The Reserve Bank of New Zealand (RBNZ) has launched an omnibus consultation on the final review of the Insurance (Prudential Supervision) Act 2010 (IPSA). It draws on five previous IPSA consultations, beginning in 2017, and includes a number of new proposals. Submissions close on 12 December 2023.
The proposed changes are significant and will underpin the shift to a more risk-based, proactive and intensive prudential supervision model, including greater use by RBNZ of standards, a more graduated approach to solvency, new powers to make on-site inspections and to overrule actuaries’ solvency calculations, and a wider set of enforcement tools.
We have summarised the RBNZ’s main proposed changes set out in the consultation paper.
Broader regulatory scope
- Changes to the definition of “carrying on business in New Zealand” to require that all New Zealand-incorporated insurers be licensed, whether or not they issue contracts to New Zealand policyholders (with new exclusions for overseas-incorporated captive insurers and overseas companies that act only as reinsurers). The existing test is to continue in all other respects.
- New declaratory power for RBNZ to declare certain types of transactions or matters to be insurance contracts for IPSA purposes, thereby providing more clarity and transparency that certain ‘boundary’ products are insurance.
Risk regulation of overseas insurers operating in New Zealand
- Subsidiaries of overseas insurers – to mitigate against contagion risk where a group runs into financial difficulties, the RBNZ proposes:
- A standard to ensure insurers identify and consider prudential and business continuity risks presented by outsourcing arrangements;
- A standard to regulate connected exposures and concentrated exposures; and
- Restrictions on dividends as part of the proposed ladder of intervention approach to solvency (discussed below).
- Branches of overseas insurers – increased regulation and supervision by:
- Imposing a duty on New Zealand chief executives to carry out due diligence to ensure that the insurer complies with its prudential obligations;
- Requiring New Zealand branches to hold assets in New Zealand equivalent to the New Zealand solvency standard prudential capital requirement for their risk exposures, and for such assets to be applied in an insolvency to meet New Zealand liabilities in priority to other creditors. (Before deciding whether it will impose such requirements, the RBNZ states that it will need to consider how to define what it means to hold assets ‘in New Zealand’ and to assess the costs of the requirements against the benefits); and
- Requiring life insurance branches to hold New Zealand statutory funds (with a de minimis exemption for small branches).
Solvency and stepped ladder of intervention
The RBNZ has refined its proposal to introduce a more graduated and risk-based approach to solvency, enabling a ‘ladder of intervention’ as insurers’ capital levels decrease. Two solvency control levels are proposed – one at the top of the ladder and one at the bottom:
- The ‘prescribed capital requirement’ (PCR) would be at the top, marking the boundary above which the RBNZ will have no particular capital-related concerns about insurers; and
- The ‘minimum capital requirement’ (MCR) would be at the bottom, providing a non-viability point for an insurer. (RBNZ will calibrate a level for the MCR after it decides, as part of the IPSA review, what the consequences of an MCR breach should be).
RBNZ proposes that some powers or requirements be unlocked when insurers breach the MCR/PCR and some should be unlocked when insurers are ‘likely to breach’ the MCR/PCR, as follows:
Solvency capital trigger
Likely breach of PCR
Appointed actuary and auditor must notify RBNZ.
Breach of PCR
Powers to direct, investigate and require a recovery plan.
Likely breach of MCR
Powers to apply to the Court for a voluntary administration order or seek statutory management.
Breach of MCR
Power to apply to the Court for liquidation.
The RBNZ’s responses along the ‘ladder of intervention’ will be governed by legislation (which will delineate some ‘hard’ boundaries) and an internal supervisory policy for risk-based responses as capital levels decline (which RBNZ will develop together with industry guidance).
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.
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.
RBNZ is proposing far-reaching and significant change to the regulation of insurers in New Zealand.
Anticipated amendments to IPSA will significantly enhance RBNZ’s supervisory and enforcement powers (including tighter oversight of overseas insurers operating in New Zealand) and will require some insurers to undertake a comprehensive review of their New Zealand operations before the changes take effect.
A number of the proposals, especially those covering governance, supervision and enforcement, will bring the insurance sector more closely into line with the prudential oversight of banks and with the extended regime proposed for deposit takers under the recently enacted Deposit Takers Act 2023.
All insurers operating or incorporated in New Zealand will have a keen interest in this consultation as a final opportunity to provide input into the policy decisions that will inform the drafting of the amendment bill.
From a director perspective, this represents a continuation of the regulatory trend to hold directors accountable for exercising due diligence to ensure that the company complies with its regulatory obligations.
In this instance, accountability is proposed to extend to the appointed actuary when performing duties under the actuarial advice standard, reflecting the critical role the actuary plays in the licensed insurer regulatory framework.
Directors and actuaries in the insurance area will need to consider the enhanced expectations that are proposed for them.
Submissions are due on 12 December 2023.
RBNZ intends to finalise its policy and seek Cabinet approval to draft amending legislation. Consultation on the exposure draft of the amendment bill is expected to begin in 2025.
If you would like more information on the proposed changes to the IPSA regime or assistance with preparing a submission, please get in touch with one of our experts.
Insurance (Prudential Supervision) Act 2010
RBNZ Omnibus Consultation Paper on IPSA (27 September 2023)
RBNZ Omnibus Consultation Non-Technical Summary on IPSA (27 September 2023)
Our previous insights on IPSA