Feedback wanted on insurance policyholder protections

03 September 2021

The Reserve Bank of New Zealand (RBNZ) is seeking input on whether and how to strengthen the protections in the Insurance (Prudential Supervision) Act 2010 (IPSA) against policyholders having insurers default on claims payments.

Submissions are due by 15 November 2021.

Scope of consultation

This is the second consultation paper published by the Reserve Bank in phase 2 of its review of IPSA. The consultation picks up on stakeholder feedback from phase 1 of the IPSA review commenced in 2017 as well as recommendations from the Trowbridge/Scholtens report following the collapse of CBL Insurance, and the 2016 IMF review of New Zealand’s financial sector as part of its global Financial Sector Assessment Programme.

It focuses on those provisions which:

  • require insurers to disclose information about their financial strength
  • relate to insurer solvency requirements
  • provide for the protection of assets through statutory funds, and
  • set minimum values for policies that are terminated where an insurer is insolvent.

Public disclosure of financial information

Issues the RBNZ has identified with the current regime are that it is not clear whether the public understands the solvency information provided by insurers and that the requirement to have a current rating from one the three approved ratings agencies (S&P Global, Moody’s or Fitch) may:

  • be a barrier to small, niche, innovative insurers
  • discourage new agencies from entering the market in New Zealand
  • lead to issues if a currently approved ratings agency loses their approval, or provides inaccurate ratings, and
  • incentivise insurers to shop around for a favourable rating.

Reform options are to:

  • reduce the regulatory burden on small insurers and lower the barriers to market entry by widening the scope of the current exemption from the public disclosure requirements
  • require insurers to rotate ratings agencies
  • standardise the information that insurers are required to disclose so that it is more easily understandable to the public, and/or
  • increase the solvency information that insurers must disclose – e.g., by requiring projected, as well as current, solvency ratios.

Solvency requirements

The Reserve Bank has identified several shortcomings in the solvency standards regime.

  • Solvency information (including the terminology) is seen as inaccessible to the public and out of step with other jurisdictions. Options for reform include:
    • replacing the “solvency margin” and “solvency ratio” concepts in IPSA with metrics relating to the insurer’s underlying stability, or
    • aligning the IPSA solvency terminology with the approach in other jurisdictions.
  • Insurers are not required to publish the capital they hold above any additional capital requirements imposed by the RBNZ via the licence conditions. The transparency and usefulness of the published solvency margin is accordingly reduced.

Reform options include:

  • enabling the RBNZ to adjust the solvency calculation with respect to individual insurers, and, if so
  • introducing a mechanism by which adjustments can be challenged.

Other questions with respect to the IPSA solvency standards regime are whether:

  • Financial Condition Reports should be provided for separately (rather than set out in the Solvency Standards, as now), and whether section 78 actuarial reports are useful
  • a graduated approach to solvency (and, therefore, to RBNZ enforcement and supervision) is preferable to a “compliant/non-compliant” model, and
  • a default solvency margin of 0% is preferable to specifying the solvency standard through licence conditions (with margins imposed only in “non-standard” situations).

Minimum termination values

The RBNZ is asking whether IPSA should require minimum termination values for certain policies that have a stored value component (consistent with some overseas jurisdictions).

Statutory funds

The Reserve Bank is revisiting the rationale for limiting IPSA’s statutory fund requirements to life insurance business only, given that most new risk written in New Zealand is now on a yearly renewable term.

(1) Extending statutory fund protection?

In particular, the RBNZ is asking whether statutory fund protections should be

  • limited to policies where policyholders build up a long-term store of value, or
  • extended to policyholders of non-life products that (a) cover “long term” risks, (b) may result in policyholders being “on claim” over an extended period, or (c) may take a long time to settle. Examples given are health and disability products, professional liability products, and claims arising out of the Canterbury Earthquakes.

(2) Priority of policyholders in the event of insolvency

The question here is whether policyholders should have:

  • priority in an insolvency situation (and whether this should be limited to policy benefits or should also cover unearned premium claims), or
  • the protection of a statutory fund.

(3) Administration and separation of statutory funds

The RBNZ is also considering amendments to IPSA which would clarify how insurers should:

  • hold statutory fund assets (including whether overseas insurers should hold statutory funds in particular legal structures), and
  • account for the assets and liabilities of statutory funds.

Policyholder guarantee scheme?

Although the RBNZ is clear that IPSA is not designed to eliminate the risk of insurer failure, it is seeking feedback on whether the idea of creating a policyholder guarantee scheme is “worth considering” and on what such a scheme might look like.

Next steps

If you would like more information on what is proposed or assistance with preparing a submission, please get in touch with one of our contacts.

Quick links

Options Paper

Non-technical summary of the Options Paper

Insurance (Prudential Supervision) Act 2010

Our commentary: RBNZ seeks input on insurance regulation

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