Expert pans risk cover for Trinity

By IRENE CHAPPLE

An expert insurance witness would "almost certainly" have declined cover such as that offered for a controversial forestry venture dubbed the Trinity scheme.

John Arpel, a principal of Zurich-based Allianz Risk Transfer, told the High Court at Auckland he believed CSI Insurance Group was created to cover a risk that would not normally have been accepted.

CSI was set up in the tax haven of the British Virgin Islands.

Arpel was flown from Switzerland by the Inland Revenue Department to give evidence yesterday in New Zealand's biggest case of alleged tax avoidance.

Taxpayers, the scheme's designers and the IRD are at odds in a test case over a scheme that could have netted wealthy investors up to $3.7 billion in tax benefits over 50 years. It was blocked by legislation but not before tax claims of hundreds of millions of dollars were made.

Trinity was a forestry investment scheme that required investors to make big payments in 50 years' time - but offered immediate tax benefits.

CSI provided a "revenue guarantee policy" which made it liable to investors if the trees failed to reach their promised value.

The IRD is challenging the validity of the insurance as part of its case.

Any link between promoters of the Trinity scheme and CSI is a point of contention in the case.

If approached for this type of cover Arpel said: "I would almost certainly decline the risk almost immediately, because of the duration [of 50 years] apart from anything else."

Arpel said he knew of no insurer who would consider an agricultural risk, a credit risk or a revenue guarantee for this period of time.

He believed it was created as part of the Trinity structure to cover a risk "which could not have been placed on a commercial basis in the usual traditional or non-traditional marketplaces".

The insurance did not appear valid because it did not involve the transfer of risk.

The policy was coupled with an "irrevocable letter of comfort" which said if the insurer was unable to meet its payment obligations a trust that earned money from the scheme would donate the shortfall.

Therefore, it appeared to be a "no-risk" arrangement.

"The current insurance industry view is that wordings purporting to transfer risk coupled with side letters (usually not shown to auditors) neutering the element of risk transfer are structures generally intended to deceive."

During cross-examination, Arpel agreed that if the forest was worth less than expected it would erode the insurance company's asset base.

But he said: "Only without the letter of comfort I accept that there is a downside and potential of loss."

The hearing continues today.