The Insurance (Prudential Supervision) Act 2010 review
13 March 2023
On 1 October 2020, the Reserve Bank of New Zealand (Reserve Bank) formally relaunched its review of the Insurance (Prudential Supervision) Act 2010 (IPSA) by publishing a relaunch paper, following an earlier announcement on 14 September 2020 that the Reserve Bank had decided to resume the review.
As of 1 March 2022, the Reserve Bank has completed four of five planned public consultations, with a fifth consultation planned for mid-2023 as part of the IPSA review. We set out more information on the four consultations below.
On 1 October 2020, the Reserve Bank also launched its review of solvency standards under the IPSA. On 22 July 2021, the Reserve Bank published a draft interim solvency standard (ISS) and, following further consultation, finalised the ISS on 3 October 2022.
The purpose of the ISS is to provide an interim standard that will work effectively once insurers have adopted IFRS 17, until the final solvency standards are finalised. We set out more information on the solvency standards and relevant consultations below.
We will regularly update this page with developments on the IPSA review.
If you would like advice in relation to the IPSA review, please contact a member of our financial services regulation team.
IPSA was enacted in 2010, providing the first comprehensive framework for the prudential regulation and supervision of entities carrying on insurance business in New Zealand.
IPSA introduced a requirement for insurance providers to be licensed, with the licensing process introduced by the Reserve Bank in 2013. Licensed insurers must comply with IPSA, the terms of their license and various secondary regulatory instruments administered by the Reserve Bank such as the 'Fit and Proper Standards' and 'Solvency Standards'. The Reserve Bank also has distress management powers under IPSA.
Terms of reference
In April 2016, the Reserve Bank released the Terms of Reference for a review of IPSA (IPSA Review), announcing its intention to review IPSA over 2016-2017.
The Reserve Bank stated that the legislative purpose of IPSA remained appropriate (maintaining a sound and efficient insurance sector and promoting public confidence in the insurance sector). The aims of the IPSA Review included, amongst others, identifying opportunities to reduce administrative costs caused by the fragmentation of requirements across regulatory instruments, creating tools to deal with a diversity of business models in the sector and ensuring overseas based insurers were appropriately regulated.
The IPSA Review has been split into two phases:
- Phase 1 was completed in October 2017. This targeted the identification of potential issues for the Reserve Bank to consider in more detail during Phase 2 of the IPSA Review
- Phase 2 is underway. Phase 2 will involve the Reserve Bank considering and responding to the points raised by stakeholders and the 2017 report prepared by the International Monetary Fund on New Zealand's insurance sector (discussed in more detail below). Other developments that will provide material for consideration in the IPSA Review include the FMA/RBNZ Thematic Review of Life Insurer Conduct and Culture and the Thematic Review of the Appointed Actuary
Issues Paper and stakeholder forum
On 30 March 2017, the Reserve Bank released an Issues Paper setting out the rationale of the IPSA Review, the intended process for the review and a range of potential issues identified. On 13 April 2017, the Reserve Bank hosted stakeholder discussion forums in Auckland and Wellington to provide an opportunity for stakeholders to discuss the Issues Paper and the review in general.
The Reserve Bank sought written submissions during a consultation period lasting from 30 March 2017 to 30 June 2017. The Reserve Bank received 42 submissions and, on 17 October 2017, released a feedback statement on the submissions.
International Monetary Fund report
In April 2016, the International Monetary Fund (IMF) announced that it would undertake a comprehensive review of New Zealand’s financial system as part of its Financial Sector Assessment Programme (FSAP).
In May 2017, IMF released its FSAP findings and report as well as individual FSAP reports on a variety of relevant topics and sectors, in particular a report on the insurance sector (the IMF Report). The IMF Report is a detailed assessment of New Zealand’s regime, benchmarked against the 'Insurance Core Principles' issued by the International Association of Insurance Supervisors.
The Reserve Bank stated that it would consider the IMF Report as part of its IPSA Review. The IMF Report on the insurance sector noted that the decision to regulate New Zealand's insurance sector was based on the recommendations of a working group established in 2005, partly in response to one of the recommendations from the 2003–2004 New Zealand FSAP.
For all documentation produced during Phase 1 of the IPSA Review, please see the Reserve Bank's IPSA Review page.
The feedback statement released by the Reserve Bank on 17 October 2017 set out an indicative timetable for Phase 2 of the IPSA Review, indicating an approximate 21 month period beginning in October 2017 and ending in mid-2019 before the Reserve Bank would be ready to publish a final 'Options Paper'. This timetable included provision for three rounds of consultation.
However, following a prioritisation exercise, the Reserve Bank had initially suspended the review in April 2018 with the intention that the decision to suspend would be reconsidered quarterly, and the review be resumed in due course. The Reserve Bank relaunched the IPSA Review on 14 September 2020.
The Reserve Bank intended to release an initial overview policy paper in October 2020 and release subsequent consultation papers on various components of the review during 2021 to 2023. The Reserve Bank envisages a staggered implementation of changes, from easily implementable operational changes to legislative changes. The Reserve Bank's estimated completion date is 2024.
On 1 October 2020, the Reserve Bank published a relaunch paper formally relaunching the IPSA Review and setting out its planned approach and timeline for the remainder of the IPSA Review. The relaunch paper provided an updated overview explaining the objectives, topics to be covered and an indicative timetable for the IPSA Review. This relaunch paper was for information purposes only and the Reserve Bank did not seek comment on this paper.
Consultation papers - IPSA review
First consultation - scope of IPSA
On 30 November 2020, the Reserve Bank published an initial consultation paper on the scope of IPSA and its treatment of overseas insurers. Submissions closed on 18 February 2021.
This consultation paper was the first of five consultations on various aspects of New Zealand's insurance regulation. The consultations have taken place between 2020-2023 with new legislation expected in 2023-2024.
The first consultation considered the following key issues:
- Scope of the IPSA - whether the definitions of "contracts of insurance" and "carrying on business in New Zealand" are sufficiently broad and capture all businesses that should be captured by IPSA
- Branches of overseas insurers - whether the rules for licensed overseas insurers who do business in New Zealand are appropriate, particularly the exemptions regime which relies on regulation imposed by these insurers' home countries
- Overseas reinsurance - whether overseas reinsurance should be treated differently to domestic insurance
- Group supervision and outsourcing - how entities' corporate and legal forms affect the way regulations take effect, in particular, discussing whether specific rules overseeing interactions between members of a corporate group and governing outsourcing policies and practices should be a part of the IPSA.
The Reserve Bank also published an accompanying non-technical summary of the consultation paper.
On 22 July 2021, the Reserve Bank published a public feedback statement on the November 2020 consultation paper on the scope of the IPSA and the treatment of overseas insurers, together with the Reserve Bank's responses to the public submissions received and a document containing full submissions.
Second consultation - policyholder security
On 31 August 2021, the Reserve Bank published a second consultation paper on a range of issues relating to policyholder security. Submissions closed on 15 November 2021.
The objective of this consultation paper was to "increase the likelihood that policyholders will receive the payments they are entitled to if they need to make a claim on their insurance policy". This consultation paper provided an overview of the current approach to policyholder security and considered the following key issues:
- Financial strength disclosures - the aim is to "provide independent and standardised information on the relative financial strength of the insurer to consumers, policyholders and potential investors", noting that the current disclosure obligations imposed by IPSA only relate to financial information and may be insufficient in their scope.
- The way solvency standards are operationalised in IPSA - this consultation paper was not concerned with how much capital insurers should hold and how that amount is calculated as that is part of a separate review (set out below). Rather, the paper focused on provisions that empower and apply the solvency standards such as whether it would be preferable to measure compliance by the degree of compliance rather than the current approach which simply deems insurers either compliant or non-complaint.
- Termination values - the consultation queried whether IPSA should set out rules for working out the amount that policyholders are owed if insurance contracts are terminated early. This is relevant to certain types of insurance, such as life insurance, where a policyholder hasn't made a claim but has contributed funds that are being held by the insurer.
- Statutory funds - under the current IPSA regime, life insurers are required to establish ‘statutory funds’ to look after the assets that underpin their liabilities to their life insurance policyholders. A statutory fund is a fund that is established in the records of a life insurer and relates solely to the life insurance business of the life insurer or a particular part of that business. A statutory fund ring fences life insurance assets from the remainder of an insurer's business and protects policyholders from the insurer's insolvency. The consultation set out several queries related to statutory funds, in particular querying whether other types of insurance contracts should also have assets held in statutory funds and whether some protections that statutory funds offer policyholders should be extended to other policyholders.
Third consultation - enforcement and distress management
On 10 March 2022, the Reserve Bank published a third consultation paper on a range of issues relating to enforcement and distress management. Submissions closed on 20 May 2022.
The consultation paper contextualised the IPSA review, noting that:
- By the time the IPSA amendments come into force, the Reserve Bank's institutional structure and governance will fall under the new Reserve Bank of New Zealand Act 2021 (RBNZ Act 2021)
- There will be three 'sectoral acts' sitting beneath this institutional framework - IPSA, the Financial Markets Infrastructures Act 2021 (FMI Act) and a Deposit Takers Act (DTA).
The Reserve Bank seeks to "apply similar rules to each sector unless there are good reasons for different treatment" and notes that its "working assumption is that we should amend IPSA to align with the draft DTA and FMI legislation unless there are strong reasons not to".
For more information on the new RBNZ Act 2021 and proposed DTA, please see our article on the Reserve Bank Act review. Please also see our article on the FMI Act for further information on this regime.
The third consultation focused on four key areas:
- Enforcement and penalties - the paper proposes introducing a wider range of enforcement tools to allow the Reserve Bank to respond to instances of non-compliance in a more proportional manner than is currently possible. It also considers increasing the amount of penalties to account for inflation.
- Supervisory powers - the paper suggests expanding the Reserve Bank's existing powers and providing new powers to allow the Reserve Bank to take a more proactive approach (eg by allowing on site inspections without prior notice, introducing a breach reporting system).
- Distress management - this relates to how the Reserve Bank deals with insurers that are in severe financial distress and may not be able to meet their obligations to policyholders. The paper discusses whether the Reserve Bank's existing powers should be modernised and modified in a similar manner to that proposed in the draft DTA and queries whether insurers should be required to undertake more detailed planning for stress events.
- Ladder of intervention - the paper considers whether the Reserve Bank's supervision powers should escalate depending on an insurer's solvency and suggests the use of two new metrics by which to measure solvency.
The Reserve Bank also published an accompanying, non-technical summary of the consultation paper.
Fourth consultation - governance, supervisory processes and disclosure consultation paper
On 15 November 2022, the Reserve Bank published a fourth consultation paper on a range of issues relating to governance, supervisory processes and data disclosure. Submissions closed on 21 February 2023.
The fourth consultation focuses on three key areas:
- Governance, key officers and control functions - the paper proposes an expansion of key officers' (eg the insurer's directors, appointed actuary and auditor) duties and whether IPSA should be amended to empower standards to better monitor and regulate insurers' governance and risk management. The paper is seeking submissions on potentially expanding fit and proper requirements for key officers by aligning them with the DTA provisions.
- Supervisory processes - the paper considers whether the Reserve Bank should be required to consult with the FMA on licensing decisions and whether there should be a single approvals process for all restructuring transactions. The paper also proposes reforming the scope of transactions under the approvals process, the approval timeframe and how we restructure approvals to ensure policyholder interests (including statutory funds) are being properly considered.
- Data and disclosure - the paper considers whether IPSA should adopt a "data and disclosure standard" to transparently facilitate the publication of wider, well-defined comparative data on insurers.
The Reserve Bank also published an accompanying, non-technical summary of the consultation paper.
An omnibus consultation will follow this consultation in mid-2023 containing all the proposed IPSA amendments before the legislative process begins.
Consultation papers - solvency standards
On 1 October 2020, the Reserve Bank also launched its review of solvency standards under the IPSA and published a launch paper on the principles intended to guide the review. Submissions on the launch paper closed on 12 November 2020.
Solvency standards are the rules that calculate the amount of capital an insurer is required to hold in order to, amongst other things, protect against costs from unforeseen events. The solvency standards are issued under section 55 of IPSA - one or more solvency standards may apply to a licensed insurer under the licensed insurer's conditions of licence.
The Reserve Bank last consulted on the solvency standards in 2018, in response to the introduction of the accounting standard NZ IFRS 16. The overarching consideration for the review of solvency standards will be an assessment of the impact of the introduction of IFRS 17. IFRS 17 is the new international financial reporting standard that, by 1 January 2023, will replace the existing IFRS 4 standards on accounting for insurance contracts.
On 30 November 2020, the Reserve Bank published a second, consultation paper on the structure of solvency standards and its response to IFRS 17. Submissions closed on 18 February 2021. The Reserve Bank also published an accompanying non-technical summary of the second consultation paper.
On 22 July 2021, the Reserve Bank published a public feedback statement on the November 2020 consultation paper on the structure of the solvency standards and IFRS 17, together with the Reserve Bank's responses to the public submissions received and a document containing full submissions.
Consultation paper - interim solvency standard
On 22 July 2021, the Reserve Bank published a draft interim solvency standard (ISS). The purpose of the ISS is to provide an interim standard that will work effectively once insurers have adopted IFRS 17. The ISS is only expected to be in force for around three years, until the final solvency standard is finalised. Although the ISS is not the final standard, it is guided by the same core principles that will shape the final solvency standard.
Stakeholders were asked to make submissions on the draft ISS in 2021, with submissions closing on 1 October 2021. The ISS was initially intended to take effect in early 2022, with the final solvency standard expected to come into force in 2024. However, in light of feedback it received during the consultation, the Reserve Bank announced it has pushed back the indicative date that the final solvency standard comes into force to 2025.
On 5 October 2021, the Reserve Bank announced that the implementation date of the ISS would be moved from early 2022 to 1 January 2023. The date was moved to align with the date on which insurers would be expected to adopt IFRS 17. The Reserve Bank stated that the change in date would also give it more time to address some of the more significant points raised in the consultation process. At the same time, it gave insurers time to prepare their systems and processes.
On 1 March 2022, the Reserve Bank published a public feedback statement on the draft ISS and its quantitative impact, together with the Reserve Bank's responses to the public submissions received and a document containing all non-confidential submissions.
On 31 May 2022, the Reserve Bank published a 'review version' of the ISS which contains several amendments to the draft ISS published in July 2021. The Reserve Bank notes that it is not conducting a full consultation on the review version of the ISS but it invites interested parties to comment on any technical or workability issues not previously identified.
The Reserve Bank also conducted a second quantitative impact assessment amongst insurers on a voluntary basis. Submissions for this assessment closed on 15 July 2022.
Issue of interim solvency standards 2023
On 3 October 2022, the Reserve Bank published the finalised ISS. Alongside the finalised ISS, the Reserve Bank has also published a regulatory impact statement and a non-technical summary of the ISS.
The ISS came into force on 1 January 2023, however it will be applied to licensed insurers through changes to their conditions of licence, with the intention that the ISS applies from the date that each insurer is required to begin their first annual reporting period under IFRS 17. The Reserve Bank has stated that licensed insurers should assume that the ISS will apply at the relevant future dates for projecting solvency margins.
The Reserve Bank has stated that final solvency standards "will be consulted on in a second stage of the review of the solvency standards". Planning for this next stage has begun, but no date has been announced for when it is to begin or when the Reserve Bank expects to publish a consultation paper on the final solvency standards.