Key points of interests from RBNZ's IPSA Omnibus Consultation

The Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) has released its final omnibus consultation paper (Omnibus Paper) of its review of the Insurance (Prudential Supervision) Act 2010 (IPSA). The omnibus consultation is a culmination of 4 consultations over the last 3 years, summarising submissions and RBNZ's views to date, as well as introducing some new proposals that haven't previously been consulted on.

This may be the final opportunity for the industry to comment on policy before draft legislation is prepared. RBNZ is taking submissions on the policy questions in the Omnibus Paper until 12 December 2023, following which it intends to seek Cabinet's approval to draft an amendment bill. 

We have identified some key topics in the Omnibus Paper that we thought might be of interest to you. We're happy to discuss further if you have any queries or are considering making a submission.

 

Purposes and principles

RBNZ is attempting to reconcile its objective under its own governing legislation to promote the stability of New Zealand's financial system (which it views as including insurers) with its role under IPSA. It uses the recently enacted Deposit Takers Act 2023 as a blueprint for some of the changes it is considering, including:

• efficiency: removing the “efficient” element of the purpose of IPSA – the purpose of the Act will be to promote the maintenance of a sound insurance sector, rather than an efficient and sound insurance sector. RBNZ is of the view that the legislation gives it few tools to promote an efficient sector.
• soundness: whether the IPSA's purpose should also be to promote the soundness of each insurer, not only the sector as a whole. It discusses whether there should be tolerance for the failure of a single insurer, given the relative impact this has on the sector as a whole.

 

Scope and definitional issues

RBNZ is not planning to change the existing definition of “contract of insurance”, but the Omnibus Paper discusses:

• a calling in power: a power to declare by regulations that certain types of transactions or matters are insurance contracts for the purpose of IPSA. This would be in addition to the current ability to exclude transactions or matters from IPSA that would otherwise be caught. The Omnibus Paper refers to this being used for “boundary” cases, but, if included in the bill, we will be interested to see if there are any limits on this power to ensure it is only applied to boundary cases.
• parametric insurance: no changes are proposed to cover all types of parametric insurance. RBNZ appears to be comfortable that only those requiring proof of loss are caught by IPSA, and notes that where no proof of loss is required the product is more derivative-like. We don't know if this is an indication that such products may end up being regulated by the Financial Markets Authority (FMA).
• “carrying on insurance business in New Zealand“: removing the New Zealand policyholder requirement, meaning all New Zealand-incorporated insurers will need to be licensed, even if they only issue policies to offshore policyholders. RBNZ's concern is reputational damage to RBNZ and/or the New Zealand insurance market if an insurer holds itself out as a New Zealand incorporated insurer but is not licensed. RBNZ acknowledges the existing “holding out” prohibitions that could be used against such insurers, but still has concerns about overseas policyholders assuming such insurers are regulated in New Zealand. This change will explicitly exclude overseas-incorporated captive insurers and overseas companies that only act as reinsurers in New Zealand.
• RBNZ has proposed IPSA be amended so that RBNZ has the ability to require licensing for a non-operating holding company, for corporate insurance groups headquartered in New Zealand (whether operating only domestically or across borders).
• Discretionary mutuals: confirmation that discretionary benefit mutuals will remain outside of the ambit of IPSA given that there is no contractual right to an indemnity under a discretionary product.
• Overseas reinsurers: it is proposed that overseas reinsurers will no longer need a licence in order to do business with New Zealand policy holders.

 

Overseas insurers – financial restrictions and requirements

RBNZ acknowledges that the New Zealand economy significantly benefits from the presence of overseas insurers, but notes that complications and risks can arise in cross-border businesses. The Omnibus Paper discusses balancing the advantages of foreign presence with appropriate controls, including:  

• dividend restrictions: restrictions on the ability for the parent group to extract resources from the subsidiary to bolster the parent's capital position.
• assets in New Zealand: a requirement for New Zealand branches to hold assets in New Zealand equivalent to the New Zealand solvency standard prudential capital requirement for their risk exposures, and life insurance branches to hold New Zealand statutory funds in New Zealand. In insolvency, these assets would then need to be applied to meet the New Zealand liabilities (with small branches being exempted, but still holding a de minimis amount).

RBNZ also acknowledges that the risks presented by branches increase with the size of the branch, and appears to be open to tailoring approaches relative to branch size.

 

Governance

RBNZ is considering a number of changes to bolster their guidance supervision, including:

standards: wanting to move from non-binding guidance to rule setting through standards. These would be consulted on in more detail, but the proposed high-level topics are:

• corporate governance,
• risk management,
• internal capital adequacy assessment process / own risk and solvency assessment,
• outsourcing policy, and
• connected / related party exposures.

RBNZ has acknowledged it will need to co-ordinate with the FMA to prevent regulatory overlap.

narrowing the scope of exemptions: for insurers exempt from certain governance and risk management standards due to home supervision, RBNZ is considering imposing rules on New Zealand subsidiaries in the appropriate context.

fit and proper regime: RBNZ has proposed expanding the fit and proper requirements to:

• extending the definition of “relevant officers” to include persons carrying out role of chief risk officer (however titled),
• require RBNZ approval of relevant officers before appointments are made, and
• introduce an obligation on insurers to notify RBNZ if they obtain information that could reasonably lead them to form the opinion that a relevant officer is not a fit and proper person to hold their position.

new director duty: the introduction of a new duty for directors of New Zealand incorporated licensed insurers to exercise due diligence to ensure that the insurer complies with its prudential obligations under IPSA and regulations, standards, conditions of licence and directions. Civil pecuniary penalties are proposed for breaches of this duty. RBNZ's concern is that existing accountabilities do not include a positive duty to ensure that the insurer complies with its prudential obligations.

CEO of overseas insurer: the new director duty will also be imposed on the chief executive officer of an overseas insurer.

actuarial advice standard: an actuarial advice standard, requiring licensed insurers to create and document their own actuarial advice framework. This framework would define when actuarial advice is needed for internal decisions and outline the duties of the appointed actuary under IPSA in a single document.

 

Policyholder protections

RBNZ has proposed that yearly renewable term life policies with no surrender value (most life policies in New Zealand) should no longer be subject to the statutory fund regime, but balances this with some new policyholder protections, including:

• projection of underwriting asset: for these kinds of policies, and health policies, the underwriting asset is to be considered a liability to the policyholder in restructuring proposals (including liquidation etc.);
• policyholder preference: RBNZ is not proposing to implement a policyholder guarantee scheme, owing to the cost of implementation and administration of such a scheme. It is considering the following;
  • policyholders claim before other unsecured creditors in insolvency, which is relatively common in other jurisdictions; and
  • expanding the requirements on disclosing the overseas policyholder preference to cover any situation in which overseas policyholders may be given preference. It might be necessary to establish a precise definition of the term 'preference' to understand the extent to which RBNZ considers a preference applies to overseas policyholders
• related party transactions: limiting investments of statutory funds in related parties and ensuring these are on market terms to insure policyholder interests are priorities over those of the related party.

 

Enforcement tools

RBNZ is looking to expand its enforcement toolkit to allow a more proportional and graduated approach.  Some enforcement tools discussed include: 

• fines: infringement notices to impose modest fines for relatively minor or unambiguous breaches (primarily for failures to provide required information);
• payment to policy holders: civil pecuniary penalties imposed on key officers being paid to policyholders;
• warning disclosures: requiring insurers to publish written warnings issued by RBNZ, we assume on the insurers' website and in communications and documents specified by RBNZ (similar to RBNZ's powers under the Deposit Takers Act and similar powers available to the FMA);
• direction orders: remediation notices enabling RBNZ to specify actions an insurer must take to remedy breaches of regulatory requirements;
• enforceable undertakings: a binding agreement to take remedial action and (unlike remediation notices) may include the payment of compensation; and
• new and expanded supervisory powers: including:
  • extending investigation powers to cover entities required to be licensed but failed to obtain a licence, or falsely holding themselves out as licensed insurers, which we think makes sense and was an unfortunate gap in the legislation;
  • wider information gathering powers, including the ability to require information from any person, not just licensed insurers and other specified persons. We imagine these will be similar to those available to the FMA;
  • on-site inspection powers;
  • requiring an insurer's staff to answer questions “on notice” as part of an investigation;
  • a breach reporting regime that would require insurers to monitor their compliance with prudential regulation and notify RBNZ if there has been or is likely to be a material breach; and
  • a power to direct insurers not to renew existing insurance contracts or write new business.

A number of these tools appear to be similar to those available to the FMA in carrying out its regulatory role.  As appears to have come through in the submissions, there is always concern from industry participants of overuse or overreach of such powers. While there is still an opportunity to submit, we imagine replication of existing similar regimes is a likely outcome for these enforcement and supervisory tools.

 

Our thoughts

Our take-away from the Omnibus Paper is that there is a conscious alignment of regulation across the financial industry, with RBNZ trying to ensure its regulatory obligations, scope and levers are consistent across the regimes it is responsible for, as well as matches those of its sister regulator, the FMA.  While consistency will be helpful for those businesses that operate across different parts of the industry, the uniqueness of each part of the industry needs to be factored into any regulatory tools.  The RBNZ does appear to be willing to account for this in discussion in the Omnibus Paper, but the proof will be in the draft bill.

 

Further information

The omnibus consultation includes a full set of proposed amendments and recommendations on 10 key topics: 

• Purpose, scope and regulatory boundaries
• Overseas insurers – branches and subsidiaries
• Solvency and ladder of intervention
• Policyholder security and statutory funds
• Governance, risk management and relevant officers
• Disclosure and reporting requirements
• Supervisory powers and approval processes
• Enforcement and penalties
• Distress Management
• Other issues

You can find the omnibus paper and previous consultations here.