The Big Game Part V

Gareth MorganInvesting


When customers find they have been diddled and seek recourse, there is a well-established sequence of responses. This invariably ends in resolution but with the offending corporate free to do it again – if not to that customer then certainly to others.

The sequence is:

  • Deny there’s a problem and certainly deny fault;
  • If litigation has begun, resist it;
  • If litigation doesn’t go well call for alternative disputes resolution;
  • Admit to an “error” or “omission” and try for a confidential settlement; and
  • If the complainant still doesn’t surrender, contrive vexatious counter litigation to burn them off financially. The immediate benefit of this is that the matter becomes sub judice, which at least prevents contamination of other customers.


The overall strategy is to contain the dissent and ultimately silence it a least cost.

Let’s look more closely at each step.

The initial response is always denial because many complainants simply don’t know what to do next. The majority will crawl back into their shells after such a rebuttal. Normally a letter from the company is sufficient.

If a complainant is sufficiently upset and resourced to become litigious, then a judgment has to be made as to whether to seek alternative disputes resolution or scare him off. A letter from the company’s lawyers saying the claim is rejected, and that the company will seek compensation for its litigation costs, cowers more than a few complainants at this point.

Assuming the matter goes to court then the consumer can only use the Fair Trading Act, as actuarial malpractice is committed at the discretion of the actuary and actuarial rules cannot be legally challenged in New Zealand.

If this course isn’t going well for the company, the next step is to admit an error or an omission and seek a confidential settlement. Remember, the strategy is always damage containment, not enabling word to spread and certainly not letting the weapon of discretions be scrutinized.

One negative aspect of a confidential settlement is that the company can admit culpability but be under no obligation to stop the “error” occurring again or to even make good the situation of other savers similarly harmed.

This process of forcing aggrieved customers into confidential settlement is a well worn path right across the insurance industry. I’ve seen it with health insurers taken to task for ramping up premiums despite written undertakings to keep them fixed.

Adjudications reached under the Arbitration Act 1996 can find the company guilty but nothing can be revealed – this suits the corporate bully but is not in the public interest.

The confidence trick of admitting to an “error” and pacifying the complainant has become so endemic that the Australian Securities & Investment Commission (ASIC) began to enquire about their frequency.

ASIC imposed enforceable undertakings and demanded restitution for savers, something not done here by the Securities Commission.

If the complainant is not badly resourced and settlement isn’t possible, then things get heavy. The standard company tactic is to get litigious and bleed the complainant through counter-claim. This ensures the complainant will be the one suffering. Justice is not available without a matching chequebook.


The Brush Off

  • This was the response of a New Zealand company to a disaffected customer: “The directors set rates of return taking into account actuarial advice. This advice is confidential.”
  • And: “[our company] endeavours to provide a smooth progression of returns and also takes into account equity between different generations of policyholders.”

Controlling the regulators

Regulators have a penchant for pleading they are ill-equipped to keep up with what’s going on in the industry. They seem to permanently be behind the eight-ball, playing catch-up and even worse, turn to the industry for advice on what to do!

The depth of expertise within the ranks of the regulator is without doubt insufficient – but it’s understandable.

The insurance companies are large multinationals, which have the benefit of access to massive legal, actuarial and accounting expertise.

Let’s just recap on how uneven the playing field is;

  • The industry’s repetitive stance to aggrieved customers is to state that “there is no legal requirement” to disclose critical information;
  • There is only limited case law, as the industry stifles precedent with confidential settlements – by far the majority of complainants never get as far as the courts;
  • Despite the most upstanding comments made to the government by the industry and the profession, it is the lack of suitable laws that is protecting these companies. In New Zealand, there is no legal requirement for actuaries to comply with any rules or for the industry to do so either; and
  • When the saver goes to court to determine who loss of funds has occurred, and seeks a judgment based on actuarial obligations and adherence to valuations, the court can only shake its head and state it must follow the law and declare there is no legal requirement for the company to disclose.

In its 1997 report on Life Insurance Law and Practices, the Securities Commission was damning of the lack of effective regulation to protect savers and expressed alarm over the conflicts of interest of the company’s actuaries.

The then government actuary departed in disgust because of lack of action by the government. When he appeared some years later before the Morris Review in the UK, he said: “… in relation to the limited scrutiny I had of life insurance company operations, I came to the view that my professional reputation would be at some risk where I to continue under the existing conditions of work… examination of the submissions made by the New Zealand actuarial profession to the New Zealand government shows that the concerns of the industries which employ actuaries are usually given greatest weight.

“While I was government actuary, with oversight of private pension schemes, I found trustees of a particular scheme were – in my view – endangering the security of benefits and misleading members in relation to a pension sash-out offer by relying on actuarial advise which I though unprofessional. I accordingly laid a complaint of misconduct with the New Zealand Society of Actuaries.

“The NZSA took over two years to act on the complaint. The actuary concerned – a fellow of the Institute of Actuaries – took a litigious attitude…”

It goes on but in essence the government actuary was roiled by the undue influence of the insurers over the government despite his confirmation of improper professional conduct by the industries actuaries. And what has been done? Nothing.

The political fiddle

The large multinationals have the money to fund permanent and substantial lobbying and propaganda machinery in world capitals. Wellington is no exception with a well-funded full-time office devoted to influencing the development of policy relevant to its patch.

Among the indicators are the bias in the numbers of insurance company personnel that sit on various task forces and inquiries where the subject of the investigation is the companies themselves. By contract, there are few consumer representatives.

Here’s an offshore example of the undue influence. The Australian Law Reform Commission is taking the initiative to ensure no consumer has recourse to legal rights under equity or fiduciary laws, by advocating a law change that will block inquiries into illegalities of breach of trust and misuse of reserves by the industry.

In its 1992 report on collective investment vehicles, the commission said: “The creation of reserves may, arguably, be a breach of trust… There are no clear guidelines, under existing law, as to how surpluses are to be distributed between sponsor and members… There is considerable uncertainty regarding the treatment of surpluses in superannuation schemes. The Review recommends that the law should make it clear that the establishment of a reserve will not of itself constitute a breach of trust.”

In other words, the commission identified the problem and recommended the law be changed so the insurance companies could do what they liked, under the veil of actuarial advice, to create, manipulate and ultimately take ownership of the reserves.

The obvious question is why the commission came down on the side of the insurers rather than the saver. Its rationale was naturally founded on the assumption there were no improprieties being committed.

The reality is quite the opposite – creating reserves is little more than a technique to plunder the public’s savings.

The Big Game Part V was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

Facebook Twitter

Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.