The Reserve Bank of New Zealand (RBNZ) began a review of the Insurance Prudential Supervision Act 2010 (IPSA) in 2016, and the final stage of consultation has now begun with the launch of an omnibus consultation paper. There are four key aspects to the review:
- a more proactive and intensive approach to supervision;
- greater oversight of overseas insurers;
- enhancing policyholder security; and
- refining the scope of the legislation.
The RBNZ is the regulatory supervisory for insurers, and aims to be “risk-based, proportionate and proactive”. They propose to strengthen this by:
- setting clearer and more enforceable expectations, particularly for governance and risk management, by using standards rather than the current non-binding guidance;
- changing the existing solvency requirements to a more graduated approach, allowing an escalating “ladder of intervention” as capital levels decrease;
- adopting a wider set of enforcement tools, including publication of written warnings, remediation notices, infringement notices, enforceable undertakings, and civil pecuniary penalties, to allow a more proactive and proportional approach to compliance issues;
- enhancing supervisory powers, including by introducing a power to conduct on-site inspections, and to overrule insurers’ actuarial calculations;
- allowing greater scrutiny of transactions that involve higher levels of risk before approval.
Directors of New Zealand-incorporated licensed insurers would also be given a duty to exercise due diligence to ensure that the insurer complies with its prudential obligations under IPSA and its regulations, standards, conditions of licence and directions. A breach of the duty may be sanctioned with a civil pecuniary penalty.
Although the review began before it occurred, some of these recommendations will almost certainly have arisen out of concerns that arose from the liquidation of CBL Insurance.
Overseas insurers with New Zealand branches are an important part of the New Zealand insurance market, but the RBNZ notes that these can create some challenges, pointing out that there can be “difficulties imposing New Zealand solvency requirements, limited RBNZ access to and influence over the board, and a reduction in the level of control and influence that can be exercised in a crisis management situation.”
The RBNZ has therefore proposed that the chief executive officer of the New Zealand branch of on overseas insurer would have a duty to carry out due diligence to ensure that the insurer complies with its prudential obligations under IPSA. This would align with the approach taken in the recently passed Deposit Takers Act 2023.
They are also considering requiring New Zealand branches of overseas insurers to hold assets in New Zealand equivalent to the New Zealand solvency standard Prudential Capital Requirement for their risk exposures, and that life insurance branches should hold New Zealand statutory funds, with a de minimis exemption for small branches. This would be accompanied by a provision in IPSA to say that, in insolvency, these assets should be applied to meet New Zealand liabilities before those to other creditors.
Earlier rounds of consultation discussed a policyholder guarantee scheme, but this is not proposed to go ahead at this time. Instead, the RBNZ is seeking views on:
- protection of the ‘underwriting asset’ involved in yearly renewable term life policies and health policies;
- policyholder preference in insolvency;
- tighter restrictions on investments in related parties for all insurers;
- an ability for the court to order that some of a civil pecuniary penalty imposed on key officers should be paid to policyholders; and
- a requirement for policyholders’ contractual rights to be documented where they are changed in a transfer of policies between insurers (under section 53 of IPSA).
Scope of the legislation
In addition to the points above, the RBNZ proposes making a range of other changes to the scope of the legislation.
Although not proposing to change the definition of a “contract of insurance”, the RBNZ does suggest permitting a “declaration power”, which would allow borderline cases to be declared to be an insurance contract via regulations. This would allow new products and business models to be easily addressed.
The RBNZ also suggests adding an ability to license non-operating holding companies for corporate insurance groups that are headquartered in New Zealand. This will give better oversight of group-wide risks and help the RBNZ to carry out their role as home regulator of corporate groups carrying out cross-border business.
Updates to IPSA’s overarching purposes and principles are also under consideration. The RBNZ is asking for views on:
- whether IPSA’s purposes should explicitly reference the Reserve Bank’s broader purpose and financial stability objective under the RBNZ Act?
- whether it should remain a purpose of IPSA to promote the maintenance of a sound and efficient sector – is ‘efficiency’ an important and desirable legislative purpose?
- whether a reference to access to insurance is needed?
- whether the purposes of IPSA should refer to promoting the soundness of the insurance sector or the soundness of each insurer?
- what role policyholder interests should play in IPSA’s purposes and principles?
Submissions can be made on these proposals until 12 December 2023. Following the consultation the RBNZ will finalise their preferred policies, and prepare an amendment bill for IPSA. It intends to introduce the amendments to Parliament in early 2025.
If you have any questions about IPSA, or would like assistance with making a submission on the consultation, please contact a member of our insurance law team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.