Wrap-up consultation on insurance sector supervision

Changes to statutory funds regime and enhanced policyholder protections

The RBNZ proposes that ‘yearly renewable term’ (YRT) life insurance policies (the most popular form of life insurance sold in New Zealand) should no longer be subject to the statutory fund regime because they do not have the ‘savings element’ that the regime was intended to address.

To balance the reduction in policyholder protection arising from this change, enhanced protections are also proposed, to apply across all classes of insurance:

• Protection of the ‘underwriting asset’ (i.e., the right for YRT life and health insurance policyholders to renew their policy annually on the same terms) by IPSA requiring it to be treated as a liability owed by insurers when they consider policyholders’ rights under any restructuring proposals (including resolution or liquidation);
• Policyholder preference in insolvency;
• Tighter restrictions in investments in related parties for all insurers in the form of a connected exposures standard limiting such investments;
• The courts being able to order that some or all of a civil pecuniary penalty imposed due to a breach of due diligence duty (by a director or appointed actuary) be paid to policyholders; and
• With respect to assignments of policies between insurers following RBNZ approval of a transfer of business under section 44 of IPSA, a requirement for RBNZ to take into account policyholders’ interests when deciding whether to approve an allocation of the insurance liabilities, and an entitlement for policyholders to receive written confirmation of the impact of any such allocation.

Governance, risk management and relevant officers

It is proposed that:

• The RBNZ be empowered to introduce standards and rules covering corporate governance, risk management, capital adequacy and solvency, outsourcing and related party exposures.
• Duties to exercise due diligence be introduced for:
  • Directors of New Zealand-incorporated licensed insurers to ensure the insurer complies with its prudential obligations under IPSA and its regulations, standards, licence conditions and directions; and
  • Appointed actuaries when performing duties under the actuarial advice standard,

with civil pecuniary penalties for breaches of these duties.  

Other propsed changes related to the treatment and appointment of officers include requiring:

• The role of chief risk officer to be a “relevant officer” of a licensed insurer requiring a fit and proper certificate from RBNZ;
• RBNZ’s approval before the appointments of relevant officers (i.e., chief executive, financial and risk officers and the actuary); and
• RBNZ to be notified if an insurer has reasonable grounds for an opinion that a relevant officer is not a fit and proper person to hold their position.

Other disclosure and reporting requirements

While possibly less significant than some of the other proposals, the RBNZ proposes:

• Expanding the requirements on disclosing overseas policyholder preference to also cover any situation where overseas policyholders may be given preference; and
• The introduction of a disclosure standard requiring insurers to provide information to the RBNZ or the public.

Supervisory powers

These would include:

• Extended investigation powers to cover entities that are not licensed insurers but may be non-compliant with licensing requirements or holding themselves out falsely as licensed insurers;
• Broader information-gathering powers (applying to any person, not just licensed insurers or specified persons);
• On-site inspection powers (with notice);
• Powers to require staff to respond to formal investigatory questions ‘on notice’ as part of an investigation;
• A breach reporting regime requiring insurers to monitor their compliance with prudential regulation, and to notify RBNZ where an insurer believes it has or is likely to breach a prudential obligation in a material respect; and
• Powers to direct insurers to not renew existing insurance contracts (additional to existing powers to direct insurers not to write new business).

Approval processes for major transactions

RBNZ proposes to consolidate into a single approvals process the statutory tests for major transactions (including transactions resulting in obtaining significant influence, change of corporate form, transfers and amalgamations).

• Decision-making criteria would have regard to:
  • Whether the insurer’s involvement in the transaction will continue to meet licensing requirements once the transaction is completed;
  • The policyholders’ interests; and
  • Any other factors RBNZ considers relevant.
• Timeframe for approval would be based on what RBNZ considers ‘reasonable’, rather than imposing a time limit.

Enhanced enforcement tools and penalties

New statutory enforcement powers are proposed to enable RBNZ to:

• Require insurers to publish a written warning issued by RBNZ;
• Issue remediation notices specifying actions to be taken by the insurer;
• Issue infringement notices that impose modest fines (mainly for failure to provide required information);
• Impose enforceable undertakings, involving a binding agreement to take remedial action and pay compensation; and
• Impose civil pecuniary penalties, primarily for breaches of standards.

Proposed levels of criminal penalties and civil pecuniary penalties are a fine not exceeding NZ$2.5 million for businesses and NZ$500,000 for individuals, or imprisonment for a term not exceeding 18 months.