=
RBNZ Pushes Ahead With Finalising IPSA Review
The Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) is moving closer to its goal of reforming the Insurance (Prudential Supervision) Act 2010 (IPSA).
The replacement law, said to be released sometime in 2025, would impose prudential restrictions on insurance companies. This includes requiring insurers to hold more assets as a buffer against major claim payouts.
External stakeholders have long called for the need for better laws surrounding insurers. In 2017, the International Monetary Fund released a report that found "significant gaps in the framework for insurance conduct regulation" by the Reserve Bank.
Further assessment from the report found that while RBNZ staff were competent, they were working with "insufficient resources". Coupled with a "non-intrusive approach" to staff and process management, this posed significant limitations regarding job completion.
Things escalated in 2018 when home building insurer CBL was put into liquidation. The failed insurance company was initially valued at $750 million. A case review by financial experts and lawyers found that the Reserve Bank could have taken more proactive steps in safeguarding investors, such as preventing CBL from listing on the New Zealand Stock Exchange (NZX) in 2015.
Following this, many urged the RBNZ to review and change how it looked at the insurance industry. There were also calls for the Reserve Bank to be more decisive in strengthening its governance regarding insurers' obligations and increase its internal supervisors' resources.
More importantly, the case has pressured the RBZ to "strengthen the capital management and solvency framework for licensed insurers," which would minimise the risk for many Kiwis seeking insurance.
Since then, the Reserve Bank has aired concerns over insurance companies' capacity to meet claim obligations. For example, its November 2019 Financial Stability Report highlighted its concerns about the effects of low interest rates on life insurers' solvency, saying that the impact is "material" for some insurers.
Since then, reforms have been underway. The IPSA review began in 2017 with talks about insurers requiring larger solvency buffers under the Act. However, this was halted a year later because the RBNZ was too busy.
The review process is now reaching its end, with promises for better laws that protect both insurers and their customers.
"A Proactive and Intensive Approach"
According to Christian Hawkesby, Deputy Governor of RBNZ, this review aims to promote a more "proactive and intensive approach" towards governing the insurance sector. Hawkesby adds that while the RBNZ's laissez-faire supervisory role was relevant previously, a change is needed to meet the challenges in today's environment.
"The proposed changes will support the Reserve Bank's evolution from light touch supervision towards a more proactive and intensive approach that is more closely aligned with international best practices… Our supervisory approach aims to be risk-based, proportionate and proactive.....and would use the full range of regulatory tools to address compliance problems."
The replacement laws will also enable the RBNZ to look at emerging issues such as cyber security and climate, as well as governance and risk management.
"The proposals will give us an expanded set of supervisory and enforcement tools.....with a graduated and proportionate set of responses… We will be able to set out clearer and more enforceable rules in areas such as governance and risk management, making us better equipped to address emerging issues such as cyber security and climate," Hawkesby says.
According to an accompanying document to RBNZ's statement, the proposal approaches solvency with a more graduated approach. It provides an escalating "ladder of intervention" that's aligned with the increasing risk of insurers who are unable to meet obligations.
The document also highlights more details of the proposal, including introducing an on-site inspection power that can overrule insurers' actuarial calculations. It also notes overseas-owned insurers, stating that "cross-border arrangements can also create risks that need to be managed."
"We propose imposing a duty on the Chief Executive Officer of a New Zealand branch of an overseas insurer to exercise due diligence to ensure that the insurer complies with its prudential obligations under IPSA…. We are likely to propose that branches should hold assets in New Zealand at a level equivalent to the Prudential Capital Requirement in the New Zealand solvency standards, though we would welcome greater information on how costly this is likely to be for branches."
For more information, please visit The Reserve Bank of New Zealand – Te Pūtea Matua's website. If you're looking for the right insurance for your company, consider engaging with an insurance advisory company like Bonded NZ.
Bonded NZ helps business owners remain efficient in economic uncertainties through comprehensive and tailored business insurance. Whether it's public liability or professional indemnity insurance, our cost-effective options help them secure their business at every angle.
For more information about our services, contact our team today.