Recently the International Monetary Fund highlighted areas it believes need addressing in its report on New Zealand’s financial sector. These included the Reserve Bank of New Zealand becoming more hands on when managing the industry and that it exert more regulatory pressure on insurer conduct.
According to Christian Thimann, head of regulation, sustainability and insurance foresight at
AXA and a professor in Paris, this focus on the regulation of the global insurance industry, which constitutes an emerging challenge in international finance, has two central objectives: strengthening the oversight of insurance companies designated ‘systemically important’; and designing a global capital standard for internationally active insurers.
He argued that it is a Herculean task because the business model of insurance is less globalised than other areas in finance; because global regulators have less experience of insurance than banking where global standards have been pursued for a quarter of a century; and because, as yet, there is limited research-based understanding of the insurance business and its interactions with the financial system and the real economy.
The IMF report recommended that the Financial Markets Authority and the New Zealand Government review the scope of conduct regulation for insurance through consideration of all aspects of the insurance product lifecycle and develop a regulatory framework.
It recommended significant work be done to close gaps in the prudential supervision regime and said that although the Reserve Bank of New Zealand’s framework of prudential regulation is well-developed, there is scope to extend its powers.
In addition, it pointed to excessive broker rates of commission, necessitating more oversight of brokers and insurance conduct.
The report stated that the approach takes account of the relatively limited conduct risks in insurance given the product range and that self-regulation by industry bodies is developing and there is a well-established system for disputes resolution.
However, it stated that there is a need, which the government is addressing, to improve the deliberately low-intensity regime currently applying to most independent insurance advisers and brokers, which does not include even basic competence and disclosure requirements; to extend the range of conduct of business requirements specific to insurance beyond the current focus on advice; and to ensure that the appropriate requirements apply to all insurance activity, including sales without advice and ancillary sales.
In this regard it recommended that the
FMA should be mandated enhanced enforcement powers and insurance-specific expertise.
It also stated that government should amend the legislation to strengthen or remove the registration-only regime currently available to intermediaries, introducing minimum requirements for competence and disclosure that apply to all advisers, including insurance brokers.
“The government should consider a proportionate regulatory regime for insurance intermediation not currently captured by the legislation, including pure sales and intermediation where ancillary to another line of business,” it said. “The FMA should assess the need for insurance-specific requirements on intermediation as well as an insurance-specific work program, taking into account its overall assessment of risks in financial markets. In that context, they should assess their need, in the medium and longer terms, for more insurance-specific skills and expertise.”
The most interesting part of the whole report perhaps, is the last two pages (90 and 91) which contain the response from the New Zealand regulators to these recommendations.
The regulators could be understood as saying that they have already done a huge amount of regulatory transformation over the past 10 years and have other priorities, which some have perceived as a polite pushback.
Insurance Business will follow up with what industry insiders have to say on the IMF’s call for increased regulatory pressure.
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