The Insurance (Prudential Supervision) Bill, tabled in Parliament this week, has been improved through the Reserve Bank consultation process. A number of the issues industry identified have been addressed but there is still some “unfinished business”.
There will be a further opportunity to pursue change through submissions to the select committee.
This advisory note identifies the principal changes and some of those areas where we consider there is room for further improvement. The Bill runs to 229 pages and is complex. We will provide a fuller analysis next week.
Welcome changes include:
Provisional licences will be available for
existing insurers that are unable to meet all the requirements for a full licence at the time of the Act’s commencement, and
those intending to leave the industry within three years of the Act’s commencement.
Holders of “pending” provisional licences will be required to make a full application within 18 months and take reasonable steps to comply with certain of the Bill’s requirements in the meantime.
Subsidiary insurer directors not to have overriding duty to act in interests of parent
If an insurer is a subsidiary, its constitution must not permit directors to act in the best interests of the insurer’s parent – a prohibition that will override the permissive provision in the Companies Act. “Constitution” for this purpose includes the constitutive documents of entities that are not a company.
Contract of insurance definition
A definition of “contract of insurance” has been inserted. This provides some welcome clarification as to what might, and what might not, be caught. While “insurance” itself is not defined, this may be a matter which can be pursued in submissions to the select committee.
Other changes of note
Fit and proper certificates for new directors of overseas insurers: The Reserve Bank may exempt overseas insurers from the requirement to provide a fit and proper certificate in relation to new directors. As with other exemption powers in the Bill, this is tied to the law or regulatory requirements in the insurer’s home jurisdiction.
Return of deposits: The Bill now provides explicit provision for the return by the Public Trust of deposits lodged under Insurance Companies’ Deposits Act 1953 or Life Insurance Act 1908, when the insurer is issued a (full) licence.
Policies to be published: The Reserve Bank is required to publish its policies relating to how it acts, or proposes to act, in relation to licensing matters.
Financial reporting: Licensed insurers will be “issuers” for the purposes of the Financial Reporting Act (and therefore be subject to the preparation, audit and registration requirements under that Act).
Financial strength ratings: The requirement in the draft Bill to obtain a “credit rating” has been replaced with a requirement to have a “financial strength rating”, and the accommodation for insurers with a gross premium income below a prescribed threshold (say, $5 million) seems now to be confined to friendly societies and credit unions.
Application to liquidate: Clarification that the Reserve Bank can apply to the High Court to put into liquidation an insurer that is carrying on insurance business in New Zealand without having obtained a licence.
Matters we raised at the consultation stage that have not been addressed include:
Scope of the licensing threshold for foreign insurers: The Bank has not clarified the intended scope of the licensing threshold for a foreign domiciled insurer that enters into insurance contracts with New Zealand policyholders. The clause 8 definition is still linked to the carrying on business test in the Companies Act 1993, the application of which is uncertain for these insurers.
Whether the Bill will ultimately include a definition of “insurance”: The explanatory note mentions the difficulty of defining insurance with precision, and points to an acknowledgement by the courts to this effect. Although the new definition of a “contract of insurance” – which specifies a number of exclusions – may go some way to removing uncertainty as to what activities might (and might not) be caught by the regime, this may be a matter that can be explored further at the select committee stage.