The Reserve Bank has released the draft Insurance (Prudential Supervision) Bill for limited consultation before the Bill’s formal introduction to Parliament. This Brief Counsel provides an overview of the Bill. The Reserve Bank is not seeking policy input, but is asking for comments on legal, drafting and operational issues. Chapman Tripp is still working through the Bill’s provisions and will produce a more detailed analysis toward the end of this month, after we have the benefit of briefings to be provided by the Reserve Bank in Wellington and Auckland on 26 and 27 May.
Overview of the bill
The Bill applies to all types of insurance. The key features of the Bill are:
- Licensing – Every person who carries on insurance business in New Zealand (except defined Crown and public entities) must hold a licence, issued by the Reserve Bank. Licences may be subject to conditions, including requiring a specified amount or proportion of the insurer’s business to relate to New Zealand policyholders. Businesses must meet certain criteria, including:
- having an “appropriate” incorporation and ownership structure, governance structure and financial strength, and the ability to carry on its business in a prudent manner
- having a “fit and proper policy” (a process for ensuring only persons of suitable character, competence and experience are directors and key personnel) and a “risk management programme” (procedures for risk management, record keeping and regular programme review)
- for overseas applicants, having home regulation that is at least as satisfactory as the relevant New Zealand law.
- Solvency standards – The Reserve Bank may approve solvency standards for insurers, after consulting with those it considers will be substantially affected. A solvency standard may, among other things, prescribe a minimum margin by which the value of the assets of an insurer (and statutory fund, for a life insurer) must exceed the value of its liabilities (including contingent liabilities). Insurers will be required to report a breach of the solvency margin to the Reserve Bank. Exemptions from compliance with a solvency standard may be granted for overseas insurers.
- Credit ratings – Licensed insurers will be required to have a current credit rating from an approved rating agency (subject to limited exceptions for small, new or captive insurers). Details of the rating must generally be disclosed to policyholders before entering into or renewing a contract of insurance, otherwise the contract may be cancelled by the policyholder. The rating must also be disclosed on the insurer’s website, and details given where the rating is referred to in an advertisement.
- Overseas policy holder preferences – Overseas insurers will be required to disclose the nature and extent of any requirement in their home jurisdiction that relates to the recognition and priorities of creditors’ claims in the event of insolvency and has the effect of giving a material preference to policyholders in the insurer’s home jurisdiction or otherwise is materially disadvantageous to New Zealand policyholders. There is no requirement for overseas insurers to incorporate in New Zealand.
- Actuarial audit – Insurers must appoint an actuary and certain information contained in the insurer’s financial statements must be audited by the actuary, in accordance with the solvency standards. The actuary’s report must accompany the auditor’s report when it is registered under the Financial Reporting Act and if the auditor’s report is included in an annual report. The actuary must investigate the insurer’s financial condition at the end of every accounting period, and its investigation must be provided to the insurer’s Board and the Reserve Bank.
- Financial reporting – Insurers must provide copies of their audited financial statements (including audited interim financial statements) to the Reserve Bank within 3 months after the end of the relevant accounting (or half accounting) period.
- Statutory funds – Life insurers will be subject to a detailed statutory fund regime. A life insurer must establish at least one statutory fund in respect of its life insurance business, relating solely to its life insurance business or a particular part of that business. All amounts received by the life insurer in respect of the relevant business must be credited to the fund. Assets and liabilities (including policy liabilities) related to the business must be included in the fund. The fund’s assets may be applied only for limited purposes. There are provisions governing the treatment of profits and losses and the investment of the assets of a fund, and special rules dealing with composite policies.
- Reserve Bank prudential supervision – The Reserve Bank will be able to require that an insurer and its associated persons provide to the Reserve Bank any information, data or forecasts about any matters relating to their business, operation or management, including corporate, financial and prudential matters, for business carried on in New Zealand or elsewhere. Information provided will be subject to confidentiality provisions. The Reserve Bank may require reports to be prepared by an approved person, and appoint a person to investigate the affairs of an insurer or associated person.
- Auditor and actuary reporting – Auditors and actuaries will be required to disclose information to the Reserve Bank if they consider the insurer or an associated person is insolvent, likely to become insolvent, or in serious financial difficulties and the disclosure of that information is likely to assist or be relevant to the Bank exercising its powers.
- Distress management – The Reserve Bank will be able to direct an insurer to prepare a recovery plan, where the insurer is failing to maintain a solvency margin, its business is not being conducted in a prudent manner or it is failing to comply with requirements. The plan must address certain matters, be approved by the Reserve Bank, and the insurer must take all practicable steps to comply with the plan. The Bank will be able to give directions to an insurer or associated person, and to remove, replace or appoint a person as a director, auditor or actuary.
- Liquidation, voluntary administration, and statutory management - The Bank will have the power to apply to have an insurer put into liquidation or voluntary administration. The Bill provides a detailed statutory management regime for insurers and associated persons.
- Transfers and amalgamations – An insurer must generally obtain the Reserve Bank’s consent before giving effect to a transaction that involves transferring all or part of its business to another person or amalgamating with another person.
- Criminal liability – There will be criminal liability for certain breaches, with the potential for substantial fines on summary conviction and, in some cases, imprisonment.
The Bill will replace Parts 1 and 1A and sections 78 to 79A of the Life Insurance Act 1908; the Insurance Company Deposits Act 1953; and the Insurance Companies (Ratings and Inspections) Act 1994.The Bill is a substantial piece of legislation, and there is a great deal of detail to be worked through. On an initial reading, the Bill does a good job of giving effect to the policy decisions identified in its antecedent cabinet papers, released in late 2007 and 2008. However, there are some interesting aspects to be looked at. For example, the drafters have chosen not to define “insurance” even though this concept is central to the prudential scheme and a definition was signalled in the August 2008 Cabinet Paper.
At this stage, the Reserve Bank is only looking for “technical” input. There will be opportunity for direct policy input once the Bill is introduced to Parliament although anyone concerned about policy issues should be working now to develop a strategy for addressing these concerns and not wait for the Select Committee.
A copy of the draft Bill is available at http://www.rbnz.govt.nz/finstab/nbdt/insurance/3612708.pdf
Comments on the Bill and certain matters the Reserve Bank has raised in its explanatory note on the Bill are available at http://www.rbnz.govt.nz/finstab/nbdt/insurance/3612272.html). Comments are due by 22 June 2009.
Chapman Tripp will be happy to assist with any submissions and advice.
Please contact John Knight, Tim Williams, Victoria Stace or Penny Sheerin for further information.