The Insurance (Prudential Supervision) Bill has been reported back to New Zealand Parliament from the Finance and Expenditure Committee with a number of recommended changes. The Committee recommends that discretionary funds be exempted from the Bill, but overseas associations of persons who are insurers be added.
They have also attempted to clarify when an overseas insurer/reinsurer is subject to the Bill, but doubts remain.
We set out below a summary of the more important changes.
Definition of 'contract of insurance
The Committee proposes to delete the express inclusion of discretionary funds in the definition of 'contact of insurance'. Thus, organisations providing discretionary payments to their members upon the happening of uncertain events do not need to be licensed.
The definition of 'contract of insurance' now expressly states that it includes a contract of reinsurance. Previously, this was implied.
Meaning of 'carries on insurance business in New Zealand '
This definition is central to the application of the Bill to overseas insurers and reinsurers. Whether an overseas insurer or reinsurer is required to be licensed under the Bill is largely determined by whether that insurer is 'carrying on business' in New Zealand for the purposes of the Companies Act 1993 and, as such, is required to register a branch under that Act. Applying the 'carrying on business' test in practice can be problematic because the test is very fact specific and there is little legal precedent for what amounts to, and what does not amount to, carrying on business.
The Bill originally amended the Companies Act to add an exemption that said merely issuing an insurance policy governed by overseas law to a New Zealander, did not amount to carrying on business in New Zealand. The Committee suggests broadening the exemption to say that merely issuing any insurance policy to a New Zealander will not, in itself, amount to carrying on business.
However, despite the Committee's best efforts, the present uncertainties associated with the 'carrying on business' test under the Companies Act for all businesses will apply equally to overseas insurers/ reinsurers under the Bill.
Whether or not an overseas insurer/reinsurer will require a licence because it carries on business in New Zealand will be a question of fact, determined by applying a range of relevant factors. Overseas insurers/reinsurers issuing policies to New Zealanders will need to carefully apply and weigh these factors when assessing the extent to which the Bill applies. Examples of relevant factors (among many) include:
- The extent of the overseas insurer's presence in New Zealand (eg infrastructure, employees, bank account).
- Continuity of dealings, and whether or not policies are issued in New Zealand by the insurer or its agents (as opposed to binding cover from overseas).
There are also provisions in the Companies Act which deem certain conduct to be carrying on business. Ideally the Bill should provide more insurance specific guidance as to what amounts to 'carrying on business' in New Zealand (rather than merely stating what, in itself, does not amount to carrying on business in the insurance context). Penalties for failure to comply with requirements of the Bill are significant and accordingly it is important that overseas insurers/reinsurers proposing to provide cover in New Zealand have certainty as to whether or not the regime applies to them.
At this late stage, significant amendments to the relevant provisions are unlikely. However, we believe it would be useful for the regulator to provide a guidance note as to how it intends to interpret the 'carrying on business' test under the Companies Act for overseas insurers/reinsurers. We anticipate this would work through some insurance specific examples, indicating whether or not the regulator would consider the relevant insurer/reinsurer to be 'carrying on business'.
The Committee also recommends extending the definition of 'carries on insurance in New Zealand' to overseas associations of persons who are not companies. This was previously missing. However, it recommends removing from the definition non-profit and voluntary professional/ trade organisations that offer insurance to their members only, if it is ancillary to their main purpose.
The Committee also proposes that the regulator be given the power to declare that an organisation entering into an isolated or occasional contract of insurance is not carrying on the business of insurance.
Accept able overseas prudential regulation
Under the Bill, a licence will only be granted to an overseas insurer if the regulator is satisfied that the overseas insurer's home prudential supervision is satisfactory. Also, an overseas insurer can be exempted from some of the ongoing prudential supervision requirements if the regulator considers its home prudential supervision as satisfactory.
In order to provide some certainty, the Committee recommends that the regulator sets out in regulations those countries that it recognises as having a satisfactory prudential supervision regime.
Financial strength rating
Currently, insurance intermediaries are authorised to disclose an insurer's financial strength rating to an insured. This provision was curiously absent from the Bill and the Committee has recommended its return.
The Committee has also recommended that notification of a rating downgrade can be effected by way of a public notice in daily newspapers in Auckland, Hamilton, Wellington, Christchurch and Dunedin, and on the insurer's website. Currently, notice has to be given to every policyholder.
Very small insurers exempt from some prudential requirements
The Committee recommends that very small insurers with a Gross Written Premium of around NZ$1.5 million be exempt from some requirements of the Bill such as financial strength ratings, statutory funds and some minimum capital and financial reporting requirements. However, they must operate as friendly societies.
Composite policies assessed on a product class basis
Because life insurance policies (as defined) must be in a statutory fund, it becomes important to determine whether a mixed life and non-life policy is caught by this.
The Committee recommends that the existing threshold (allowing a non-life policy to have up to 24% of its premium relating to life cover) be applied on a per product line basis. The percentage is ascertained at the commencement of cover only.
The Bill now goes back to the full House of Parliament for its second reading. It will be interesting to see whether all of the Committee's recommendations are adopted and what further changes may occur before it is passed. We will keep you up to date with developments.
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