Published in Insights, The New Zealand Initiative’s newsletter, 8 November 2013
The biggest surprise announcement out of Labour’s conference last weekend was the proposal to establish KiwiAssure, a new state-owned insurance company.
Speaking to his party’s delegates, opposition leader David Cunliffe argued KiwiAssure would inject more competition into the insurance market. It would also give New Zealanders the choice of insuring with a wholly domestically-owned company that would keep its profits in the country.
Media commentators have been split on what to make of Cunliffe’s announcement. Some regard it as a sign of Labour’s ‘lurch to the left’ and a big risk to taxpayers. Others complain that KiwiAssure was not bold enough as it would be profit-oriented and not pursue any social policy goals.
Such differences aside, KiwiAssure already fails on the reasons given for its introduction. If the goal is to promote more competition in the market for insurance, the answer cannot be to create a new state-owned company to enter the market.
To show the absurdity of such a proposition, one only has to imagine what it would mean if this became a guiding principle. Say a future government came to the conclusion that a market might benefit from more competition, it would have a blank cheque for creating new competitors.
Unfortunately, such state-owned companies never play by the same rules as their market rivals – even if they are started with the best intentions. State-owned companies always have the financial, regulatory and political power of their creators behind them. Ask any courier company competing with NZ Post how this plays out in practice.
To ensure markets are competitive, the best option governments have is to keep markets contestable by new entrants. Even the vague potential of market entry can discipline established companies.
Labour’s other reason for KiwiAssure is to have a nationally-owned company keeping profits in New Zealand; this is yet another fallacy. Firstly, profits may well be sent abroad but they typically return quickly. Secondly, thanks to the international division of labour, not every product or service needed in New Zealand also has to be produced here or owned by New Zealanders. If it were otherwise, we would not just create KiwiAssure. We would also need KiwiCar, KiwiPlane, KiwiSearch, KiwiDrugs, KiwiMachinery and KiwiTextiles to compete with imports or foreign-owned New Zealand companies.
Ironically, KiwiAssure fails to assure the public of Labour’s economic credentials.