NZ Insurance - Prudential Regulation. Unanimous Agreement. at least from the Select Committee

Size: px

Start display at page:

Download "NZ Insurance - Prudential Regulation. Unanimous Agreement. at least from the Select Committee"

Amie Barker
5 years ago
Views:

NZ Insurance - Prudential Regulation Unanimous Agreement at least from the Select Committee The Insurance (Prudential Supervision) Bill is continuing its journey through the legislative process with

1 NZ Insurance - Prudential Regulation Unanimous Agreement at least from the Select Committee The Insurance (Prudential Supervision) Bill is continuing its journey through the legislative process with the Finance and Expenditure Committee reporting back to the House. The FEC has recommended that it be passed with a number of amendments to the version first introduced to Parliament. Perhaps not surprisingly there appears to have been little contention in the Committee with the Bill largely unchanged. We suspect this is because the Bill is viewed as legislation that is good governance and isn t going to win or lose votes. June 2010

2 Key Points on a Page Where are we up to? Key points - While they no longer apply (or apply fully) to all entities, there are no major changes to the core requirements: fit & proper policy, risk management programme, and solvency standard. Timing - The development of the Act appears to be continuing along the timetable we have outlined in our earlier flyers. We expect that the Bill will be passed in September 2010 with continuing development of the necessary supporting regulations by the Bank over the next several months. What s happening? Changes - We have outlined some of the key changes recommended by the Committee. Exemptions have been introduced Confirmation that the bank approves material changes to risk management program Bill gives the Bank authority to impose a minimum capital requirement The Reserve Bank is required to have regard to overseas solvency standards Financial Strength Ratings for overseas insurers must refer to any overseas policyholder preference Composite policy threshold (<25%) to be assessed across a line of business. A more complete list of changes is included below. So what does this mean? Implications This draft is largely it. While there is the opportunity for changes to be made as the Bill goes through the final stages of Parliamentary debate, significant change is not expected. There is no further opportunity for public submissions or debate on the policy or content. June

3 The changes in more detail Exemptions Introduced - Coverage is not universal Discretionary mutuals are no longer considered to be insurers so will not have to comply with the Act once passed (deletion of clause 7(3)) Professional or Trade associations who provide some insurance services to their members are also excluded from the regime (new clause 8(2)(e) and 8(3)). There are conditions around this exclusion including: The society or association is not for profit The provision of insurance is ancillary or incidental to the primary purpose of the society of association The insurance: is provided to members or their relatives, or is in respect of the activities of its members when carrying out or conducting the work of the profession, trade or occupation. Some categories of insurer may be exempt from some requirements by Order in Council (new clause 229A) The FEC have recommended that small insurers be exempt from financial strength ratings, statutory fund requirements and minimum capital requirements, as well as some financial reporting requirements Small insurers will still be required to have risk management programs, and appoint an actuary The FEC recommends small to be less than $1m to $1.5m of gross annual premium This exemption will only apply to small insurers who are: in business prior to the passage of the Bill, or Friendly Societies established under the Friendly Societies and Credit Unions Act 1982 either before or after passage of the Bill. June

4 Bank to Approve Risk Management Programme The requirement for an insurer to obtain the Bank s approval before its risk management programme is amended in a material way (clause 74(4)) remains, although a new clause 74(5) has been added. Where prior approval is not reasonably practicable, the insurer can notify the Bank of a change within 5 days of making the amendment. The FEC notes in its Commentary that regulatory awareness and pre-approval of plans are important components of the prudential framework. This amendment allows flexibility for insurers to act if there is particular urgency. The result however may be that the risk management programme becomes so high level and general that it is rarely, if ever, changed thereby avoiding the need to seek approval. In the absence of any guidance to date, we are very interested to see how this develops. Minimum Capital Requirement Clause 56 is amended to give the Bank the means to impose solvency requirements including the concept of a minimum capital requirement, that is captured within the current draft solvency standard. This clause now makes it clear that the solvency standard should also cover disclosure requirements to the Bank and reporting to other interested parties (eg policyholders and public) in relation to solvency matters. Regard to Overseas Solvency Requirements New clauses 53(3A) and (3B) have been added to the Bill requiring the Bank to have regard to relevant overseas standards to ensure that the NZ solvency standard does not apply in an unreasonable manner as a result of an insurer s incorporation in either NZ or overseas. Financial Strength Rating While we expect a number of insurers (particularly life and health) will have made submissions recommending the removal of the requirement for financial strength ratings, this has not occurred. Some changes have been made including reinstating the requirement for a rating to refer to any overseas policyholder preference (clause 61A). Two other changes have been made that largely bring the Bill into line with the current ratings regime: (i) The requirements to disclose a downgrade have been amended to apply to all policies, not just those with duration of more than one year, and this disclosure may be by way of a public notice rather than in writing to all policyholders (clause 69); and (ii) the ability to disclose ratings to policyholders through an intermediary. The change to publication requirements will reduce costs and overcome some practical issues. June

5 Composite Policies Under the previous version of the Bill composite policies were assessed at a policy level and classified as life or non-life based on whether less than 25% of the premium was one or the other. Clause 85 has been amended and this test is now applied to an insurance product line, with the 25% threshold unchanged, and being applied at the point the contracts are entered into. Clause 85(5) defines an insurance product line as all contracts of insurance entered into by an insurer that have the same, or substantially the same, terms and conditions. We think this is a much more sensible approach to the issue. Implications The exemptions that have been introduced are practical in nature, but they do risk distortion and the introduction of a less than completely level playing field. It is also likely the exemption criteria will create boundary issues. Exactly how these exemptions are managed in practice will be interesting as Associations and the Bank determine exactly what ancillary or incidental mean We assume that the Bank will want to have oversight of the entire market including exempted insurers - but how will they achieve this as the legislation doesn t seem to provide support for them to monitor exempted insurers? Given a major purpose of the Bill is to provide financial protection to insurance policyholders, it is interesting to note that there will be segments of the market completely outside that protection Some commentators have noted that consolidation of smaller players would be a good thing. Will exemptions now provide a greater incentive to remain small and prevent the consolidation that might otherwise have occurred? Conclusion Legislative and regulatory changes being implemented in the current year are impacting insurance companies more than any other in recent history. Insurers we have talked to over recent months are extremely busy dealing with the implementation of the Financial Advisers Act, as well a change to the GST rate. Life insurers have also had a fundamental change to the way life insurance is taxed. As a consequence the Insurance (Prudential Supervision) Bill has almost slipped under the radar at times. Much of the Bill s content is consistent with overseas regimes and reflects good governance. It s hard to argue with the underlying principles associated with a fit & proper policy, risk management programme or solvency standard. As is often the case however the devil s in the detail. The Bill is likely to be passed in the next 3 to 4 months meaning insurers will need to respond substantively and be prepared to engage with the Reserve Bank regarding licence applications. A bigger challenge perhaps confronts the Reserve Bank as it prepares to deal with all of the applications, develop regulations and standards, and is no doubt challenged at some point on areas of detail that haven t been tested previously. June

6 About Finity Finity is the largest independent general insurance actuarial and consulting firm in Australasia, with around 80 staff in Sydney, Melbourne and Auckland. Our core areas of expertise include: Strategy: Finity assists insurers with a range of strategic issues. A key area of our work is helping clients consider responses to current industry change. Appointed Actuary role: Our consultants are experienced in preparing liability valuations and Financial Condition Reports. Our reputation is built on providing clear, accessible advice of outstanding technical quality. Demutualisation, merger and acquisition: Finity has been actively involved in recent industry consolidation in Australia, and was engaged by insurers on both the buy and sell sides in recent transactions. We also have expertise in other areas, including: Actuarial Outsourcing: Whether you want help with a single project or are looking for a complete outsourcing solution, Finity can help. Peer Review: We are happy to provide managements and their boards with a concise second opinion on any matter, drawing out key issues and making broad market comparisons. Contacts For further information on the changes in New Zealand, or on the support we can provide, please contact any of the following: John Smeed Jeremy Weight Ian Burningham Geoff Atkins Steve Curley john.smeed@finityconsulting.co.nz jeremy.weight@finityconsulting.co.nz ian.burningham@finityconsulting.co.nz geoff.atkins@finity.com.au steve.curley@finity.com.au Copyright 2010 Finity Consulting Pty Limited Sydney ph: fax: Level 7, 155 George Street THE ROCKS NSW 2000 Melbourne ph: fax: Level 6, 30 Collins Street MELBOURNE VIC 3000 Auckland Finity Consulting Pty Limited ph: ABN: fax: Level 27, 188 Quay Street AUCKLAND