Lies, Damned Lies, and NO Statistics

While serving on the ISI (now the FSC) Board many moons ago, I informally broached the subject of publishing the quarterly statistics submitted by Life Office members, and was promptly dispatched to the wood-shed! These statistics were published at one time, but it’s so long ago, it even pre-dates my arrival in NZ and the start of Sovereign’s illustrious history.

The statistics comprise new business recorded per quarter per member company, company lapse rates, and the in-force premium income for each Life Office. The data crosses all risk products including medical insurance – group and individual.

The aspect of commercial sensitivity was promulgated as a reason for the requirement for secrecy, but to be honest, I didn’t buy that excuse back then, and I don’t now.

After all, two of the major players, AMP and Sovereign, have recently gone public with their lapse rates, which puts the commercial sensitivity argument to bed.

In this era of commercial transparency and regulated disclosure, such statistics should be available for scrutiny by advisers and consumers alike, in order to provide an opportunity to make an informed judgement on the state of the company. In particular, the in-force metric should be published quarterly for every Life Company as a true measure of progress – or otherwise, as the case may be.

In the absence of transparency, advisers and consumers will speculate, and such ill-informed guesswork can be damaging – so why not provide some accurate information upon which stakeholders can make better value judgements.

In reality, the published accounts on the Companies Office website provide relevant data, and are likely a more reliable and accurate source of information – being subject to audit and Reserve Bank scrutiny.

FSC Life Insurance company members need to realise that the reputation of the industry is not served by this secret squirrel approach to production and retention statistics.

Reference to the Reserve Bank leads me into another item mired in the “we’ve always done it this way” category.

If the Reserve Bank is now supervising a solvency and capital adequacy regime for licensed insurers – and none are at risk of breaching these parameters – why is an annual rating from AM Best or Standard & Poor’s still mandated?

Apart from the recent and significant settlement S &P had to meet in the US courts for failing to meet their primary function of reporting the financial malaise of commercial entities, the significance of such ratings to the consumer is marginal at best.

I posed this question not so long ago to the Reserve Bank, and was informed that the information is used by the regulator to help build a comprehensive view of the licensees.

No problem with that response – except that if the Reserve Bank wishes to access and use the Rating Agency information, then the Reserve Bank should pay for it!

The fees for this exercise are now truly eye-watering, and this now appears to be an entirely superfluous impost in light of the robust and comprehensive prudent management regime now in force. There is the further issue surrounding the currency and validity of the data provided by rating agencies.

The commercial nature of the relationship between the agencies and the rated entities presents as much a conflict of interest as any life insurance commission over-ride structure in the market.

This also poses the age-old question – “Quis custodiet ipsos custodes?” As all you scholars of Latin know – this translates roughly into – “Who guards the guardians themselves?” or “Who watches the Watchmen?”

In this instance, the rating agencies have a financial interest in providing their clients with an acceptable rating – failing to do so is unlikely to see their brief renewed. Is it just me or is there a conflict of interest inherent in this relationship?

Think Andersons and Enron

As if that weren’t enough to question the credibility of the agencies, this extract from Huff Post Business adds fuel to the fire –

Moody's, Standard & Poor's, and Fitch Ratings all maintained at least A ratings on AIG and Lehman Brothers up until mid-September of 2008. Lehman Brothers declared bankruptcy Sept. 15; the federal government provided AIG with its first of four multibillion-dollar bailouts the next day.

It’s my contention that the rating insisted upon by the authorities has passed its use-by date.

Consumers have little or no awareness of the implications of a rating; advisers pay little heed to the existence of a rating (I know this from leading a once-AAA rated organisation!!); and it’s a wholly unnecessary expense which ultimately is paid for by policyholders and consumers.

In an era when advisers are being pushed in the direction of disclosure and transparency, all with the best of intentions to promote integrity and honesty, it behoves all stakeholders and participants to do likewise.

Publication of the ISI Life Company members’ production and lapse statistics would be a good start, followed by a consistent approach to ‘user pays’ from the Reserve Bank.


The Laird