Gordon Campbell on why we need a Kiwi-owned insurance company, and the TPP

Is there any New Zealander who doesn’t like Kiwibank? From the outset, Kiwibank has introduced fresh competition into banking in this country, and – although still a small player – its presence in the market has been one of the few brakes on the bank charges and lending terms being levied from an otherwise captive market by a virtual cartel of the Aussie-owned banks. Not that Kiwibank has been able to stop the Aussie banks from creaming a record $3.5 billion level of profit at an amazing 9% rate of profit increase during 2011/2012. Even Granny Herald has come to love Kiwibank. To the point where in May 2010, it was saying in an editorial that Kiwibank had been such a success, it should be semi-privatised! You know, so that New Zealanders could buy shares in the Kiwibank they already own. As in…”The float of Kiwibank would be the most logical of outcomes. The bank’s success means it needs substantial amounts of capital to grow further.”

Indeed it still does. Given how the Aussie banks are pillaging this country, Kiwibank needs to grow to act as a an even more meaningful force for restraint. And in the light of the ropey track record of the asset sales programme to date, that capital injection to Kiwibank should be coming from the government, so that all taxpayers can reap the full benefits from its expansion and not just a select pool of private investors. So, riddle me this. Since Kiwibank has been such an acknowledged success, why on earth has Granny Herald been editorialising so strongly this week against the Labour Party’s announcement of a Kiwi owned and operated insurance company, along Kiwibank lines? The KiwiAssure proposal unveiled last weekend by David Cunliffe invites the same nationalistic support, and – more importantly – bids to challenge the stranglehold that Aussie-owned companies have on our insurance market, in exactly the same way that Kiwibank has done.

Now, Granny H. could have chosen to applaud the extension of a successful Kiwi model from one vulnerable sector of our economy to another equally vulnerable one. In both cases, Kiwi households and firms would be the winners. Instead, the Herald has turned back the clock to the days when Kiwibank was trying to get off the ground and when National and its media cronies were treating its very existence as a crime against nature, and the market.

I’m not exaggerating. Even by the Herald’s usual standard of National Party apologetics, yesterday’s editorial was a lulu. Goodness me, what will those socialists come up with next?

The idea seems to have come completely out of left field to impress the party’s annual conference at the weekend. It gave new leader David Cunliffe something to announce that would be state owned and immune to foreign purchase. It was also designed to appeal to Christchurch where the conference was held and where Labour needs to win a byelection shortly. But in practical terms it is hard to see what purpose another insurance company would serve.

Yep, just an election bribe plucked out of the hat. Nothing to see here, move on. And while you’re doing it, please shed a tear for the Insurance Council, which otherwise might actually have to cope with Kiwis rallying to support a home-grown insurance company! What a perfectly dreadful prospect! The Herald explains:

The illusion of a “home-grown alternative”, as Mr Cunliffe calls it, has a powerful commercial appeal. Members of the Insurance Council do not relish competing with a new state company for that reason. Taxpayers should be wary too. When a political party goes into business for no reason better than ideological satisfaction, it is likely to create a commercial lemon requiring ever more capital to survive. Let us hope this is one we will never see.

Righto. Faced with this garbage, I could cite Labour’s rationale for KiwiAssure. Instead, let me quote that other socialist bastion, Fairfax media. In an excellent article by Rob Stock, the Sunday Star-Times recently explained how Aussie owned insurance companies – IAG and Suncorp – control 65% of our insurance market, and they’re coining gold out of the Christchurch earthquake:

IAG chief executive Mike Wilkins told shareholders in April to expect “strong profitability” in New Zealand He said gross written premiums earned by its New Zealand brands State, NZI and AMI, bought in 2001, 2003 and 2012 respectively, gave the group a 40 per cent market share and contributed 17 per cent of IAG’s total premiums. For its part Suncorp has told its investors that profits of more than $100 million were now possible, even taking “earthquake impacts” into account. Suncorp investors were also told to expect growth of 7 per cent to 9 per cent in the next two years – compared to sluggish GDP of perhaps 3 per cent.

….. New Zealand’s general insurance market is dominated by the brands owned by the Australian Securities Exchange- listed pair, which have been buying up Kiwi insurers for a decade or more to accumulate a combined market share of 65 per cent. In Australia, Suncorp and IAG have what equity analyst Morningstar described as a “profitable duopoly” over the general insurance market, but recent communications with investors have emphasised the increasing profitability of their New Zealand operations.

Not that the Herald has noticed any of this. While the Aussie insurance companies plan on hiking Christchurch earthquake re-insurance premiums to screw profits from their New Zealand insurance customers, the Herald goes in the other direction and cites the earthquakes as a risk for insurance companiesthat should make New Zealanders shy away from the KiwiAssure proposal. The reality is almost the exact, 180 degree opposite. Yet as the Herald editorial tried to argue:

The global reinsurance industry is charging a high premium for New Zealand risk after the Canterbury earthquake sequence and there is no getting around that, even for a government-owned insurer.

Now compare and contrast this what the industry insiders were saying in the Fairfax SST article:

….The impression the industry has given to customers here is that premium rises are the result of reinsurance costs sky- rocketing since the Christchurch earthquakes. When asked about the statements, one prominent fund manager with investments in insurance companies told the Sunday Star-Times: “The best time to own a general insurer is after a catastrophe.” The share prices of Suncorp and IAG appear to confirm that. IAG shares have risen from A$3.75 in late 2010 to around A$5.80, while Suncorp’s have gone from trading between A$7 and A$8 in 2010 to over A$12.

Note that phrase: “The best time to own a general insurer is after a catastrophe.” And why should that be the case ? Because after a catastrophic event such as a major earthquake, people and firms are vulnerable to a major hike in premiums. The insurers can jack up the price through the roof, and rake it in:

With so much bad news about, policyholders are amenable to premium increases, the fund manager said. The reinsurance story provides good cover for a one-off opportunity for a step change in the profitability of general insurance.”They put their rates up. Households are accepting because there is a lot of bad news and a lot of red ink,” he said.

In other words, there has never been a more pressing need for the likes of a KiwiAssure to be available to New Zealand householders and businesses. Like Kiwibank, it will be successful, and for the same reasons. Besides the direct benefits it would bring to its customers, a Kiwi-owned insurance company would also help to staunch the flow of profits offshore, a chronic condition that is doing damage to the current account. (Only the centre-left however, appears to find that a matter of concern.) Oh, and KiwiAssure would also be an income-generating option for a hard pressed New Zealand Post.

Conference footnote on the TPP

On the subject of bias in the mainstream media, isn’t it interesting that the Trans Pacific Partnership is always seen as being politically problematic only and exclusively for the Labour opposition, and never for the National government – who, you know, are the ones who are actually signing it? Here’s a story idea: what about an examination of the political risk that the TPP poses for a government that is evidently prepared to put this country at risk (a) of being sued by foreign investors via the so called investor state dispute mechanisms and (b) of undermining Pharmac’s operations due to changes to the IP provisions? Neither of these proposals, which are on the TPP bargaining table, would be acceptable to the public. Neither of these immediate impacts would be seen as an acceptable trade-off for any conditional, much delayed boost to our agricultural trade – and on the evidence to date, only hedged (i.e. subject to ten year or twenty year market entry conditions) are the only progress we are likely to make in the farm sector.

Oh, I know, some weasel words have been uttered about protecting Pharmac. But in the just concluded EU/Canada trade deal, pharmaceutical patents were extended for two years, and it can be presumed that a similar provision will be carried over to the TPP. In fact, it would be a relatively easy calculation to assess the number of prescriptions/ relative value of prescriptions that generics currently comprise within Pharmac’s annual budget, and thereby assess what a two year delay of access to generics would mean, in dollar terms. That would give us a ballpark estimate of the likely health budget cost to taxpayers that the government is currently willing to run, in order to pursue its flirtation with the TPP.

No sign of that kind of analysis. Instead, the mainstream TPP coverage – such at it is – carefully avoids any consideration of the political risk that the TPP may pose for National. It prefers to recycle National party propaganda that opposition to the TPP amounts to a breach of a mythical bipartisan consensus on trade policy.

This “consensus” fallaciously assumes that the TPP is an ordinary run of the mill trade deal. It isn’t. Its provisions go well beyond any existing WTO proposals. Some of its provisions seek to inhibit trade, not to promote it. Some have nothing to do with trade at all. That is one reason why authorities such as Professor Jagdish Bhagwati – acknowledged for the past two decades as being the world’s leading free trade advocate – opposes the TPP. Partly because he too, says it is not a trade deal, but a set of proposals largely devised and driven by US commercial lobbies and which will undermine genuine free trade via provisions whose benefits will primarily accrue to the Americans. As Bhagwati told me in an interview last year:

I’m in India now and I’m going to see the Trade Minister and say that we have here a TPP with all these things that are really US –lobby reflected demands, and which is really calculated to reduce the openness of the [free trade] system in terms of new members. Because India could never agree to these things. Its not that we want to pull out the fingernails of these business lobbyists or torture them. We are a democratic country. So is Brazil. But we don’t want the things that are in the TPP [to be introduced] here. Because we think they will be misused. We ought to ask for – and this I think, is what New Zealand ought to do, since New Zealand is a very interesting and important country…We ought to insist that the membership of TPP must be open to people provided they make trade concessions. But it should not be required of people that they must go on to sign onto all these other provisions…