The Reserve Bank has sought comments by 22 June 2009 on legal, drafting and operational issues arising from the draft Insurance (Prudential Supervision) Bill.
It has also sought feedback on three specific matters of policy:
Ministerial consent requirements for Reserve Bank directions to insurers in distress
controls over owners and changes in owner, and
restrictions on directors of those licensed insurers which are New Zealand incorporated subsidiaries acting otherwise than in the best interests of the insurer.
In this Brief Counsel, we offer our own views on the three policy matters and on several of the drafting issues which are critical to the overall operation of the Bill.
Definition of “insurance”
We support the inclusion of a definition of “insurance” to promote certainty on which types of arrangements are caught by the new regime.
At present the Bill covers all “insurers”, being all persons who have accepted a risk under a “contract of insurance”. But there is no definition of “insurance”.
The types of “insurance” that should be covered by the Bill are part of a spectrum of arrangements involving insurance of risk. We believe it is important that the Bill makes it clear which types of insurance are regulated, and which types are not.
At one end of the spectrum, is what is commonly understood to be insurance (for example, life insurance, disability insurance, general (i.e. house and car) insurance, liability insurance).
At the other end of the spectrum, there are arrangements that cover risk, but which are not commonly thought of as insurance. For example, a customer buys a product from a supplier and pays the supplier extra for a three year warranty. Or a client of a lawyer pays for a “letter of confirmation” that the client’s documents are compliant with a legislative regime. In each of these cases, the “insurance” element is a part of the service provided by a non-insurer. For the most part it will be reasonably clear that the new regime does not apply to these types of arrangements.
However, some arrangements fall somewhere in the middle. For example, where a superannuation scheme provides annuities (and they are not reinsured with a life company). Or a superannuation scheme offers death and disability benefits (in addition to return of accumulated contributions) and does not effect any insurance to cover that liability. In our view, these arrangements should not be covered by the Bill because the superannuation scheme is already prudentially regulated under the Superannuation Schemes Act. The Bill should make this clear. The Bill should also expressly address whether “insurance” includes derivatives (e.g. weather derivatives and commodity derivatives) that offer insurance-type protection.
We suggest a general definition of “insurance” with specific, but non-exclusive, exceptions.
Ministerial consent for directions
The Reserve Bank has sought feedback on whether Ministerial consent should be required before the Bank can give a direction to an insurer in distress. We support the view that under the new regime the Reserve Bank should be an independent arms-length regulator, free of political involvement (or perceived involvement). If the argument for Ministerial consent rests on an extra level of supervision, then an alternative may be to require the question of the giving of the direction to be referred by the Reserve Bank Governor to the Bank Board for advice before the direction is issued.
Controls over owners and changes in owners
We support the draft provisions which require the Reserve Bank to be satisfied that the applicant’s ownership structure is appropriate at the time of licensing.
Any additional provisions relating to reviewing suitability of owners at the time of licensing appear to us to be unnecessary. Directors and senior managers of the insurer will have day-to-day control of the insurer’s operations. The Bill requires a “fit and proper” policy for directors and relevant officers of the insurer. In addition, the insurer will be registered under the Financial Service Providers (Registration and Dispute Resolution) Act – which requires that directors, senior management and controlling owners not be “disqualified”.
However, there is good reason for having additional provisions around changes in ownership of an insurer. If the ownership of an insurer was transferred to an entity with less financial capacity, then that could affect the security of the policyholders.
We support the proposal that the Bank have the power to delicense an insurer if the insurer’s ownership structure changes to the extent that it is no longer appropriate or satisfactory having regard to the size and nature of the insurer’s business. However, a requirement to approve in advance changes in ownership may well be too intrusive and unnecessarily hinder a sale process.
Restriction on insurer’s directors acting otherwise than in the best interests of the insurer
We consider that it is an important safeguard for policyholders that directors of an insurer (which is a New Zealand incorporated subsidiary) not be permitted to act otherwise than in the best interests of the insurer. The constitution of the subsidiary should reflect this restriction.
This appears logical in light of the (in our view, sensible) underlying policy approach taken regarding priority afforded to the interests of policyholders in relation to statutory funds (clause 100). However, there are additional issues related to clause 100. Is it intended for example, to prevent the insurer giving security over statutory fund assets for borrowings on account of the statutory fund? This should be made clear.
Condition of licence relating to liabilities to New Zealand policyholders
The draft provisions of the Bill allow for a condition to be attached to a licence that requires a specified amount or proportion of an insurer’s business to be related to New Zealand policyholders (clause 21(2)(b)).
The “proportionality” threshold could potentially curtail New Zealand insurers expanding overseas. This is not in the interests of encouraging growth of New Zealand businesses or making New Zealand an attractive place for foreign insurers to centre their international operations. Amendments could be made to the Bill so international business can be conducted in separate subsidiaries. Presently the provisions do not allow for the thresholds to be applied on a group basis.
We understand that the Bank does not want New Zealand to attract insurers who are looking for a “soft” regulatory system from which to conduct insurance business written for offshore policyholders. But we query whether this will still be a real concern after the new robust prudential supervision regime is enacted. At the least, there should be guidelines on how the “proportionality” threshold is to be applied in line with principles of the legislation in clause 4.
We support inclusion of a facility for licensing exemptions to deal with the peculiar cases and to assist with the development of new products.
The Bill currently requires that all persons carrying on an insurance business in New Zealand, be licensed. The tests for whether an insurer carries on business in New Zealand include acting as an insurer in New Zealand (or elsewhere) where the insurer is liable under a contract of insurance to a New Zealand policyholder and is an overseas company liable to be registered under the Companies Act. This is likely to catch any overseas insurer carrying on business in New Zealand and writing more than a negligible amount of insurance in New Zealand.
However, for some of the less mainstream types of insurance, there is no satisfactory alternative New Zealand provider and it is necessary, or at least beneficial, for the insured to get cover from an offshore provider.
Even though the insurer may carry out relatively limited business in New Zealand, it faces the potentially significant costs of obtaining a licence in circumstances where there is little policy benefit in requiring it to do so. There is a clear risk that some of those specialist insurers may decide to withdraw from the New Zealand market, rather than go through the licensing process.
We support the inclusion in the Bill of an exemption facility to allow the Reserve Bank to exempt offshore insurers providing a speciality type of insurance to New Zealand business, where the offshore insurer is subject to a robust regulatory regime in its home jurisdiction.
In addition we consider that the Bill should provide further clarity around the concept of “carrying on insurance business in New Zealand”. The Bill should make it clear the overseas insurers, who do not seek to procure insurance business in New Zealand, are not required to obtain a licence. Uncertainty over this test may dissuade overseas insurers from accepting unsolicited requests for cover for New Zealand risks, and deprive New Zealand businesses of the benefits of that insurance.
We suggest the Reserve Bank be encouraged to enter into Memoranda of Understanding with overseas regulators to develop a synchronised regulatory process for insurers between New Zealand and other jurisdictions.
A copy of the draft Bill is available at http://www.rbnz.govt.nz/finstab/nbdt/insurance/3612272.html