Failed insurer's policy book 'beggars belief'

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Blacklisted in Australia? No worries. Try Queenstown.

The policy book of failed insurer Western Pacific Insurance has been labeled “absurd” after liquidators revealed the small Queenstown-based firm had written billions of dollars worth of policies despite holding only “limited” reinsurance cover.

And questions have been raised how the company’s chief executive, after being blacklisted by ASIC from the insurance industry in Australia, was able to move to New Zealand and continue operating.

Western Pacific went into liquidation on April 1 after claims from the Christchurch quake exceeded available funds. Liquidators David Ruscoe and Simon Thorn of Grant Thornton said this week only $32.7 million was available to satisfy $41.2 million in quake claims.

While quake coverage dominated coverage of the liquidation, the appendix of Grant Thornton’s letter to creditors raised eyebrows in the industry over revelations the small company had written more than $7.8 billion worth of casualty insurance and professional indemnity and public and product liability policies.

Letter savages insurer

Mr Ruscoe and Mr Thorn’s letter said Western Pacific aggressively chased market share with considerably discounted premiums and paid brokers commissions of up to 25%, leaving little cash to meet claims.

But worse occured offshore, the letter notes: “The company accepted risks outside the scope of its reinsurance policies and chased premium income in numerous countries, including: Australia; Abu Dhabi; Chile; Fiji; Rarotonga; Samoa; Singapore; and Vanuatu."

Jonathan Ericksen of Ericksen and Associates, initially disbelieved the $7.8 billion figure as he understood Western Pacific to be small.

“Are you sure that’s true? That seems absurd,” he told NBR.

John Durning, spin doctor for Grant Thornton, confirmed the figure and added that reinsurance for this part of the book was “very limited”. The report said Western Pacific’s asset base had a book value of only $4.5 million, but warned realisations would be considerably less.

Mr Ericksen was scathing of Western Pacific’s exposure. “It beggars belief from a risk management point of view. They’ve written $7.8 billion of insurance - don’t have reinsurance - and clearly they don’t have $7.8 billion of funds in the bank.”

Asked if liquidators were mulling a referral to the Serious Fraud Office, Mr Durning said activity to date had focused on assessing quake claims:  “Our focus is to get money back and then we will start looking at the matters mentioned.”

Western Pacific had sought taxpayer bailout

After the February Christchurch quake, Western Pacific CEO Jeff McNally wrote to Bill English seeking a $5 million government guarantee to continue trading.

Mr McNally indicated in his letter Western Pacific was “now a viable entity” and had a target market of “small to medium businesses in New Zealand.”

No mention was made in Mr McNally’s letter of their billion-dollar exposures in countries as varied as Chile or French Polynesia.

Treasury staff rejected the request for a bailout citing the lack of a “sound business model”.

Western Pacific’s shareholders and directors are Mr McNally and Queenstown lawyer Graham Solenski.

Mr McNally could not be reached for comment. Mr Solenski did not respond to NBR emails.

CEO blacklisted in Australia

Mr McNally has a questionable track record in providing insurance products in Australia.

On April 16, 2002, ASIC said it had obtained a Federal Court order preventing Mr McNally from selling insurance after he said he worked on behalf of the Marshall Islands-based Atlantic and Pacific Insurance

ASIC said: “Atlantic and Pacific Insurance Limited is not, and never has been, registered as company or as an insurer in the Marshall Islands.”

ASIC director of enforcement Jamie Orchard said at the time: “ASIC commenced these interlocutory proceedings because of the clear risk to those with insurance that any claims they make on insurance placed with an unincorporated or unregulated insurer may not be met.”

Three months after ASIC announced legal action against Mr McNally, Western Pacific Insurance was incorporated in New Zealand.

Mr McNally joined as a director in July 2003.

Mr Ericksen said a new insurance regime, established in after the AMI bailout, would help to improve confidence in the sector. “The Reserve Bank regulations will sort all this out over time.”

But Mr Ericksen warned that even stringent regulation would guarantee further failures would not occur.