitude 8.0+ earthquake that will cause disruption all over the South Island and much of the lower North Island, the urgency is there.

I am not sure re-nationalizing the E.Q.C. will work, or whether it would have the desired effect in time. A renationalization would require the Government to take back financial and procedural oversight of the organization. In a political sense this carries the obvious risk that a future Government would not then privatize it a second time.

The public might despair of politics, especially when it comes to politicians with their snouts in the public fund trough. However it really would be a good idea given the monsters waiting in the wings to start paying attention to what is happening to E.Q.C. now.