Insurance

11 Dec 2009

Changes to the regulation of insurers in New Zealand

The Insurance (Prudential Supervision) Bill (Bill) had its first reading in Parliament on 8 December 2009. The Bill has been sent to the Finance and Expenditure Select Committee for submissions. The Bill will significantly change how insurers are regulated in New Zealand and will replace most of the current regulation of the insurance industry.

The Bill will introduce prudential regulation of insurers. To do this, the Bill will require insurers to meet prescribed solvency standards, adopt an approved risk management programme and set approved qualifications for directors and key employees. The Reserve Bank of New Zealand (RBNZ) will become the key regulator of the insurance industry, monitoring and enforcing the standards set by the Bill.

This FYI looks at who will be subject to the prudential requirements, what the key requirements will be and how they will be monitored.

The Bill introduced into Parliament differs from the earlier draft Bill released for consultation in two key ways. The Bill now sets out detailed transitional provisions and will prevent an insurer's directors from acting in a way which is in the insurer's group's best interest, but not the insurer's.

Application

The Bill applies to any company which "carries on insurance business in New Zealand".

An overseas based insurer can apply to the RBNZ for an exemption from certain requirements in the Bill if the overseas insurer is subject to equivalent standards under its home jurisdiction.

Licensing and Prudential Requirements

The Bill establishes a licensing regime for insurers. The RBNZ will issue licences to insurers who meet the eligibility requirements.

The key requirements which an insurer must meet to be licensed are to:

1. satisfy the RBNZ that it will maintain a solvency margin in accordance with the applicable solvency standard;
2. hold a current financial strength rating;
3. have a "fit and proper policy" for key personnel;
4. have an approved risk management programme; and
5. have established a separate statutory fund solely for the purpose of meeting life insurance liabilities (if applicable).

Once licensed, insurers will have ongoing obligations in relation to each of these requirements.

Regulatory Oversight

The Bill provides two levels of review to make sure insurers comply with the Bill (particularly the solvency standards). The first level of review comes from the actuaries which insurers will have to appoint (in addition to auditors). The second level of review is ongoing supervision from the RBNZ.

Actuarial Oversight / Auditing

Every insurer will be subject to actuarial oversight. The insurer-appointed actuary will be required to audit the actuarial information in the insurer's financial statements and ascertain whether certain requirements in the solvency standards are met.Actuaries and auditors of insurers and insurers' associates (insurers' holding companies) will have an obligation to pass certain information relating to insurers and their associates to the RBNZ. This obligation will apply where the insurer or associate is or may become insolvent, faces serious financial difficulties, or has operated fraudulently or recklessly.

RBNZ Oversight

The RBNZ will be able to require insurers and their associated persons to provide any information about the insurer's business. Insurers will have to provide a copy of their audited financial statements to the RBNZ. Insurers will also be required to complete and deliver half-yearly financial statements to the RBNZ. The RBNZ may require an insurer to have its half-yearly financial statements audited.The RBNZ has a number of tools to deal with an insurer which becomes financially distressed (the insurer is failing, or likely to fail to maintain, a solvency margin). The RBNZ will be able to:

1. require the insurer to prepare a recovery plan (which must be approved by the RBNZ) setting out actions the insurer will take to effectively address any failings;
2. issue directions to the insurer or related companies. For example, the RBNZ may direct the insurer to not enter into new insurance contracts; and
3. apply to Court to have the insurer put into liquidation.

The final distress management option available to the RBNZ will be to have an insurer and/or its related companies declared subject to statutory management. Statutory management will only be available in limited circumstances.

Restrictions on Constitution of an Insurer

The constitution of an insurer may not provide that it can act in the best interests of the insurer's holding company unless this is also in the insurer's best interests. This is a new restriction which is designed to prioritise policy holders' interests.

Transitional Provisions

Transitional provisions will come into force when the Bill is passed. These provisions allow the RBNZ to issue provisional licences to insurers carrying on business at that time.

The Bill repeals the current requirement to deposit $500,000 with the Public Trust. Current deposits will be returned to insurers, typically on issue of a full licence.

Timeframes

The deadline for submissions to the Select Committee is 10 February 2010. The Select Committee is due to report back to Parliament on the Bill in early June 2010. We expect the Bill will be passed in late 2010 or early 2011. The Bill will then come into force over a period of time. The Bill currently provides for a three year transitional phase.

Authors

Michael Sage

Partner - Corporate & Commercial

DDI: +64 9 977 5006

Mobile: +64 21 664 993

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Stephen Ward

Partner - Corporate & Commercial

DDI: +64 4 924 3418

Mobile: +64 21 987 056

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