The 22 June deadline for submissions to the Reserve Bank of New Zealand on the consultation draft of the above Bill is fast approaching.
Now is the time to voice any concerns. The Bill will be introduced into Parliament before the end of this year and is expected to be passed into law early next year. There is likely to be a two-year phase-in before it is fully in force.
In this update we set out some of the key issues for New Zealand insurers to consider when making submissions.
Should The Bill Define 'Insurance'?
Whether a financial service amounts to insurance is central to whether the service provider is caught by the Bill. There is only one court case in New Zealand that directly addresses this issue (Motor Cycle Specialists Limited v The Attorney-General (1988) 5 ANZ Insurance Cases 75,611) and it provides limited guidance.
The Bill is an ideal time to clarify the common law position. However, the draft Bill fails to define 'insurance'. In order to ensure a level playing field, it is essential there are no loopholes allowing companies to issue products that amount to insurance that are not caught by the obligations of the Bill.
Is The Definition Of 'Continuous Disability Insurance' Appropriate?
Disability insurance is one insurance product that both life insurers and fire and general insurers commonly offer. Its inclusion in the definition of 'life insurance' is slightly surprising as it is, of course, not life insurance at all.
Life insurers tend to offer the product as a continuous contract that cannot be terminated by the insurer until the insured reaches a specified age. Fire and general insurers tend to offer the product as a 12-month contract only. They can refuse renewal at any time.
The other key difference is that once a claim arises, the life product usually provides indemnity until the age specified (which can result in a 'claim tail' lasting decades), whereas the fire and general product usually only provides an indemnity for a maximum of two years.
The proposed definition of 'continuous disability insurance' captures the fire and general product. This means it will have to be accounted for in a statutory fund.
According to the recommendations of the Office of the Minister of Finance to the Cabinet, the principal rationale for statutory funds is to stop products with short-term exposure undermining assets required to service longterm liabilities. Capturing the short-term fire and general product within a statutory fund for long-term exposure life products would appear to have the opposite effect.
Does The Bill Cope With Composite Policies?
The requirement for life insurance products (as defined in the draft Bill) to be accounted for in a statutory fund creates a difficulty for composite policies that contain elements of both life and non-life insurance. An extreme example of this difficulty is the domestic motor vehicle policy. This predominantly fire and general insurance product commonly includes a tiny amount of life insurance (often about $2,000). Requiring this product to be in a statutory fund with traditional life insurance products seems inappropriate.
There are a number of options open to the Reserve Bank of New Zealand to overcome this problem. Determining which option is best for you will be a vital step in framing your submission.
Is The Definition Of 'Carrying On Insurance Business In New Zealand' Correctly Framed?
The definition of 'carrying on insurance business in New Zealand' in the draft Bill has been taken from the current Insurance Companies (Ratings and Inspections) Act 1994.
An unincorporated overseas insurer does not appear to be caught by this definition.
We also note section 13 of the draft Bill requires every 'person' (undefined) who carries on insurance business in New Zealand to hold a licence, whereas section 15 allows any 'body corporate' (undefined) to apply for a licence. We query the different terminology.
Is Disclosure Of The Date Of An Insurer's Current Credit Rating Necessary?
The draft Bill carries over the obligation in the Insurance Companies (Ratings and Inspections) Act 1994 to obtain and register a current credit rating.
The credit rating cannot be more than 12 months' old. Thus, the date of the rating changes at least every 12 months.
Requiring disclosure of not only the current rating, but also the date of it creates a costly administrative burden for insurers. Every 12 months they must change their documentation to the new rating date even though their rating may remain the same for years.
So long as the rating is the current one, is there also a need for the date of it to be disclosed? Removing the need to add the date would reduce costs to insurers without having any harmful effect on the consumer benefit of this requirement.
Should The Bill Create A Permanent Legal Process For Transferring Books Of Insurance Business?
Currently, transferring a book of business (eg a portfolio of life policies) without transferring ownership of the legal entity that underwrites it requires a scheme of arrangement under the Companies Act 1993.
This is a complicated legal process requiring an application to the High Court and usually a meeting of policyholders to approve the scheme. The process under the Companies Act 1993 was not primarily designed for transferring insurance policies, and it is cumbersome.
The Reserve Bank has indicated it is considering creating a simpler legal process under the Bill for such transfers to occur. This would be a welcome change and especially if it is to be a permanent arrangement, not just a transitional provision.
The above are only some of the many issues that may affect insurers.
The Bank has indicated the 22 June deadline for making submissions on the draft Bill will not be extended.
Click here to read our earlier update outlining the main features of the draft Bill.
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