Tuesday, 9 December 2008

The First Rotting Corpse

World Leader Now Insolvent

Several commentators have sought to focus attention upon the financial failure of the Accident Compensation Corporation (ACC). It is a disaster which raises a plethora of vitally important issues. Let us see if we can rehearse some of the most important.

Firstly, it is clear that socialist (state owned) commercial operations are not immune from commercial disaster or failure. In fact, they have a parlous history overall. Adolf Fiinkensein, at No Minister paints the ideological debate in sharp relief when he writes:

It seems the stark reality of what is actually happening with ACC has not sunk into the nation's journalistic mind.

This is a crisis of greater magnitude than the 1980s collapse of BNZ but people are only just waking up to it. The collapse is remarkable for the quiet way in which it is being revealed. Little by little by little. There is lots more bad news to come as the full implications of new but uncalculated risks demanded by government over the last nine years have been taken on.

Just imagine the outcry, had a private insurance company, a 'mutual' owned and funded by the policy holders, gone to the wall with projected three year liabilities exceeding assets and projected three year premium income to the tune of between three and four billion dollars.

There would be an uproar of unparalleled savagery. Banner headlines and vitriolic commentary from Trotter, McCarten, Harre, The Standard, Pundit, Poneke and all the rest of the liberal self styled intelligentsia, including ninety percent of the nation's paid journalists. It would be painted as a failure of evil capitalism and the victimization of the Kiwi battler at the hands of grasping rich pricks.

The Serious Fraud Office would be on the job and the passports of directors and senior executives would have been seized by authorities. Charges against directors under the Companies Act would be under way, receivers would be appointed and senior executives dismissed.

That is precisely what should be happening right now with our hapless ACC.
Adam, at Inquiring Mind, opines that the magnitude of the problem is significant--he calls it a major scandal--and that a complete and thorough analysis of the causes of insolvency needs to be undertaken. As with most things, there is probably a cluster of causes, each contributing to the debacle. This is almost certainly likely to be the case—as is true when any commercial enterprise becomes insolvent.

David Beatson weighs in, arguing that there is prima facie evidence of a cover-up on the part of the former government. Thus, along with the commercial reasons for collapse, we have the aspect of venal political “blind eye” syndrome, coupled with the apparent failure to obey the law. If true, there will be departmental collusion with the politicians who determined to “see no evil.”

There is no doubt that the recent financial market meltdown will have contributed significantly to the insolvency of the Corporation. The ACC, like all insurance companies, operated wholesale investment accounts in which “pre-paid” premiums are invested as reserves to fund forthcoming claims. With share markets declining well over fifty percent, the size of the reserve funds will have shrunken terribly. Is it appropriate to blame management and the Board for the market collapse?

Hardly. Management can only be blamed for imprudent investment strategies. Most insurance companies hold relatively conservative portfolios which generate high, sustainable earnings. The question is whether ACC ran its reserve portfolios in a prudent and conservative fashion. Within the portfolio one would expect that there would have been a high proportion of high-quality, highly secure bonds. One would have expected a proportion of the Fund would be invested in high quality shares in companies with very low debt, strong balance sheets, and high quality, sustainable earnings. We know that during the “good years” the ACC portfolio reported extraordinarily good results. But now that the tide has gone out, have they been found to be swimming naked?

If so, one could argue that at least it is in illustrious company. The Big Three auto companies in the US have been guilty of just that kind of behaviour. Like the ACC, at least two of the three are now effectively insolvent. Like the ACC, they are turning to the tax payer to fund them into solvency again.

Here is one of the great weaknesses of socialist commerce. It introduces a terrible moral hazard into operations: taxpayer capital is cheap—it can be garnered via the tax system—which in turn encourages reckless commercial behaviour. With respect to the ACC reserve fund, we suspect that in hindsight this will prove to be the case. We suspect that it will turn out that a good deal of the ACC funds were invested in highly speculative investments—which is an enduring occupational weakness of socialist commerce: money just keeps flowing in through the front door via the taxation system, so investment errors can be covered over—for a time. It will be interesting to see how much of the investment portfolio will have to be permanently written off, as opposed to written down temporarily.

Yes, there will be other causes. We expect that there will have been inefficient operations, featherbedding and layering of costs, blow-outs of medical expenses, a complicit government seeking to win electorate approval by expanding entitlements and coverage—all of which are also systemic weaknesses of socialist commerce.

The larger lesson is plain: whenever state governments move outside their legitimate areas of responsibility into utopian dreams of creating a risk-free society where all harm is compensated by society-at-large, there will eventually be a house-of-cards type collapse. The socialist utopian pretensions of the ACC system are betrayed by its very name: Accident Compensation Corporation. Society (the State) will compensate you for accidents. So, society is to blame for accidents? How stupidly utopian is that!

Scrubone deserves the final mention. He pokes fun at the utopian left winger blog, The Standard, which, running the Labour party line that the present debacle is softening up ACC for privatisation, damns ACC with fulsome praise. He reports that just a few days ago, The Standard was asserting that the “ACC is a worldleading, cheap, efficient system that would be wrecked by privatisation.”

We ask, world leading in what? Insolvency. Hardly—there are plenty more candidates for that around these days. It is just one more shabby collapsed insolvent insurance company. Nothing world leading there. Cheap? Tell that to the employers and car owners and tax payers generally as levies drastically increase. Cheap maybe as in “shoddy” or “worthless.” Efficient? We were unaware that efficient companies were normally to be marked by cost blowouts and insolvency.

The Big Three US automakers are back at the public trough for another slurp. How many times has ACC had to come back for “top ups” or additional slurps in its relatively short history? ACC the envy of the world? Yeah, right.

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