The Reserve Bank of New Zealand (RBNZ) has launched the final policy consultation (Consultation) on its review of the Insurance (Prudential Supervision) Act 2010 (IPSA). This Consultation provides a full set of proposals for amending the IPSA, after considering feedback from earlier consultations over several years.

The review proposes a more pro-active and intensive approach to RBNZ supervision of domestic and international insurers, while also offering risk-based and proportionate amendments on many fronts. The underlying rationale is to deliver on the purpose of having a cost-effective supervisory regime that promotes the soundness and efficiency of the insurance sector. The review is informed by sector and supervisory experience since the IPSA was first legislated (including the liquidation of CBL Insurance Limited), consistency with other regulatory regimes, and international practice.

Supervision

Proposals relating to supervision powers include:

• providing for a graduated approach to assessing solvency and applying a “ladder of intervention” approach, depending on where the insurer sits on the solvency scale;
• introducing a wider set of supervisory and enforcement tools, including the power to conduct site visits, and updating penalties;
• a more cohesive and proportional approach to supervision of insurance merger activity;
• requiring RBNZ approval for appointment of all “relevant officers” (who would include the chief risk officer) before appointment;
• adding powers to create standards on corporate governance, risk management, additional solvency matters, outsourcing, connected/related party exposures, actuarial advice, data and disclosure, and post-failure resolution preparedness.

Territorial scope

Key proposals affecting overseas insurers include:

• providing that the CEO of the New Zealand branch of an overseas insurer will have a duty to ensure the branch complies with IPSA requirements;
• adding a power to require that branches hold assets in New Zealand; and
• explicitly excluding overseas reinsurers and overseas captive insurers from the obligation to be licensed in New Zealand.

On the other hand, it is proposed that New Zealand insurance companies:

• that only have overseas customers will now need to be licensed;
• that are part of a New Zealand-headquartered group may have licensing requirements extended to non-operating holding companies.

Policyholder security

The RBNZ has backed away from the possibility of introducing a policyholder guarantee scheme that was discussed in previous consultations. Instead, it is now proposed that:

• policyholders’ claims against statutory fund assets (ie for life insurance) would be elevated in insolvency so that those claims are paid ahead of other creditors;
• directors would have a duty to carry out due diligence to ensure that insurers comply with IPSA prudential obligations, and if a pecuniary penalty is imposed on directors, this could be payable to policyholders;
• yearly renewable term and other life policies with no surrender value would be removed from the statutory fund regime;
• prescribed capital requirements should apply automatically rather than being a licence condition, while giving RBNZ the power to apply adjustments to the way solvency calculations are carried out if appropriate;
• RBNZ be given the power to take policyholder interests into account when liabilities are apportioned between insurers in a policy transfer transaction.

What next?

Submissions on the Consultation are open until 12 December 2023. Following this, RBNZ’s proposals for amendments to the IPSA will be finalised and Cabinet's approval for drafting an amendment Bill will be sought.

Get in touch

If you would like to learn more about anything discussed in this article, how it could affect your business or get help in preparing a submission, please get in touch with one of our experts.

Special thanks to Michael Carston for his assistance in writing this article.