Insurance Council rejected Western Pacific's membership

Collapsed boutique Queenstown company Western Pacific Insurance, owing more than $40 million at present, was rejected for membership of the Insurance Council of New Zealand.

The reasons are not being disclosed by the Insurance Council of New Zealand (ICNZ's) chief executive Chris Ryan.

"Western did apply for membership, about two or three years ago, but it was the insurance council's view that they shouldn't be a member . . . I won't go into the reasons why," Mr Ryan said when contacted yesterday.

Industry insiders, who spoke on condition of anonymity, said they have been "surprised" and "astounded" from liquidators' recent reports that the boutique Western had worldwide exposure to insurances valued at more than $10 billion.

"No-one was aware of the multinational connections Western had been making," one source said of its business being generated in places such as Chile, Vanuatu, Abu Dhabi and numerous Pacific Island countries.

Findings by liquidators Grant Thornton have noted Western accepted risks "outside the scope of its reinsurance policies" and "in some instances premiums were too low", with industry insiders claiming premiums offered were "undercut" by up to 50% and "handling fees" were subsequently charged by brokers to clients to make up the percentage of income lost from the low premiums.

While the liquidators have described Western as "aggressive" to win market share which "may have" led to its failure, other insurance insiders labelled it a "highly dangerous company" because of its low premium approach to undercut the market.

Attempts to contact Queenstown-based director Graham Smolenski yesterday were unsuccessful.

Mr Ryan would not be drawn into directly addressing the allegations against Western, saying only that in general it "remained wrong" that in the financial services sector the commissions of brokers did not have to be disclosed.

"This is a point we've wanted changed [in legislation] for some time, and still do so," Mr Ryan said.

Western, whose other director is Jeff McNally, of Victoria, Australia, was advised by the insurance council it could reapply for membership, but had not done so, Mr Ryan said.

He said at the time of application, Western had a $500,000 bond lodged with Perpetual Trustees and also a credit rating.

Western was initially placed in voluntary liquidation on April 1 by its directors owing creditors and insurance claimants $6 million.

However, because of its exposure to the Christchurch quakes in September and February, that exposure has since leapt to more than $41 million, liquidators Grant Thornton estimated.

While possibly $32 million can be recovered through Western's reinsurers, industry insiders were astounded to learn from liquidators its total sums insured were valued at $10.25 billion across all its insurance policy types around the world.

Western made an after-tax profit of $281,000 in 2008 and $241,000 in 2009 and its directors pumped in a $500,000 cash injection late last year.

Mr Ryan declined to talk specifically about Western, as it was not a council member, but said any insurer not under the council umbrella would not be subject to any industry self regulation, insolvency rating or auditing.

Other than holding an investment rating, any company was obliged adhere to Companies Act regulations when filing financial returns.

In April 2002, the Australian Securities and Investment Commission (ASIC) had the licence removed from Mr McNally's insurance broker service, Allied Asia, for not being registered, as claimed, with the Australian Prudential Regulation Authority, and ASIC also issued other consumer warnings about the company's practices.

Western Pacific became an incorporated company three months later and Mr McNally, who is Mr Smolenski's brother-in-law, became one of its directors in July 2003.