Taking on the insurance titans
Former investment banking lawyer and psychotherapist Sarah Miles, of Christchurch, has written a book on how the private insurance industry has failed Christchurch after the earthquakes.
She started writing The Christchurch Fiasco and the Insurance Aftershock: Its implications for New Zealand and Beyond in September 2011. Her home was near the epicentre of the September 4, 2010 earthquake and her house was extensively damaged. She's been living with family and her own insurance claims remain unresolved.
In her book, Miles says the delays and problems are not accidental and are in the financial interest of the private insurance companies.
In this edited extract from Chapter 4, she outlines where she believes blame should lie.
Asecond major disaster is currently taking place in Christchurch - the insurance aftershock, in which tens of thousands of people are currently being cynically exploited by the local insurance industry.
During the "good times" and bad, insurance companies spend considerable funds shaping the public's perception of their business through sympathetic marketing and advertising. However, the industry as a whole proves very unwilling to disclose information about its internal workings, particularly information relating to failure to deliver to their policyholders. The fact is that there is simply very little information about the insurance industry and its performance, on either the internet or in libraries and the press.
In addition, the internal structure of insurance organisations is carefully devised so that the bottom layers have no idea what the top layer strategies seek to achieve. Such information is held very closely. Much effort is expended on limiting the information produced and endeavouring to keep that which is produced out of the hands of policyholders. It is for that reason that this information is made public.
Insurance policies are sequential and contingent. This means that the policyholder pays the premium now and the insurance company must later pay a claim, if one is made. Under the Fair Insurance Code, insurers must settle valid claims "quickly and fairly", which means they must act promptly after the policyholder has supplied the relevant information.
Because insurance policies concern a raft of potential risks, they have a tendency to incorporate abstract language which leaves insurers significant contractual discretion and inevitably leads to a temptation for insurers to adopt overly aggressive claims-handling practices. Every dollar that an insurer avoids paying in claims adds to their profit margins. Arguably, in some cases that temptation has become policy.
Consumers purchase insurance as a way of protecting themselves from significant financial risk. When those risks arise, they are often in an ill-equipped position to "battle" their insurer to obtain what they have paid for, and if they do, they find themselves in a very unequal contest.
Yes, it is true that Christchurch has not had only one event but a series of earthquakes and aftershocks. However this, I believe, has been used as a convenient excuse for insurers simply to sit and wait. True, it has been a major event, but again, this has now been excessively over- used as one of the excuses in their armory of delay tactics.
Insurers well understand the risk profile in New Zealand. The risk was defined and priced by the insurer, the price paid and the risk then transferred from the policyholder to the insurer. All that is legitimately and contractually left to be done by the insurer is to settle the claim on the basis of "good faith". In theory, and according to the concept of "good faith", the insurer must not place its own financial interests above those of the policyholder. Since September 4, 2010, there has been poor sequential performance by the private insurers on the scale required.
Not every insurance company should be tarred with the same brush. There are a few, generally smaller insurers (mutuals), who are performing their contractual obligations as best they are able, in contrast to the larger players such as IAG and its subsidiaries such as State Insurance and NZI, which show very different results and behaviours (evidenced in a television interview with John Campbell on TV3 on September 5, 2012). Contributing to the current difficulties is the fact that IAG holds most of the policies in Christchurch. Unfortunately, when the Commerce Commission was taking the decision to allow IAG to purchase AMI's client base, it chose not to regard what essentially amounts to a monopoly as a problem.
So why the delays? The answer is simple - generally, an insurance company will pool the premiums paid by policyholders to pay losses and expenses, not simply banking the money locally until they need to pay out, but rather reinvesting the premiums and reinsurance payments, often offshore.
The time between taking in premiums and paying out claims is known as the "float". The subsequent income earned from such investment is a major source of insurer profit. There is absolutely no incentive for insurers to break these term investments. That is why the population of Christchurch still waits and waits for the insurance industry to carry out its contractual obligations. In this way, insurers mitigate their own liabilities and inflate profits. Simply put, Cantabrians have become the faceless victims of insurers' corporate profit strategy.
Without their insurance pay- outs many homeowners are unable to repair the damage to their homes and move forward with their lives. The quick settlement of each individual insured's claims would serve the region as a whole by mitigating economic disaster in the affected area. Now, as the third year since the September 4 earthquake is under way, Canterbury is seeing the effects of slow insurance settlement as businesses fail, jobs are lost and disillusioned residents move on to greener pastures, or simply remain trapped and helpless through a complete loss of options.
Consumer impressions of insurers are formed on the whole by advertising and word-of-mouth rather than on actual hard fact and identifiable results. Insurance advertising tends to focus on abstract unverifiable promises eg "love your stuff", or "we'll take care of that problem". Most people who are insured will never test the most critical element of their insurance policy - that of the low- probability, high-cost loss. This is, of course, how insurance works.
However, in Canterbury, between 2010-12, many thousands of policyholders are testing just that. It is also the case that when consumers do have these experiences they are not well equipped to make judgments about the performance of their cover provider as they have little with which to make comparison.
The major question on the lips of most owners of damaged property in Canterbury is "Why is my insurance company taking so long to do anything effective about my damage?" No matter how well you held up your end of the bargain, extensive delays continue throughout the claims process, and these delays to their repairs or rebuilds are causing real suffering for many as their accommodation allowance has run out or is rapidly running out and they are having to also pay mortgage payments and rates on properties that are often uninhabitable. The insurers provide a variety of reasons for these delays, and the expected timescale for resolution of a settlement remains a mystery.
There are also rather more sinister corporate forces at work. Canterbury is not alone in experiencing great difficulties with insurers in the aftermath of major catastrophe. Not paying out or paying out less than their entitlement to victims of catastrophes has helped produce record profits for the insurance industry.
In the past 12 years, insurance company net income has soared - even in the wake of Hurricane Katrina, which was the worst natural disaster in US history. Property/casualty insurers reported their highest-ever profit of $US73 billion in 2007, up 49 per cent from $US49 billion in 2005. Are Cantabrians to become major contributors to such insurance industry profit statistics?
There are plenty of stories of American insurers giving rewards (such as portable fridges) to employees who quash valid claims or use a "boxing gloves" approach to policyholders who refuse to accept lowball offers. When units of the American International Group (AIG) lost money, former chief executive officer Maurice Greenberg was reported to have put in place new teams of staff to systematically reject thousands of valid claims, according to the American Association of Justice.
The AAJ went on to say that State Farm, another major US insurer, went so far as to engage in fraud to deny claims. After the 1994 Northridge earthquake in California, which caused an estimated $US33.8 billion in damage, company officials forged signatures on waivers of earthquake coverage to avoid paying quake-related claims. Incredibly, internal documents used by Allstate featured an alligator motif and the caption "sit and wait" - a clear reference to their delaying of claims to increase the likelihood that a claimant would give up. There is good evidence that similar tactics are being employed in Canterbury.
?? If policyholders do litigate, the insurers are masters of delay and use every means open to them to delay trial, often for years. Having had the financial benefit of huge delay, insurers rarely go through the courtroom door, preferring to "settle on the steps of the courtroom" before trial. The fact is that the industry has been raking in spectacular profits while increasing the use of more and more audacious tactics towards their customers. You may well be thinking, "well that's the USA, not New Zealand". In the aftermath of the Australian Cyclone Yasi and in the wake of the New Zealand earthquakes, staff from some of the same American companies, such as Crawford and Company, have in fact, also been working in the Canterbury area.
. . . What is repeatedly happening in Christchurch is many insurers denying and reducing policyholders' claims, routinely refusing to pay market prices for homes and replacement of contents, use of "low-pitched" computer programs to cut pay- outs, changes of policy coverage with no clear explanation, ignoring or altering engineering reports, and sometimes asking their adjusters to slow down claim progress or lie to customers.
Then the insurers make low offers, or refuse to pay at all. They stall until claimants are so desperate that they are then prepared, or forced by circumstances, to accept what the insurer offers them. Customers who try to take a harder line with them are subjected to even more delay and are then offered a "take- it or leave-it" deal. This does not sound like "good faith".