Bringing Financial Stability Legislation to the Insurance Industry-The Insurance (Prudential Supervision) Act 2010

Article excerpt

1 Introduction

Insurance is an important (but not systemic) component of the financial services sector in New Zealand. The protection provided by insurance is a significant element in the financial security of individuals and companies in New Zealand, as is the case worldwide, and the lack of insurance through the failure of an insurer could have significant impact on those who are directly or indirectly affected. Whilst the failure of an individual insurer may not have the same systemic importance in New Zealand as the failure of one of New Zealand's major banks, independent failures within the insurance industry would certainly have a degree of impact on the economy's security. Accordingly, it is important that the New Zealand insurance industry is financially stable and soundly regulated, and, equally importantly, is seen to be so by external observers.

For many years, the New Zealand insurance industry has carried something of a "wild west" reputation, at least as viewed from overseas. The country had one of the least regulated insurance markets in the world and, despite a reasonably effective self-regulatory approach taken by insurers, New Zealand remained firmly out of line with established international expectations of insurance regulation. (2) All our relevant trading partners have well-established and strong regulatory models covering the activities of insurers; for example the Australian Prudential Regulation Authority (APRA) regulates insurance in Australia, the Financial Services Authority (FSA) in the UK, the Office of the Superintendent of Financial Institutions (OSFI) in Canada, the Monetary Authority of Singapore (MAS) in Singapore, and there are many state regulatory models in place across the US.

Government acknowledged this regulatory shortfall early in the decade and, in 2003 and 2004, the New Zealand Law Commission produced reports on life insurance, including recommendations regarding an overhaul of existing outdated legislation and the establishment of a prudential regulator for the New Zealand insurance sector; ie, a watchdog over the financial stability of insurers carrying on insurance business in New Zealand.

Following this report, and as part of its ongoing "Review of Regulatory Frameworks", the government announced a review of the Regulation of Non-Bank Financial Products and Providers (RFPP) in 2005, with the intention of ultimately developing an effective and consistent regulatory framework and promoting confidence and participation in sound and efficient financial markets. This review included the insurance sector. Arising from the RFPP was the government decision to appoint the Reserve Bank as the prudential regulator and supervisor for insurers.

2 Designing a new regulatory regime

A strong Reserve Bank understanding of the New Zealand insurance industry was a critical factor in the successful design of an effective and appropriate regulatory model for insurers carrying on insurance business in New Zealand. New Zealand's population of just over 4 million people is served by a diverse insurance industry that currently comprises approximately 160 registered entities that have paid their statutory deposits as required by the Insurance Companies Deposits Act 1953. (3)

Insurers are split approximately 75 percent non-life (including medical insurers) and 25 percent life insurers. There are a large number of small companies and a smaller number of large companies--at least large by New Zealand standards. (By worldwide standards all insurers operating in New Zealand are small, and the total New Zealand insurance market is tiny when viewed in a worldwide context). There are a large number of companies that are sourced offshore, some of which exist in New Zealand as locally incorporated subsidiaries and some as branches of overseas insurers. There are also a number of indigenous insurers. There are reinsurers and captive insurers. In summary, the market is small, comparatively well developed, diverse--and (until now) virtually unregulated from a prudential perspective. …