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 by:
understanding exactly what their respective obligations are, and
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, or
- 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 required.
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 Bank
- 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 insurer.
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 solvency
- 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.