The proposed new regulator of insurers in New Zealand, the Reserve Bank of New Zealand, has released a consultation draft of the Insurance (Prudential Supervision) Bill. The Bill is to be introduced into Parliament later this year. In this update we highlight some of the changes to the current regulatory environment proposed in the Bill.
The draft Bill requires the Reserve Bank of New Zealand (Bank) to:
- Issue licences to every person carrying on insurance business in New Zealand.
- Undertake prudential supervision of licensed insurers.
- Enforce the Bill against licensed insurers who fail to comply with it.
Every person carrying on insurance business in New Zealand must hold a licence. A person carries on insurance in New Zealand if the person or entity:
- Is a body corporate, an overseas company liable to be registered in New Zealand or is ordinarily resident in New Zealand.
- Acts as an insurer in New Zealand.
- Is liable to policyholders in New Zealand.
An overseas insurer that is not resident in New Zealand and that is not a company (eg a Protection and Indemnity Club) appears to be outside this definition. However, the licensing requirements in the draft Bill do address unincorporated bodies outside New Zealand. This express inclusion in the licensing requirements makes it unclear whether unincorporated bodies outside New Zealand are meant to be subject to the licensing regime or not.
In order to obtain a licence, the applicant must:
- Hold a current credit rating from a credit rating agency approved by the Bank (reinsurers, captives, small insurers below an as yet unspecified GWP and start-ups trading for less than a year are exempt).
- Be able to carry on the business in a prudent manner taking into account their financial resources, level of internal controls, size and type of risks being insured, level of reinsurance, non-insurance activities and related party transactions.
- Be able to meet the approved solvency standards (to be specified).
- If it is a life insurer, have at least one statutory fund (as detailed in the draft Bill) in respect of its life insurance business.
- Be able to comply with any proposed conditions upon which the licence will be granted.
- Provide a fit and proper policy to the Bank that governs the qualifications, requirements and any other criteria that directors and relevant officers (CEO, CFO and actuary) must have in order to be appointed to and to continue to hold office in the insurer.
- Confirm each proposed director and relevant officer is a fit and proper person in accordance with that policy.
- Provide a risk management programme that:
- Sets out procedures that the insurer will use for the effective identification and management of insurance risk, credit risk, liquidity risk, market risk, operational risk and any other prescribed risks.
- Sets out auditable record keeping requirements.
- Sets out procedures to ensure the programme remains current.
- Is appropriate for the size and marketplace of the insurer.
- Have an appropriate incorporation, ownership and governance structure, and sufficient financial strength for the proposed size and nature of the business.
- If it is an overseas based entity, be subject to laws in its home jurisdiction that are comparable to New Zealand's.
- Be registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008.
- If subject to the Anti-Money Laundering and Countering Financing Terrorism Act 2009, be able to comply with it.
The draft Bill will repeal the Insurance Companies Deposits Act 1953. A deposit of NZ$500,000 with the Public Trust will no longer be necessary. Presumably, existing depositors will have their deposits refunded.
The draft Bill strengthens the rating requirements in the current Insurance Companies (Ratings and Inspections) Act 1994. The Bill will also repeal that Act.
Presently, a failure to disclose a rating at inception or renewal only entitles the insured to cancel the policy up to four weeks later and obtain a premium refund. The draft Bill makes a failure to disclose a rating a criminal offence with a possible fine of up to NZ$500,000 for the insurer.
If the licensed insurer maintains an Internet site advertising its products, every page of that site must clearly and prominently disclose that insurer's rating.
If the constitution of an overseas insurer favours its home policyholders over New Zealand policyholders, that preference must be disclosed as part of the rating also.
Licensed insurers must appoint an actuary.
The actuary must audit the actuarial information contained in the financial statements of the insurer in accordance the solvency standards (to be specified).
Within three months of the end of every financial year, the licensed insurer must ensure that a copy of its financial statements and auditor's report are delivered to the Bank.
Life insurers must have at least one statutory fund in relation to their life insurance business. A statutory fund is a fund that:
- Is established in the records of the life insurer.
- Relates solely to the life insurance business of the life insurer, or a particular part of the life insurer.
The principal requirements of the statutory fund are as follows:
- All amounts received in respect of the business of the fund must be credited to it.
- All assets and investments related to the business of the fund must be in the fund.
- All liabilities (including policy liabilities) arising out of the conduct of the business of the fund must be treated as liabilities of the fund.
- The assets of the fund are only available for expenditure related to the conduct of the business of the fund.
- Funds cannot be restructured or terminated without the approval of the Bank.
- All profits and losses of the fund must only be dealt with in a manner that protects the interests of policy owners and in a prudent way.
Overseas life insurers can apply to the Bank to be exempt from these requirements.
Rather unhelpfully, the draft Bill defines a 'life policy' as 'a contract of life insurance'. One of the current difficulties facing fire and general insurers is that some traditional fire and general policies contain a small amount of life insurance cover. For example, loan repayment insurance and income protection insurance often provide limited cover in the event of the insured person's death. It is unclear whether this limited cover will turn the policies into 'life insurance' under the Bill, requiring a statutory fund.
Interestingly the draft Bill does address the reverse situation, where a composite policy of predominantly life insurance contains a small element of non-life insurance cover.
Any transfer of all, or part, of an insurer's insurance business to another entity, or an amalgamation of insurance companies under the Companies Act 1993 requires the Bank's prior written approval.
The Bank can require an independent actuary to report on the proposed transfer. The insurer making the request must pay for this.
The Bill will include a statutory scheme to enable transfers of insurance policies without the need for Court approval. It is unclear whether this will be a permanent feature or a transitional provision only.
Interested parties are invited to make submissions direct to the Bank on the consultation draft by 22 June 2009. The Bank has warned that this date will not be extended.
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