Key points for insurers in the new IPSA Bill

Last week the Reserve Bank of New Zealand (Reserve Bank) released its exposure draft of the Insurance (Prudential Supervision) Amendment Bill (Bill), marking a significant milestone in the long-running review of the Insurance (Prudential Supervision) Act 2010 (IPSA). Submissions are due by 7 July.

Experience with consultation processes under IPSA, the conduct of financial institutions regime (CoFI) under the Financial Markets Conduct Act 2013, and the Deposit Takers Act 2023 (DTA) suggests that early, focused engagement can make a meaningful difference.

The Bill broadly tracks the direction indicated in earlier consultation, including:

• redrawing the boundaries of who is caught by IPSA
• stronger powers for the Reserve Bank, both in enforcement and in setting standards
• Reserve Bank approval for relevant officer appointments
• adjustments to the settings for approving transactions
• a new distress management regime.

 

Redrawing the boundaries

New Zealand policyholder requirement: Under the Bill, New Zealand-incorporated insurers insuring only offshore risk will now be subject to IPSA. Currently, only those insurers (incorporated in New Zealand or overseas) insuring New Zealand risk are caught (there must be at least one New Zealand policyholder). The Bill removes this requirement for New Zealand-incorporated insurers, so that any New Zealand-incorporated entity insuring offshore risk will now be caught.

The New Zealand policyholder requirement remains for entities with only branch registration in New Zealand (ie, incorporated offshore but required to register on the New Zealand Companies Register as an overseas company). The Reserve Bank’s concern is that offshore consumers may assume New Zealand-incorporated entities are regulated here, which is not currently the case if there are no New Zealand policyholders. This gap will be closed for New Zealand-incorporated insurers, but not for entities with only branch registration, presumably on the basis that the entity is regulated in its country of incorporation. If there are New Zealand policyholders, the licensing requirement applies.

Captives and reinsurers: Offshore-incorporated captives (insurers only insuring entities within their corporate group) and offshore reinsurers are no longer subject to IPSA, even if insuring New Zealand risk. The same does not apply for New Zealand-incorporated captive insurers and reinsurers, who will continue to be caught. Here, the Reserve Bank appears content to assume the entity is regulated in its home jurisdiction, even where there is New Zealand risk, we assume on the basis that the policyholder is a sophisticated corporate or an insurer itself.

Holding entities: Mandatory licensing of non-operating holding companies was considered during consultation but has been abandoned. However, these entities may still be subject to new prudential standards (yet to be developed), as the Reserve Bank will have the power to apply standards directly to holding entities. As noted below, holding entities can also be issued Reserve Bank directions if their subsidiary insurer is in distress.

‘Call in’ power: As expected, a new ‘call in’ power will allow certain transactions to be declared insurance contracts by regulations. Entities operating on the fringes of the licensing regime will need to be vigilant.

 

Stronger enforcement powers

New tools: The Bill significantly expands the Reserve Bank’s supervisory and enforcement toolkit. This includes on-site inspections without notice, compulsory interviews, mandatory breach reporting, remediation notices and plans, accepting enforceable undertakings, infringement notices, civil pecuniary penalties, banning orders, and disclosures to policyholders. These are consistent with the tools available to the Reserve Bank under the DTA.

Fewer breaches, higher penalties: Penalties have increased, and in some cases more than doubled (for example, for corporates who fail to obtain a licence, breach licence conditions, or fail to report a potential breach of prudential or solvency margins). These increases are somewhat tempered by higher thresholds for breach in some cases. Certain offences now:

• have a materiality threshold (such as providing false or misleading information in relation to an application)
• apply only where the relevant conduct has occurred ‘without reasonable excuse’ (such as failing to report a potential breach of a prudential or solvency margin)
• require the offender to have known, or been reckless as to, their non-compliance (including failing to be licensed, holding out to be a licensed insurer, breaching banning orders, non-compliance with remediation notices and requirements, breaching confidentiality obligations, and making false declarations and representations).

These higher thresholds for breach may mean there are scenarios in which non-compliant operators are not subject to enforcement for behaviour occurring before they became aware of the breach, regardless of any consumer harm.

 

Standards, standards, standards

Multiple standards: A defining feature of the Bill is the move away from reliance on licence conditions and non-binding guidance towards a broader range of enforceable standards issued by the Reserve Bank. These may cover governance, board composition and responsibilities, incorporation status, organisational structure, risk management, disclosures, contingency and recovery plans, the new resolution regime, actuarial advice, outsourcing, and related party exposures. Given the range of structures, size, products and distribution channels in the market, it will be challenging for the Reserve Bank to develop standards that work across the diverse range of insurers in New Zealand.

While an expansion of standards was signalled during consultation, the breadth of the final standard-making powers, and their interaction with licence conditions, directions, enforcement tools and other regimes such as CoFI, are likely to have significant operational impact. A multitude of standards will also increase compliance burden for insurers.

Prudential margin: A new concept of a prudential margin has been introduced, in addition to the solvency margin, which can be set in standards or licence conditions. There is no differentiation between the two at this stage (for example, in relation to enforcement tools available to the Reserve Bank for breach), so the distinction is likely to be clarified in standards.

Proportionality: While the Reserve Bank has expanded standard-making powers, the Bill introduces some new checks and balances (borrowed from the DTA) requiring the Reserve Bank to:

• publish (following consultation) a proportionality framework for how it will take proportionality into account when developing standards. This reflects one of the two new principles in the Bill: “the desirability of taking a proportionate approach to regulation and supervision”
• consult with persons substantially affected by the standard
• for the solvency standard, have regard to relevant overseas standards to ensure the standard does not apply in an unreasonable manner.

This is consistent with the second new principle under the Bill: “the desirability of maintaining awareness of, and responding to: (i) the practices of overseas supervisors that perform functions in relation to any licensed insurer or any holding entity of any licensed insurer; and (ii) guidance or standards of international organisations.”

 

New approval powers: relevant officers

Appointment approvals: The Bill requires insurers to obtain the Reserve Bank’s approval before appointing new directors and relevant officers (chief executive officers, chief financial officers, appointed actuaries, and now chief risk officers) to New Zealand-incorporated licensed insurers. Licensed insurers must also notify the Reserve Bank of any emerging fitness and propriety issues in relation to directors and relevant officers.

These proposals attracted material concern during consultation, particularly around recruitment timing and operational disruption. While the Bill includes statutory decision timeframes (a decision within 20 working days of receiving all required information), this may provide limited comfort given the discretion as to when the Reserve Bank has ‘received all relevant information’ and the decision period begins.

For licensed insurers incorporated outside New Zealand, the existing requirement to notify the Reserve Bank and provide a fit and proper certificate would remain.

 

Transactions: unders and overs

Changes in control: Under the Bill, more transactions will be caught, but requirements become more stringent for New Zealand-incorporated licensed insurers and less stringent for those incorporated overseas.

Currently, a change in control of 50% or more of the voting rights of a New Zealand or overseas insurer must be notified to the Reserve Bank before the change. Under the Bill:

• New Zealand-incorporated insurers must seek approval
• licensed insurers incorporated overseas must notify the Reserve Bank after becoming aware of the change (within 20 working days).

For both, the threshold for control lowers to:

• 25% or more of the voting rights in the insurer; or
• the right to appoint at least 50% of an insurer’s directors.

Business transfers: Transfers still require approval, but there is a new materiality threshold. Approval is required only if all or a ‘material part’ of the insurer’s insurance business (or New Zealand insurance business for overseas insurers) is being transferred. What constitutes a ‘material part’ will be key, and will be set out in standards issued by the Reserve Bank. The Reserve Bank can also use standards to specify other kinds of transactions that require approval.

Restructuring: Changes in corporate form (such as demutualisation) move from requiring prior notification to requiring prior approval from the Reserve Bank for domestically and internationally incorporated licensed insurers. Approval of amalgamations for New Zealand-incorporated licensed insurers remains, while only post-amalgamation notification is required for overseas licensed insurers.

 

Distress management: Reserve Bank as resolution authority

New regime: The Bill substantially reworks IPSA’s distress management regime, moving away from statutory management to a resolution regime, giving the Reserve Bank more power to oversee the process. The Reserve Bank is designated as resolution authority, enabling it to appoint and supervise a resolution manager to exercise certain powers in relation to the distressed insurer, and allowing the Reserve Bank to exercise certain powers directly (whereas, under the existing statutory management regime, resolution powers are exercised by the statutory manager).

The triggers that allow the Reserve Bank to place an insurer into resolution are broadened to capture circumstances where failure of the licensed insurer may cause significant harm to a significant number of policyholders, or to a particular group of policyholders.

Associated persons may also be issued a direction notice to help manage the distressed insurer’s situation.

While broadly consistent with earlier consultation, the expanded scope of resolution triggers may have wider application than some insurers previously anticipated. The Reserve Bank has requested feedback on any unintended consequences of the new resolution regime.

 

Licensing

Existing insurers will not be required to re-license.

 

Timing

The Reserve Bank has indicated a six-year timeframe for full implementation, aiming for general commencement by the end of 2028. Development of, and consultation on, the proportionality framework and standards is expected to take place after that. The target date for a fully operational Act and standards is 2032.

 

Submissions

Consultation materials are available on the Reserve Bank’s website.

We welcome discussion on the Bill and can assist with submissions. Please contact any of the authors.