Most Read Contributor in New Zealand, September 2016
The Insurance (Prudential Supervision) Act, which came
into full force on 7 March, contains a range of new risks and
liabilities for insurers and their directors.
To minimise these, affected companies and directors
should ensure that they are match fit for the new Act
understanding exactly what their respective obligations
ensuring they have appropriate compliance and training
programmes in place.
This Brief Counsel provides an overview of the risks for
directors, and how they can protect themselves.
New penalties under the Act
The Act introduces a range of new criminal penalties for
insurers and their directors, and provides the Reserve Bank
(the Bank) with considerable additional powers to regulate
the insurance industry.
Directors' liability under the Act
Section 216 provides that if a licensed insurance company is
convicted under the Act, every director will also be convicted, if
he or she:
authorised, permitted or consented to the offending behaviour,
knew, or could reasonably be expected to have known, that the
offence was to be or was being committed, and failed to take
reasonable steps to prevent or stop it.
A defence is available:
where the breach was due to actions of others (who are not
employees, fellow directors or agents), or to events beyond the
director's control, provided
the director took "reasonable precautions and exercised
due diligence to avoid the failure".
Director's responsibilities are very broad
Recent securities law decisions (the latest being Lombard) have
reinforced that there are limits to how much directors can delegate
their statutory duties to management. One of the messages is that
they should have in place reporting processes that enable the Board
to verify compliance and to apply their own judgement when
The Insurance (Prudential Supervision) Act suggests a similar
approach. It provides defences if directors can demonstrate that
they took reasonable precautions. It is highly prescriptive, which
means that directors need to be familiar with the Act's
requirements and to have robust monitoring systems to ensure that
all of these requirements are being met.
Directors could be liable, for example, if they don't take
reasonable precautions and their insurance companies fail to:
report to the Bank any failure, likely within the next three
years, to maintain the required solvency margin(s). Companies
without substantial excess capital or which have material
uncertainty on their level of claims (including, for example,
Christchurch earthquake claims), should monitor their solvency and
confirm compliance regularly to the Board
maintain a financial strength rating (which has to be renewed
annually) from an approved rating agency
comply with all licence conditions imposed by the Bank,
including any condition ensuring that its overseas insurance
business does not exceed limits (typically 50%) imposed by the
disclose to all new policyholders the insurer's rating and
certain related information, post it on the insurer's website
and refund premiums received from policyholders who cancel due to
failure to comply with the disclosure requirement
ensure all life insurance policies identify the issuer's
relevant statutory fund
provide the Bank with a fit and proper person certificate for
new directors or senior officers within 20 working days of
appointment (reassess each person every three years)
notify the Bank before changes in control or legal form,
entering an amalgamation or agreeing to transfer all or part of the
company's insurance business to another party
disclose any change in credit rating to the Bank, and
provide all information and reports as the Bank may seek on any
matters relating to the insurer or to any person associated with
The Bank also has extensive powers to direct companies which are
in distress, which may impose further obligations on directors. It
may direct the company to:
prepare a recovery plan, including a timetable to return to
cease entering any new contracts of insurance and carry on its
existing business under the Reserve Bank's direction, or
cease trading altogether.
Where to from here?
Directors need to be aware of the extensive requirements which
the new Act imposes on them and need to put in place strategies,
reporting systems and monitoring systems to ensure compliance
because the costs of non-compliance can be high – both
reputationally and financially.
Chapman Tripp has extensive expertise in these issues and can
assist you to get match fit.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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