Source: Labour Party – Press Release/Statement:
Headline: Speech to the Insurance Council of New Zealand Conference
Thanks for the invitation to be here.
It is an honour to speak with you this afternoon.
Can I acknowledge the previous speaker, Her Worship the new Mayor of Christchurch, Lianne Dalziel.
Lianne not only brings new leadership to her broken city but also a new and innovative approach to the recovery. She is the right person in the right job at the right time, as her overwhelming mandate shows.
I wish her well and look forward to working closely with her and her team as the recovery unfolds.
Can I also acknowledge the leaders of the insurance industry and the wider industry, and your contribution to the recovery.
I believe that the insurance industry has stepped up to many of the challenges facing Christchurch and is trying to settle claims in order for people to move on with their lives.
It would be ridiculous to suggest that there have not been problems – of course there are. Some people have been pushed from pillar to post, being subjected to far more inspections, assessments, reinspections and reassessments than seems reasonable. The prolonged uncertainty and disruption is very frustrating for them.
I know the causes of delay are sometimes complex, including the legal wrangle between EQC and other insurers as to the whether EQC was liable for its layer of cover once only, or had additional liability for later events.
I hope that in the future a more practical and timely method can be devised for settling EQC and private insurer layers of cover through a single process. Lianne Dalziel has previously suggested some delegation of settlement functions by EQC to the private insurer, and perhaps vice versa, back by a letter of comfort or undertaking from the Crown to honour the decisions made.
I am frustrated that where there are disputes, there is no practical, affordable and timely route to resolve them through the Courts.
It is likely that some test cases are needed. They should be fully funded by the Crown and expedited. The proper place for resolving these is in the Courts. Precedents are sometimes needed rather than compromises.
There is a broader problem which extends beyond insurance. I am a former civil litigation partner of a major SI law firm. The complexity, delay and cost of civil Court processes is intolerable. It is one of the main reasons I gave up the practice of law. The cost of court proceedings and therefore my bills were too high in proportion to the value of the disputes being litigated.
Too often civil court processes are a barrier to resolving disputes through the Courts. This means the Courts do not meet their societal aim of providing a just mechanism for resolving disputes. It is frustrating and costly for all involved. This feeds the viewpoint that some insurers string out processes in order to delay and put pressure on the insured claimant to settle.
This is a wider problem than just insurance. We have as close to perfect outcomes as can be achieved in any system for those litigants who can afford to and do run the marathon of civil processes. Most lawyers and judges are perfectionists.
But perfection of outcome is getting in the way of access to justice. Justice delayed or too expensive to access is justice denied.
I am the Shadow Attorney General. The rules of Court in a constitutional sense are promulgated by the Attorney General. I want to work with the Law Society, Judges and Civil Society to reform civil processes, so that the courts really do meet their purpose of providing a civil and accessible means of resolving disputes.
Returning to Canterbury earthquake claims, the ability to secure against risk is vital to the effective functioning of any modern economy – any modern society.
Christchurch has bought home to the vast majority of New Zealanders the importance of having fair and affordable access to adequate insurance cover.
Insurers and reinsurers, according to the industry, will pay out around $20 billion to customers under policy arrangements triggered by the Canterbury earthquakes.
The government – the taxpayer – will contribute around $15 billion.
The total cost of rebuilding Christchurch is estimated to be around $40 billion.
The weekend before last, my party held its annual conference in Christchurch. Ordinarily, such an event would have gone largely unnoticed by many of you – but for the announcement that a Labour government will set up a KiwiBank-style general insurance company.
KiwiAssure will provide a significant locally-owned alternative and further sharpen competition in the market. It will offer home, contents and vehicle insurance, along with cover for small business plant and equipment.
KiwiAssure will offer New Zealand families an alternative they will share a stake in.
Subject to a business case, KiwiAssure will be a sister company of KiwiBank and will evolve out of the existing Kiwi Insurance Limited.
The response from the public has been encouraging. Not so the insurance industry or our political opponents.
The Insurance Council, speaking on behalf of the industry, called KiwiAssure “ill-conceived” and “back to the future” and raised the spectre of “manipulating premiums for political purposes”.
However, behind the hyperbole was a serious concern, that a State-owned insurer would place the taxpayer at risk of incurring losses from natural disasters.
KiwiAssure will operate under the same prudential regime administered by the Reserve Bank as its competitors.
It will access the international reinsurance market in order to limit its exposure.
Premiums will be competitive and commercially priced and there will be no government guarantee.
It will be well placed to spread geographic risk within New Zealand, given the reach of the NZ Post/ KiwiBank group.
The experience of KiwiBank – with 800,000 customers – shows there is indeed a market for a domestic insurer giving people the choice to do business with a company that keeps its profits in New Zealand.
Time will tell.
The big banks are relaxed about competing with KiwiBank, and so should you be to compete with KiwiAssure.
Another issue worthy of more discussion is whether we should move the prudential requirement to a one-in-1,000-year event rather than a one-in-500-year event, an issue raised with me by a number of senior figures in the insurance industry.
I do not believe that they are doing so from a position of self-interest. Indeed, I think that they have New Zealand’s interests at heart, because they can live with either eventuality.
The first consequence is that if there is higher capital requirement for an insurer, it may be that capital is not available to them. The multinationals that are present in New Zealand compete for capital amongst different parts of the world.
So it may well be that they find it difficult to get the additional capital to put into their New Zealand operation and their parent company chooses, on balance, given our risks in respect of earthquakes and the like, to withdraw from the New Zealand market.
That would mean that we have less competition in insurance in New Zealand and we become more reliant on the remaining insurers, which could also increases risk in the event of a very big earthquake.
The second issue is that even if they can get that additional capital in New Zealand to meet a higher prudential ratio to cover a one-in-1,000-year event rather than a one-in-500-year event, the cost of that increased capital would be passed on to the people who buy insurance.
In other words, people’s insurance premiums would go up.
Then some of those people who would otherwise have taken insurance will not take insurance or will take lower levels of cover. In terms of the effect on New Zealand’s insurance cover, it is conceivable that it could be that increasing the capital requirements could actually result in lower levels of insurance in New Zealand.
So it could be counter-productive, if what we are trying to do is minimise the risk of consequences in New Zealand if there is a really bad earthquake. I am not saying it would be an inevitable outcome, but this requires careful analysis.
Should fewer people insure against different sorts of risk – domestic and commercial – and we have insurance costs going up even more than they are already, then we could actually have the opposite outcome from that which we intend.
Even though the Reserve Bank might be thinking that it is improving, from its perspective, the financial stability of the insurance companies, overall, New Zealand might be worse off because we have lower levels of insurance.
The third area where this is relevant concerns the effect on competition with the multinationals. Over the last two or three decades we have seen a concentration of ownership by overseas multinationals of New Zealand’s insurance market. This is also something that has happened in other parts of the financial services sector, like the banking industry.
As a consequence of, amongst other things, monetary policy settings, savings and tax settings, New Zealand has been hollowed out when it comes to ownership of our financial services sector. If you have any doubt about this, reflect on the fact that Australia owns most of its financial services sector and ours. The ability of small New Zealand companies to start up and grow into companies that compete with these overseas companies could be inhibited by increasing stringency of capital requirements that make it harder for new entrants to enter into the market and compete.
Settling on appropriate prudential capital ratios is a matter that needs wider discussion, and more stringent analysis, in my view, before decisions are made.
To conclude, I would like to address the wider economic issues confronting the nation.
I am convinced that unless we grow the breadth and depth of our exports we will never cover the cost of our imports and interest, and will continue our lamentable record of 30 years of current account deficit.
I believe this is New Zealand’s greatest economic challenge.
While our government debt has just hit $60 billion (net debt was zero five years ago), the books are heading back into surplus, which we support.
This is a good thing. When we were last in government, we ran nine surpluses in a row – one every year.
So we know a thing or two about running surpluses. Being fiscally responsible is a given. We know we cannot write cheques we cannot cash. My Southern Presbyterian roots make me naturally careful with the public purse.
Yet according to the IMF, New Zealand had the highest external deficit in the developed world last year.
Worse than Greece.
That sorry state of affairs is predicted to continue not just this year. For the next 3 years our external deficit is predicted to be worst in the developed world.
We have been living beyond our means for decades.
Unless we fix this, we will own less and less of our own country and our younger New Zealanders will have fewer opportunities to prosper in our own country.
We need to do more than talk about rebalancing the economy to ensure more high value exports and new jobs.
In short – we need to move from volume to value.
The solutions are complex, but first let me share a bit of recent history to help explain how we got to where we are today.
A global energy crisis occupied the minds of Governments in the late 1970s. In New Zealand, coloured stickers appeared on our windscreens marking the ill-fated carless days.
How many of you remember careless days? When I mention this to young people they think I’m making it up. They cannot conceive of a government that is so draconian that it would tell you what days of the week you can use your car.
It always amuses me when our opponents trot out images of a command economy and references to Polish shipyards whenever we propose progressive policy solutions – given that it was their party in charge at the time.
By 1983, double-digit inflation had been running for a decade. Wages had failed to keep pace. In response, the government of the day brought down a wage and price freeze.
It failed.
The economy stalled and the Government’s financial position was in free fall. There was a run on our currency. Interest rates for home loans hit 20 per cent by the mid-1980s.
The efforts of the Reserve Bank to rein in inflation were formalised by the late 1980s. By then New Zealand had been suffering from high and erratic inflation averaging between 10 and 15 per cent for close to two decades.
The Reserve Bank was given independence by the Labour Government and the mandate to pursue price stability to preserve New Zealanders’ purchasing power. Its obligation to protect the stability of our financial sector was retained.
The pursuit of lower inflation was not without cost, but by the early 1990s low inflation had been achieved. As the Reserve Bank observes, “it has since become a well-entrenched feature of the economic landscape”.
The importance of controlling inflation is a lesson of history well understood. We remain committed to an independent full service Reserve Bank.
I mention this history to remind us all that a high and volatile exchange rate is not the only economic setting that hurts the tradeable export sector.
High inflation, especially in the absence of any capital gains tax, encourages speculative investments in land to the detriment of investment flows into capital equipment.
The high interest rates associated with high inflation also increase the cost of investing in the capital plant which we all know is needed to improve productivity and maintain export competitiveness.
The crippling effect of high and volatile inflation is uncontested.
But it is at the very least arguable that the New Zealand prescription of monetary policy was applied in too draconian a fashion in terms of how high interest rates were pushed, and in too lax a fashion in terms of credit flows into New Zealand.
We do have a tendency for policy extremes in New Zealand.
Other countries achieved control of inflation without interest rates staying higher than international averages over time. The international trend was for lower inflation over this period anyway, and some inflationary pressures would have abated even without the Reserve Bank Act.
So while the success of the Reserve Bank Act is reasonably clear – low and stable inflation – it is important that we are not blind to the limits and side effects of monetary policy and reflect on ways we could do better.
Nor should it blind us to ways to rationally deal with our world-leading external deficit.
The other major issue the 1980s through to the 2000s left us with was an infrastructure deficit – we fell behind on infrastructure investment.
Governments faced with the mess left by National’s Muldoon had to restore the government balance sheet and deal to the crippling level of debt. One dollar in five of taxes was being spent on interest, and this was compounding. The huge government deficit had to be curbed.
Nurses, teachers and police still had to be paid, as did unemployment benefits and superannuation. Government capital investment was one area of spending that could be cut and delayed. And it was.
It took two decades to restore the government books. By then there was a substantial deficit in roads, rail, schools, hospitals, electricity generation and transmission, and telecommunications.
Infrastructure is fundamentally important because it is an enabler of the economy. Its importance extends beyond the cost of the asset. Without adequate roads, rail, electricity generation, transmission, telecommunication, schools or hospitals the economy as cannot prosper.
A decade ago our serious infrastructure deficit threatened our efficiency and prosperity.
But now we have largely caught up.
The last government – and to be fair to them, this one too – has invested in capital expenditure on infrastructure.
Central government capital expenditure has risen to amongst the highest in the OECD.
Whether its roads, rail, electricity, hospitals, schools, or telecommunications, we have made enormous progress.
However the question now to be asked is – where best to direct the substantial government contribution to our country’s capital expenditure?
In my view it is time for government to focus more on stimulating industrial capital expenditure, following a period of necessary – and expensive – catch up capital expenditure on infrastructure.
This is not to deny the need for continued infrastructure spending. There will always be more that needs to be done. The Auckland City rail link is a prominent new example.
Continued investment in all the other areas of infrastructure will always be required. But the balance of capital expenditure stimulated by government can now shift towards industry.
It is clear that we must pay our way in the world by being a highly successful trading nation. Our ambition must extend beyond commodities and include more high value exports in manufacturing in and beyond the primary sector.
Our proposed policy mix is intended to drive our economy towards productive investment and growth – policies that drive our productive economy.
We need to deepen capital markets, and reduce our dependence on imported capital, through making Kiwisaver universal.
We need pro-growth tax reform to ensure capital is invested on the basis of the profitability of enterprise.
We have proposed a capital gains tax excluding the family home. Currently speculative over investment in property is rife. A substantial driver is the tax bias which favours investment in land and buildings over investment in productive businesses. This is a serious problem.
That tax bias also contributes to our underinvestment in banker deposits, retirement savings and in productive plant and manufacturing equipment. The absence of a Capital Gains Tax also pushes up house prices beyond the reach of many, and enables some of New Zealand’s wealthiest people pay lower rates of tax than less wealthy New Zealanders, which is plainly unfair.
It is worth noting that a reputable public opinion poll out this week shows a majority of people in favour of the introduction of a capital gains tax.
We need research and development tax credits – the second leg of our pro-growth tax reform – that will encourage innovation and push our product mix towards higher value goods and services.
We need changes to monetary policy to enable more attention to be paid to our overvalued and volatile currency, which currently hinders exporters and import substitution. The current Reserve Bank Act is 25 years old. It forces the Reserve Bank to give primacy to inflation targeting ahead of the exchange rate and external balance. We believe its objective should be broadened.
I am committed to a prosperous balanced economy that fairly delivers for everyday New Zealanders through decent jobs that sustain good wages. Currently not enough people are on good middle incomes.
The policy challenge, for me, is how we achieve this step change towards higher valued output sustaining higher incomes. Achieving this will deliver social well-being and maintain New Zealand’s control of our own destiny.
Growing working New Zealand in this way will take improvements in productivity in the tradeable export sector.
This change in viewpoint has come about in no small part because the Global Financial Crisis laid bare the frailties in economies which pushed financialisation of the economy too far. Inadequate investment in the productive economy left excessive reliance on the service sectors.
Pouring more coffees, tucking-in more tourists or selling more raw commodities doesn’t add enough to our productivity or sustain enough well-paid jobs in other parts of the economy.
We need transform more of our products, and create additional value. The rest of the world sees this too, and competition will always be tough.
Our exports haven’t grown as a proportion of GDP. Our share of world trade has been dropping, and all the talk of added value over the last 30 years hasn’t grown middle New Zealand.
The globalisation of world trade accelerated exponentially since the 1980s.
We should have encouraged investment in the sophisticated plant and innovation needed to improve labour productivity and sustain high wages.
In New Zealand savings were low, monetary policy jacked up our exchange rate and deterred productive investment, incentives for research and development went out the window, and tax policy advantaged speculation for capital gain.
The labour market remained slanted towards lower skill jobs, where working people on low wages substituted for capital investment.
Improvements in tertiary education, important though they are, are no substitute for capital.
Even with low wages we could not compete against developing countries when producing lower-value high-labour content manufactured goods.
Our failure to save and invest sufficient new capital compounded. We didn’t raise productivity, and so we fell further behind productivity improvements in other countries.
As a consequence, while there are exceptions, our productive and export base has narrowed and we have hollowed out well-paid jobs.
Imbalances in the economy remain, and need to be fixed.
And they will never be fixed if we restrict the debate to doctrinaire slogans and mindless adherence to economic dogmas whose time has passed.
Just as your industry has had to adapt to a swiftly changing market reality – albeit brought on by massive natural catastrophe – the nation has to adapt to the post-GFC realities evident in the global economy.
The sky will not fall if we tax realised gains on investment property, it will not fall if we back the tradeable export sector through monetary policy to move from volume to value, and it will not fall if KiwiAssure enters the insurance market.
As my former colleague Lianne Dalziel so eloquently explained earlier, the name of the game, these days, and the secret to long-term success, is resilience.
I am certain that the insurance industry is sufficiently resilient to meet the on-going needs of a changing New Zealand and continue to play its vital role in our transformation.
Thank you and enjoy the rest of your day.
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