On 27 September 2023, the Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) launched an omnibus consultation, in respect of a full set of proposals for amending the Insurance (Prudential Supervision) Act 2010 (IPSA). The IPSA omnibus consultation paper (Consultation Paper) and the "non-technical summary" of the IPSA omnibus consultation are available on the RBNZ's website. Most of the proposals in the Consultation Paper build on the policy options that were discussed in the previous five public consultations on IPSA.
For further information on the RBNZ's review of IPSA (including the RBNZ's previous consultations on IPSA), please see our previous article The Insurance (Prudential Supervision) Act 2010 review.
What has happened?
The RBNZ's proposed changes are wide-ranging. However, the changes can be summarised under four key themes:
- The RBNZ's evolution to a more proactive and intensive approach to supervision
- The treatment of overseas insurers
- The purposes and scope of IPSA
- Policyholder security.
Each key theme is discussed in further detail below.
The RBNZ's proactive and intensive approach to supervision
The RBNZ is of the view that the "most important goal" of the proposals is to support the RBNZ's evolving approach to supervision across the sectors it regulates, including the insurance sector. The RBNZ, at paragraph 1.4.3 of the Consultation Paper, describes its supervisory approach as follows:
Our supervisory approach aims to be risk-based, proportionate and proactive. Supervision proactively identifies problems with compliance and uses our full range of regulatory tools to address compliance problems.
Under this theme, the RBNZ proposes to introduce policy changes to IPSA to better support its supervisory approach, including:
- Clearer and more enforceable rules, particularly for governance and risk management (by empowering the RBNZ to introduce new enforceable ‘standards’ in these areas)
- A more graduated and risk-based approach to solvency from an intervention perspective. The RBNZ intends to introduce a ‘ladder of intervention’ with increasing supervisory intervention as an insurer’s available financial resources decline. The ladder of intervention will introduce new solvency concepts; the top of the ladder will be marked with 'prescribed capital requirements' (anyone above this level is not of concern) and the bottom of the ladder will have 'minimum capital requirements' (anyone below this level is likely at the point of non-viability)
- A wider set of supervisory and enforcement tools to allow a more proactive and proportional approach to compliance. For example, these new tools would include the power to conduct on-site inspections and the power to require insurers to publish a written warning received by the RBNZ
- A more proportional approach to supervising major transactions that allows for a greater level of scrutiny of transactions that have potential to have a significant impact on an insurer's financial soundness or on policyholders’ interests.
The RBNZ recognises that branches of overseas insurers play an important role in providing insurance to New Zealanders, but they also create some challenges from a regulatory, supervisory and crisis management perspective. To address these risks, the RBNZ is considering the following key changes:
- The imposition of a due diligence duty on the Chief Executive Officer of a New Zealand branch of an overseas insurer to ensure that the insurer complies with its legal obligations under IPSA
- The inclusion of additional measures to manage risks of intra-group contagion for New Zealand subsidiaries of overseas corporate groups
- The inclusion of a requirement that New Zealand branches hold assets, in New Zealand, equivalent to the solvency standard prudential capital requirement for New Zealand insurers, for their risk exposures.
Purposes and scope of IPSA
The RBNZ proposes to refine the scope of IPSA by clarifying its regulatory boundaries. RBNZ's key proposals under this theme include:
- Introducing a ‘declaration power’, which would allow the RBNZ to declare certain contracts which are on the 'boundary' as insurance contracts via regulation
- Amending the definition of ‘carrying on business in New Zealand’ to include insurers based in New Zealand but with no New Zealand policyholders
- Introducing the power to license non-operating holding companies for corporate insurance groups that are headquartered in New Zealand.
It is worth noting that the RBNZ is not proposing to make major changes to the key definitions that set IPSA's regulatory boundaries (ie the meaning of "contract of insurance" and "carrying on business in New Zealand"). This is because the current definitions are reasonably well understood and align with common law and other existing regulatory regimes.
Policyholder security and statutory funds
In a previous consultation, the RBNZ considered introducing a policyholder guarantee scheme. However, the RBNZ no longer intends to introduce the scheme, although it may consider it again in the future. While the RBNZ is not currently intending to pursue this idea, the RBNZ is considering the introduction of new policyholder protections, including:
- Protection of the ‘underwriting asset’ involved in yearly renewable term policies and health policies
- Policyholder preference in insolvency
- Tighter restrictions on investments in related parties for all insurers
- An ability for the court to order that a portion of any civil pecuniary penalty imposed on key officers of an insurer should be paid to policyholders.
Who does this affect?
The changes proposed in the Consultation Paper are wide ranging. This means the changes will affect all insurers that are carrying on insurance business in New Zealand, including New Zealand incorporated insurers and overseas insurers.
What is next?
The consultation period is now open and will close on 12 December 2023. The Consultation Paper is the last IPSA policy consultation before an exposure draft of an amendment bill is released for consultation, which is likely to be early 2025.
Please contact our financial services regulation team if you would like any assistance with preparing a submission in response to the Consultation Paper or on any aspect of compliance with IPSA.