Prudential regulation of insurance in New Zealand: Towards best practice?

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Introduction

The Reserve Bank of New Zealand has published for consultation a draft amendment to the Insurance (Prudential Supervision) Act 2010. As the amendment introduces a new principle that requires an “awareness of and a response to… the guidance or standards of international organisations”, we decided to take a look and see how the amendment itself promotes this aim.

Helpfully, there is an existing process under which jurisdictions are assessed against the standards of international organisations. The International Monetary Fund (IMF) runs a Financial Sector Assessment Program (FSAP) under which the insurance sectors of certain jurisdictions are periodically assessed against the Insurance Core Principles (ICPs) published by the International Association of Insurance Supervisors (IAIS).

The New Zealand insurance sector was last reviewed in 2017¹ and received the assessments shown in the graphic below. A new review is expected to commence in the next year or two.

• In 2016, the International Monetary Fund assessed New Zealand’s financial system against the Insurance Core
Principles of the International Association of Insurance Supervisors.
• Three of the twenty-six principles were found to be fully observed, while ten were largely observed and 13
partly observed.
• A draft amendment to the Insurance (Prudential Supervision) Act 2010 has been published but will not be
enacted in this parliamentary term.
• The amendment should facilitate significant progress towards observance of the Insurance Core Principles,
however important areas remain unaddressed.

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Areas of progress

The 2017 FSAP provided a series of recommendations to New Zealand authorities that would bring the jurisdiction into closer observance of the ICPs. This section highlights changes in the amendment that implement the recommendations.

Scope

1. The types of overseas insurers requiring licences has been reviewed (ICP4).
2. NZ based insurers without NZ policyholders must now be licensed (ICP23).
3. NZ holding companies of licensed insurers can be subject to standards and other requirements.
4. The scope of the fit-and-proper framework is extended to include the Chief Risk Officer (CRO) (ICP5).

Standards

1. The amendment extends the powers of the RBNZ to make binding standards on a fuller range of prudential issues, and to extend this range even further with ministerial approval (ICP1, ICP7).
2. The proposed disclosure standard may facilitate more information being published to support market discipline (ICP2, ICP20).

Powers

1. Dual solvency control levels are supported by the amendment, allowing the RBNZ to receive recovery and resolution powers on different triggers.
2. The amendment empowers the RBNZ to (i) use graduated enforcement powers, (ii) restrict dividend payments and (iii) direct an insurer to close to new business (ICP11)
3. Administrative sanctions and fines are facilitated (ICP1).

Suitability of persons

1. Approval must be obtained for persons exercising “significant influence” (ICP5, ICP6), and such approval should not be given solely on the basis of continuing to meet licensing conditions (ICP6).
2. Insurers are required to notify the RNBZ of changes in the suitability of key persons (ICP5).

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Remaining gaps

In this section we highlight areas where the FSAP’s prudential supervision recommendations have not been implemented by the amendment:

Policyholder protection

1. IPSA continues to have no explicit policyholder protection purpose. While this is a requirement of ICP1 (“Objectives, Powers and Responsibilities of the Supervisor”), the 2017 FSAP noted that IPSA has many provisions that implicitly support policyholder protection, and that continues to be the case under the proposed amendment.
2. (ICP12, ICP 17) The statutory fund requirement has not been extended to non-life sector and Australian life insurer branches are still exempt.
3. (ICP12) Policyholders outside statutory funds still have no priority over other creditors. Provisions copied across from the Deposit Takers Act 2023 may inappropriately focus on general creditors rather than policyholders.

Risk and Solvency

1. ICP 16 requires the use by insurers of a full Own Risk and Solvency Assessment (ORSA) process, which is not explicitly supported.
2. There is no facility for transparent supervisory adjustments to capital requirements (ICP17).

Insurance groups

1. The IMF’s concerns about the establishment of home country supervisory equivalence for overseas insurers (ICP4) have not been addressed.
2. While holding companies can now be regulated, there is no comprehensive group supervision regime (ICP23)

Powers

1. There is still no power for the RBNZ to impose emergency licence conditions without consultation (ICP1).
2. There is no requirement (ICP8) for insurers to establish internal control functions (although this could perhaps be included in standards)

Supervisor

1. The amendment doesn’t require a management structure or minimum RBNZ resourcing for insurance regulation, data processing and supervision (ICP2, ICP9).

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Conclusions

• The degree of observance of an ICP is influenced not only by the prudential legislation (IPSA), but also by other legislation and the practices of regulators and supervisors (notably the RBNZ and the Financial Markets Authority, which is the conduct regulator)

• Observance of many of the ICPs may see significant progress under the amendment, however legislative change alone is only likely to trigger a few upgrades. These are shown in the table below:

• We have set out the remaining gaps we see relative to the IMF’s 2017 legislative recommendations. While some of these would be difficult to address, others could easily be closed through additions to the amendment. Such additions could further enhance New Zealand’s observance of the ICPs.

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PFS Experience

PFS Consulting helps clients with a wide range of services relating to insurance regulation, for example:

• Support with licence applications, including business plan preparation.
• Advice on, and reporting of, regulatory capital & solvency.
• Advice on portfolio transfers and other regulated restructures.
• Appointed actuary and independent actuary assignments.