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The long-awaited review of the Insurance Prudential Supervision Act will likely start towards the end of this year heralding further change for insurers. The Reserve Bank of New Zealand (RBNZ) is laying the ground now for a shift from a light-handed, self-regulatory approach to a more intrusive, interventionist stance.
The review is scathing of the regulatory framework. It says there is over-reliance on the role of the appointed actuary. Solvency and capital requirements in the solvency standard are too narrow. Governance requirements are minimal for prudential purposes and not effective in holding the appointed actuary, boards or senior management accountable and effective.
So, no holding back. The RBNZ says that it accepts all findings, but no decisions have been made for the regulatory regime. So, what does the review recommend?
Well, the three pillars – self-discipline, market discipline and regulatory discipline – would be reviewed, and the primary purpose of policyholder protection in a new Act would be elevated.
The critical role of the appointed actuary in attesting that solvency margins are being met may see the RBNZ empowered to challenge their opinion. This will, inevitably, create tension and demand fine judgement because no-one can prove in a scientific sense that an appointed actuary is either right or wrong.
Governance is another key area where change may occur. The Act does not allow the RBNZ to issue governance standards, although it may issue guidelines (which don’t have the force of law), and the RBNZ lacks processes to hold boards accountable for meeting them. Trowbridge says that they should have the force of law and that the Act should allow the RBNZ to modify business practices in the insurance sector and amid changing international regulatory developments.
Empowering the RBNZ to enforce good governance and effective risk management is raised, too, noting that under current practice, once directors have met the fit and proper test, that’s it – no further questions.
The Solvency Standard, a cornerstone of supervision, also comes in for attention. It seems the RBNZ may move away from a rigid solvency measure to create a buffer zone above the minimum solvency capital at which a supervisory response can be triggered. The RBNZ will need to be clear about how and under what circumstances it would escalate matters, but it would provide flexibility to act sooner with potentially distressed insurers.
There are also some considerations for international insurance groups to reflect on. The review recommends that where an insurer is owned by a parent company with other material subsidiaries, the RBNZ needs to be satisfied with the risks posed by coincident boards. It wants the RBNZ to maintain connections with international regulators, acting, as appropriate, as the lead regulator or home regulator for New Zealand licensed insurers operating offshore and offshore insurers operating in New Zealand.
The review also recommends the RBNZ introduce a group regulation regime for licensed insurers. Outsourcing comes in for a mention where core functions are outsourced and increase the level of risk. So, it recommends that under the Solvency Standard these be reported on to the RBNZ.
The direction of travel is clear; we know it will be a beefed-up regulatory vehicle. What we should expect from the RBNZ in its consultation process and regulatory re-set is that it lives up to the aspirations of its charter. These include being open-minded and professional in its behaviour and clear, targeted, consistent and timely in its communications. We should do the same.
It’s also important to avoid the pendulum swinging too far in the other direction, reflecting the circumstances that gave rise to this review. It was focused on one company dealing in long-tail risk, with minimal business underwritten in New Zealand, who, for the most part, acted as a reinsurer offshore where regulation is often minimal. That is not to say that lessons have not been learned that are applicable to an IPSA Review, but that the principle of proportionality is relevant, too.
Insurers, though, should read the tea leaves about the RBNZ approach for the banking sector.
