Reserve Bank did not act on CBL suspicions

When insurer CBL collapsed last year costing shareholders nearly $750 million, investors found they had been kept in the dark about the true state of the company.

Now a report has found the Reserve Bank, which regulates the insurance and banking industry, first had suspicions about CBL’s financial strength in 2013 but lacked the resources and experience to investigate and did not pursue its concerns until 2017.

The report also found the Reserve Bank should have prevented CBL from listing on the NZX in 2015 until it had increased its capital, a move that could have prevented CBL’s collapse.

CBL Insurance was not a household name, but it was the main asset of a $750 million company listed on the NZX sharemarket, which specialised in selling builders’ warranties in New Zealand and France. But when CBL hit trouble in early 2018 after claims in France began to rise, the company revealed the Reserve Bank had been investigating it for months and had issued confidentiality orders that prevented the insurer telling the market.

That left investors buying and selling without full knowledge of the state of the company, and left New Zealanders paying premiums on building warranties they would never be able to claim on. In mid2017 CBL was valued at $747m. Today its shares have no value.

As anger mounted, the Reserve Bank ordered a review of its handling of CBL by Australian John Trowbridge and Mary Scholtens, QC. They found the Reserve Bank already had concerns about CBL as early as 2012, but it was correct to grant it an insurance licence with the intention of following up on its concerns afterwards.

But between 2014 and 2016 the Reserve Bank did not act on its suspicions. It did push for CBL to beef up its balance sheet as part of its 2015 float on the NZX sharemarket, and CBL agreed to hold more capital against future claims.

But, Trowbridge and Scholtens said: ‘‘We believe that the bank should have considered using its position (in 2015) to deter CBL Corporation from ... listing on the NZX before the bank had been fully satisfied on its reserving and solvency concerns.’’

‘‘The bank was raising important unresolved issues with CBL in 2016 but it was not exerting any particular pressure,’’ they found.

From 2017 the Reserve Bank was more decisive, launched an investigation and it became evident CBL had been indisputably consistently under-capitilised. By the end of 2017 was insolvent.

The report recommended law changes to beef up Reserve Bank powers, but also recommended: ‘‘When in doubt about an insurer’s financial soundness, the bank should take steps ... to investigate the company without delay.’’