IPSA review under scrutiny

The Reserve Bank of New Zealand (RBNZ) is reviewing the legislation that regulates insurers and is seeking feedback on the issues it believes should be addressed in its ‘Review of the Insurance (Prudential Supervision) Act 2010’.
 

Part of the bank’s proceedings includes two stakeholder discussion forums in Auckland (10.30am-12.30pm at Rydges Auckland) and Wellington (10am-12 noon at the Reserve Bank Museum) on May 22 and 24 respectively. Questions that will be addressed include whether RBNZ is correctly addressing the amount of capital insurers are required to have to face another major catastrophe and the extent to which insurance policyholders in New Zealand are safeguarded in the event parent companies of New Zealand’s insurers decline financially.
 

Already insurers are concerned, however, that the IPSA review could result in more stringent capital requirements, making it harder for some businesses to remain profitable and leaving them at risk of closure or takeover as consolidation in the industry occurs. Another concern is that the RBNZ’s approach is too binary in that licensed insurers are perceived as either going about their business as usual, or in decline, and that perhaps a more graduated approach is called for as an insurer’s financial condition deteriorates.  
 

Also of concern for insurers is that RBNZ’s Issues Paper reveals that it is considering making it a requirement that all insurers be locally incorporated. While there is no difference in the legislative requirements that pertain to an overseas insurer to that of a New Zealand incorporated insurer, the RBNZ wants to address the risks to New Zealand policyholders should an overseas firm face financial adversity.

 

“Assets within, or allocated to, a branch operation may be utilised to meet overseas obligations, or a New Zealand branch may be isolated from the financial support of the wider entity,” it said.

 

“Such risks may materialise from the operation of New Zealand or international insolvency law, the action of overseas regulators or supervisors, or the actions taken by the insurer themselves.”

 

It is of the opinion that it should address the balance point between protecting New Zealand policyholders while recognising the New Zealand insurance market and the resilience of the economy is strongly supported by overseas reinsurers, as well as addressing whether its framework provides a sufficiently level competitive playing field regarding the overall degree of regulatory requirements and associated costs, including differing degrees of New Zealand specific capital, risk management and governance requirements.

 

This is where the bank’s idea of requiring all insurers to be locally incorporated comes in - while it is aware of the fact that a “one size fits all” approach may not be the answer to the problem.

 

“The review may therefore need to consider the development of principles to guide the establishment of appropriately tiered requirements that may apply to insurers of different size or nature,” stated the RBNZ.