The feedback from this consultation will be factored into RBNZ's final policy decisions on the legislative changes which it will recommend to Cabinet. Following Cabinet’s decision, an exposure draft of an amendment bill will be prepared. This is expected to be released for consultation in May 2025.
Unlike the previous consultations, which were relatively open-ended discussions on a range of options, this consultation sets out a more focussed set of considered proposals which reflect RBNZ’s preferences in the light of the feedback it received on previous consultations. There are also a number of new proposals.
In this update we provide a brief overview of RBNZ’s proposals under the four key review themes that have emerged from the previous consultations:
1. proactive and intensive approach to supervision and enforcement;
2. greater oversight of overseas insurers;
3. regulatory scope and statutory purposes; and
4. policyholder security and statutory funds.
1. Proactive and intensive approach to supervision and enforcement
Under the proposed reforms, RBNZ’s overall approach to supervision will aim to be risk-based, proportionate and proactive through:
- Greater use of prudential standards to set clearer and more enforceable expectations, particularly for governance and risk management.
- A more graduated approach to solvency, allowing an escalating ‘ladder of intervention’ as capital declines and the corresponding risk of being unable to meet obligations increases.
- Introducing a licence regime for non-operating holding companies.
- The introduction of an on-site inspection power and some other enhancements to supervisory powers (including the ability to overrule insurers’ actuarial calculations) to underpin RBNZ’s ‘trust but verify’ approach to supervision.
- A wider set of enforcement tools to allow a more proactive and proportional approach to compliance issues.
- A new approach to approving significant transactions that allows scrutiny to be more proportionate to the risk involved in the underlying transaction.
Further details on the proposed changes that are required for RBNZ to deliver on this approach are set out below.
Prudential standards and governance
New standards for governance, risk management and related issues
In keeping with the recommendations provided in the 2017 IMF Financial Sector Assessment Programme report and the Trowbridge-Scholtens report into the failure of CBL Insurance Limited, RBNZ is proposing empowering standards that allow RBNZ to introduce rules covering:
- corporate governance;
- risk management;
- ICAAP/ORSA (to the extent those rules are necessary on top of what is already in the solvency standard);
- outsourcing; and
- connected / related party exposures.
The detailed content of these standards will be assessed and consulted on at a later stage, if progressed. Overall, RBNZ intends for the legislation to give it sufficient discretion to be able to implement appropriate governance and risk management rules in response to emergent risks (for example in the face of rising climate or cyber risk).
As consulted on previously, RBNZ is proposing to introduce a new duty for directors of New Zealand-incorporated licensed insurers, to exercise due diligence to ensure that the insurer complies with its prudential obligations under IPSA and its regulations, standards, conditions of licence and directions. A breach of the duty may be sanctioned with a civil pecuniary penalty. The same duty will also apply to the chief executive officer of an overseas licensed insurer (that is, New Zealand branches).
RBNZ has concluded that, in keeping with practice in other jurisdictions, a duty to comply with prudential obligations is sufficient protection for policyholders without the introduction of any additional specific requirements for directors to consider policyholder interests.
Fit and proper regime
RBNZ is proposing a number of changes to the fit and proper requirements including:
- Extending the definition of ‘relevant officers’ to include the chief risk officer (but not any other senior managers).
- Introducing a requirement for licensed insurers to seek approval of the appointment of relevant officers from RBNZ before appointments are made (RBNZ will be required to decide whether to approve the appointment within 20 days of receiving all required information).
- Introducing a requirement for licensed insurers to notify RBNZ if they obtain information that could reasonably lead them to form the opinion that a relevant officer is not a fit and proper person to hold their position.
Actuarial advice and the appointed actuary
Previous feedback on RBNZ’s proposal for an actuarial advice framework was generally positive, but there was less certainty of the need for an appointed actuary standard or an actuarial due diligence duty.
The purposes of standards and an actuarial due diligence obligation include that actuaries’ outward-facing duties are clearly articulated through standards and that actuaries are accountable to the public for exercising those duties though the proposed statutory due diligence duty. Given that there are a variety of different parties who rely on actuarial advice (the insurer’s board, markets and RBNZ) RBNZ proposes that IPSA empowers an actuarial advice standard which will:
- require licensed insurers to develop and document their own actuarial advice framework, setting out when actuarial advice was required for internal decisions; and
- set out clearly the appointed actuary’s duties under IPSA in a single document (potentially cross-referring to detail contained in other standards).
RBNZ also proposes that IPSA should impose a duty on appointed actuaries to exercise due diligence in the performance of the duties required of them under the actuarial advice standard. Although the statutory duty will create new liability for actuaries, RBNZ proposes that liability will be capped at a maximum of $500,000, which they note is considerably less than the broader contractual liability many actuaries are likely to be exposed to in the usual course of their work.
Solvency and ladder of intervention
Setting solvency requirements and supervisory adjustments
The way solvency requirements are established in primary legislation and the way solvency metrics are used to unlock certain powers in IPSA were the subject of the second consultation.
Currently, RBNZ imposes solvency capital requirements on insurers via a licence condition that specifies the ‘solvency margin’ an insurer must maintain (as defined further by, and calculated according to, the relevant solvency standard) for its overall business and for any statutory funds. However, following the feedback it received from submitters, RBNZ has decided it will recommend that the prescribed capital requirement should apply automatically to non-exempt insurers, without the need for a specific licence condition.
RBNZ also proposes that it should not only be able to impose a capital overlay where doing so is necessary in the light of specific risks, but it should also have the power to impose supervisory adjustments to the way the solvency calculation is carried out.
RBNZ is not planning to make any changes to the current solvency reporting regime, which relates to the financial condition report and the appointed actuary’s report required under section 78 (commonly known as a ‘section 78 report’). However, as part of producing any exposure draft it will consider the appropriate instrument for setting out requirements for financial condition reports, alongside considering how to simplify the process of setting insurer reporting requirements across the IPSA regime.
Ladder of intervention
Consultations 3 and 4 of the IPSA review discussed changing the way solvency requirements are set in IPSA to introduce a more graduated and risk-based approach to solvency, enabling a ‘ladder of intervention’ as insurers’ capital levels decrease.
Under the proposed amendments, IPSA will operate based on two solvency control levels. At the ‘top’ of the ladder there will be a ‘prescribed capital requirement’ (PCR), which marks the boundary above which RBNZ has no particular capital-related concerns about insurers. At the ‘bottom’ of the ladder RBNZ will set a ‘minimum capital requirement’ (MCR) at what it considers to be the point of non-viability for an insurer. RBNZ’s responses along this ‘ladder of intervention’ will be governed in two overlapping ways:
- the legislation will delineate some ‘hard’ boundaries (or statutory triggers) via the way different statutory powers are enabled at different capital levels; and
- internal supervisory policy for risk-based responses as capital levels decline (with corresponding guidance for industry).
RBNZ proposes anchoring these statutory triggers for various powers closely to the MCR and PCR, with some powers or requirements being unlocked when insurers breach the MCR/PCR and some being unlocked when insurers are ‘likely to breach’ the MCR/PCR as outlined in the table below.
Solvency capital trigger
Likely to breach PCR
Appointed actuary and auditor duty to inform RBNZ
Power to require a recovery plan
Likely to breach MCR
RBNZ can apply to court for voluntary administration order
RBNZ can seek statutory management
RBNZ can apply to court for liquidation
Group supervision – licensing non-operating holding companies
RBNZ’s first consultation on the IPSA review considered what might constitute an appropriate form of group supervision for New Zealand’s larger insurers to address the risks that can arise through interactions between different legal entities within a corporate group structure.
RBNZ recommends IPSA is amended so that RBNZ has the power to require licensing for a non-operating holding company (NOHC) for corporate insurance groups headquartered in New Zealand (whether or not operating only domestically). Broadly speaking, the licensing regime is proposed to include the following features:
- A separate licensing regime for NOHCs, similar to the existing licensing regime for insurers but omitting those obligations which are not relevant to NOHCs.
- Particular provisions for groups within standards for risk management and corporate governance (where the standards will include requirements for the head of the group to provide appropriate group-wide governance and risk management).
- Standards to impose requirements for the management of outsourcing and of related-party exposures (which will also promote the management of intra-group risk).
RBNZ will also continue to follow the international convention of relying on overseas regulators for group supervision of corporate groups headquartered overseas.
Supervisory and enforcement powers
Currently RBNZ has broad information gathering powers to investigate potential breaches of IPSA, including the power to obtain information or documents and to search premises. However, it only requires reporting of likely failures to maintain a solvency margin. Where RBNZ has reasonable grounds to suspect an insurer is in distress—for example, where it is likely to fail to maintain a solvency margin—RBNZ has a wide range of powers to step in and manage the situation. Those powers include requiring an insurer to produce a report prepared by a person approved by RBNZ on the relevant matter, giving the insurer compulsory directions, removing or replacing a director, auditor or appointed actuary and directing an insurer to prepare and implement a recovery plan.
RBNZ proposes to introduce all of the powers discussed in its earlier consultations. These powers will provide RBNZ with a broader range of tools for verifying insurer compliance with prudential obligations, facilitating a more proactive approach to supervision that identifies issues before they become serious problems. The consultation paper addresses some of the safeguards for each power, but notes that some of the details will not be available until the exposure draft of the bill is released. The key new powers include:
- Extending investigation powers (currently set out in sections 130 to 134 of IPSA) to cover entities that are not licensed insurers but which might be failing to comply with a requirement to obtain a licence or falsely holding themselves out as licensed insurers.
- Wider information gathering powers which allow the ability to require information from any person (not just licensed insurers and other specified persons) in pursuit of RBNZ’s prudential purposes under the IPSA.
- An on-site inspection power.
- The ability to require an insurer’s staff to answer questions ‘on notice’ as part of an investigation (as defined in IPSA section 30).
- A breach reporting regime.
- A power to direct insurers not to renew existing insurance contracts, in addition to the existing power to direct insurers not to write new business.
Disclosure and reporting requirements
Overseas policyholder preference
RBNZ proposes that the requirements on disclosing overseas policyholder preference be expanded so that disclosure requirements are not confined to preference in insolvency but also cover any other situation in which overseas policyholders may be given preference (for example in allocating bonuses to relevant life policies).
A new data and disclosure standard
IPSA provides broad powers for RBNZ to gather information from insurers for prudential supervision purposes via notice or as a condition of licence. Such information is subject to statutory confidentiality provisions which permit RBNZ to disclose and publish the information in limited prescribed circumstances. RBNZ proposes that IPSA also empower a data and disclosure standard that will be used to require insurers to provide information to RBNZ or to the public in pursuit of RBNZ’s purposes and functions under IPSA. This standard will be used to set out RBNZ’s regular data gathering and disclosure requirements. There will be no change to RBNZ’s existing suite of information gathering powers.
Enforcement and penalties
IPSA imposes a number of prudential obligations on insurers and creates a wide range of criminal offences for breach of those obligations. Directors of the insurer may be liable for offences committed by the insurer if (in broad terms) the offence took place with the director’s knowledge or consent. The offences are punishable by potentially significant fines and/or imprisonment for individuals, without any express power under IPSA to adopt less serious enforcement options.
RBNZ proposes to introduce a wider set of enforcement tools to allow a more proportional and graduated approach to enforcement. These include:
- All of the tools previously consulted on.
- An explicit power to require insurers to publish a written warning issued by RBNZ.
- Remediation notices which enable RBNZ to specify actions an insurer must take to remedy breaches of regulatory requirements.
- Infringement notices that allow RBNZ to impose modest fines for relatively minor or unambiguous breaches (primarily failure to provide required information).
- Enforceable undertakings which involve a binding agreement to take remedial action and (unlike remediation notices) may include the payment of compensation.
- Civil pecuniary penalties, primarily for breaches of standards.
Penalty levels and structure of penalties
The maximum IPSA penalties levels are to be set at levels that sit between those in the new Financial Market Infrastructures Act 2021 (FMI Act) and the Deposit Takers Act 2023 (DTA). This will see an increase in the current IPSA criminal penalties. The maximum fines for businesses will increase from $1 million to $2.5 million. For individuals, the maximum fines will increase from $200,000 to $300,000 and maximum imprisonment will increase from 3 months to 18 months. The proposed maximum civil penalties are $2.5m for businesses and $500,000 for individuals.
RBNZ intends to maintain the general structure of IPSA criminal penalties (which are currently organised into three tiers), but it will consider whether some of the lower tier criminal penalties should be replaced by either civil pecuniary penalties or infringement offences.
RBNZ considers that it will be helpful to include a purpose provision for the distress management section of IPSA, as it can provide useful guidance to RBNZ for the exercise of the relevant powers and can promote clarity and accountability externally. It will generally be along the following lines:
- To enable a licensed insurer in distress to be dealt with in an orderly manner.
- To avoid significant damage to the financial system or the New Zealand economy by:
- maintaining the continuity of systemically important activities carried out by licensed insurers; and
- mitigating or otherwise managing any loss of confidence in the financial system resulting from a licensed insurer that is in financial distress or other difficulties.
- To protect policyholder interests.
- To protect the public interest.
- Where not inconsistent with the other purposes, to minimise the costs of dealing with a licensed insurer in distress. It is proposed that ‘costs’ will include preserving value in the insurer, preserving creditor interests and limiting financial risk to the Crown.
RBNZ’s proposed changes to IPSA’s statutory management provisions echo those set out in its previous consultation on these provisions. RBNZ proposes that IPSA should contain two sets of provisions to supplement the moratorium that already comes into play in statutory management. Those provisions are:
- an ‘ipso facto’ provision that provides that other contractual rights (such as terminating the provision of services) cannot be enforced against the entity in resolution solely because it has been placed into resolution/statutory management (even where the contract contains an ‘ipso facto clause’, which would otherwise create these rights); and
- a short term “stay” on the exercise of close out rights under derivatives contracts against the entity in resolution.
However, RBNZ proposes to modify the trigger conditions that must be satisfied before RBNZ may recommend statutory management by removing the requirement that “the failure of an insurer would cause significant damage to the financial system or the economy of New Zealand (or both)”.
Resolution planning for insurers
Despite some concerns being raised in the earlier consultation, RBNZ has confirmed that IPSA should empower a standard to deal with resolution preparedness for future-proofing purposes. RBNZ agrees that there is further work to be done in considering resolution strategies for insurers and it does not expect to require resolution planning for insurers in the short-term.
IPSA currently has different requirements for oversight for different transactions. RBNZ proposes to leave the current arrangements for RBNZ approval of the restructure of a statutory fund unchanged, but it is combining the statutory tests for other significant transactions (including obtaining significant influence, change of corporate form, transfers and amalgamations) into a single approvals process. This will provide more flexibility so that supervisory scrutiny can be tailored to the risk presented by each transaction. Under this process:
- RBNZ will be able to decide whether or not to approve a transaction before the transaction takes effect and will be able to attach conditions to approval.
- When making that decision, RBNZ may have regard to:
- whether or not the insurers involved in the transaction will continue to meet licensing requirements once the transaction is completed;
- policyholder interests; and
- any other factors that RBNZ considers relevant.
- RBNZ will be required to make its decision within a reasonable time after receiving all necessary information.
- The restructuring approval process should apply to situations where a licensed insurer acquires business from a non-licensed insurer.
- The threshold for ‘obtaining significant influence’ should be set at 25% of voting rights or the ability to appoint 50% of directors.
2. ‘Overseas’ insurers – subsidiaries and branches
The current prudential regulation regime permits overseas insurers to operate in New Zealand using branch and subsidiary structures, and it recognises that where overseas providers are subject to high quality regulation in their home jurisdictions there may not be a need to impose additional requirements in New Zealand.
RBNZ recognises that New Zealand benefits significantly from the presence of insurers that are based overseas, but it wants to ensure that regulation balances the advantages of foreign presence with appropriate controls for any risks involved. In that light RBNZ is proposing to:
- Impose a duty on the Chief Executive Officer of a New Zealand branch of an overseas insurer to exercise due diligence to ensure that the insurer complies with its prudential obligations under IPSA (echoing the duty that RBNZ is also proposing for directors of New Zealand incorporated insurers as discussed above);
- Require branches to hold assets in New Zealand at a level equivalent to the New Zealand solvency standard prudential capital requirement for their risk exposures and potentially require that life insurance branches should hold New Zealand statutory funds (with a de minimis exemption for small branches and subject to a consideration of how costly this is likely to be for branches).
- Introduce measures to manage risks of intra-group contagion for New Zealand subsidiaries of overseas corporate groups, such as:
- an outsourcing standard to ensure that insurers have identified and considered the prudential and business continuity risks presented by outsourcing arrangements;
- a standard to regulate connected exposures and concentrated exposures; and
- potentially introducing dividend restrictions as part of the ladder of intervention approach to solvency.
RBNZ also proposes that overseas reinsurers should no longer be required to be licensed under IPSA in order to do business with New Zealand policy holders (and so won’t be required to hold assets in New Zealand).
3. Regulatory scope and statutory purposes
Definitions of ‘insurance contracts’ and ‘carrying on business in New Zealand’
RBNZ does not propose to make major changes to the key definitions that set IPSA’s regulatory boundaries – namely, the meaning of ‘contract of insurance’ and ‘carrying on business in New Zealand’ respectively. This is because it considers the current definitions are reasonably well understood and align with common law and other existing regulatory regimes.
Contract of insurance
Issues related to the definition of ‘contract of insurance’ were raised in the first consultation. The question is whether the definition remains sufficiently broad to cover new forms of business that should be prudentially regulated as insurance and whether it is clear enough to provide industry the guidance it needs. RBNZ is comfortable that the existing definition appropriately sets out the boundaries of business that should be prudentially regulated as insurance.
However, RBNZ proposes to include a power to declare by regulations that certain types of transaction or matters are insurance contracts for the purpose of IPSA (a ‘deeming in’ power). This will be additional and complementary to the existing power to declare by regulations that transactions or matters are not by way of insurance. The ‘deeming in’ power is intended to provide clarity and transparency that certain ‘boundary’ products are insurance.
Carrying on insurance business in New Zealand
In previous consultations, some stakeholders argued that what it means to ‘carry on insurance business in New Zealand’ lacked clarity and suggested it might be too narrow, allowing too many overseas insurers to write contracts covering New Zealand risk without acquiring a licence.
Overall, RBNZ considers that the risks of changing the definition outweigh the benefits, but it is proposing to modify the definition to remove the requirement that a person must be liable under a contract of insurance to a New Zealand policyholder. This means that all New Zealand-incorporated insurers will need to be licensed, whether or not they issue contracts to New Zealand policyholders.
RBNZ also proposes to address two areas of perceived ambiguity relating to overseas captives (that is, overseas-incorporated insurers that only provide cover to their parent or other subsidiaries of their parent (at least one being New Zealand-incorporated) and overseas reinsurers). Under the proposed amendments overseas-incorporated captive insurers and overseas companies that only act as reinsurers in New Zealand will be excluded from the definition, making it clear that such entities do not need to be licensed under the IPSA.
Policyholder in New Zealand
Currently insurers do not need to be licensed unless they are liable under a contract of insurance to at least one New Zealand policyholder. This means that an insurer incorporated in New Zealand that only writes policies to foreign policyholders could escape regulation under any jurisdiction. In practice, this could create a reputational risk for RBNZ as overseas policyholders might still assume that a New Zealand incorporated insurer is regulated by the New Zealand authorities (even though the insurer cannot hold itself out as a New Zealand licensed insurer). Although amending the legislation to address this issue creates some additional regulatory costs, RBNZ is of the view that these costs are less significant than the potential reputational risk.
Statutory purposes and principles
For the first time in this review, RBNZ is seeking feedback on changes to IPSA’s purposes and principles. This is largely in response to the considerable changes made to RBNZ legislation since the Terms of Reference for the IPSA review were released. This includes RBNZ’s overall statutory objectives which were updated by the Reserve Bank of New Zealand Act 2021 (RBNZ Act) and the new prudential legislation for other sectors RBNZ supervises (namely the FMI Act and the DTA).
RBNZ does not expect the proposed changes to have a large impact on its regulation and supervision of the insurance sector in practice, but they will serve to clarify the purposes of IPSA in the broader role of RBNZ. Some of the key feedback RBNZ is interested in receiving relates to:
- whether IPSA’s purposes should explicitly reference RBNZ’s broader purpose and financial stability objective under the RBNZ Act (just as the DTA makes it clear that the new deposit-taker regulatory regime is part of RBNZ’s broader mandate);
- whether it should remain a purpose of IPSA to promote the maintenance of a sound and efficient sector (when RBNZ’s overall financial stability objective contains no express reference to efficiency);
- whether a reference to access to insurance is needed (in line with the DTA, but bearing in mind that section 4 of IPSA already requires RBNZ to have regard to the importance of insurance to members of the public in terms of their personal or business risk management and to the importance of maintaining the sustainability of the New Zealand insurance market);
- whether the purposes of IPSA should refer to promoting the soundness of the insurance sector or the soundness of each insurer; and
- what role policyholder interests should play in IPSA’s purposes and principles.
4. Policyholder security and statutory funds
RBNZ has confirmed that it will not be introducing a policyholder guarantee scheme for New Zealand, which would provide consumers with some compensation if their insurer failed, at this time. It is also likely to propose removing yearly renewable term (YRT) life insurance policies (a common type of policy sold in New Zealand), and other life policies with no surrender value from the statutory fund regime. However, proposes to extend some of the benefits statutory funds provide across all insurance policyholders (albeit in a weaker form) so that:
- the implications for YRT policyholders of no longer having statutory fund protection is reduced;
- the treatment of YRT and health policyholders is more similar reflecting their similar exposure; and
- the differences in protection between life and non-life policyholders are slightly narrowed.
The new policyholder protections include:
- Elevating policyholder preference in insolvency: proposing that policyholders’ claims in insolvency should have preference over the claims of other unsecured creditors (but not ahead of ‘preferential claims’).
- Protecting the underwriting asset: providing a clear statement in IPSA that a policyholders’ ‘underwriting asset’ in YRT and health insurance policies should be considered as a liability owed to policyholders by the insurer when considering policyholder rights under any restructuring proposals (including resolution or liquidation).
- Regulating investments in related parties: introducing a standard that will create rules on connected exposures. This will limit investments in related parties and ensure that those investments take place on market terms to help ensure that investments are made in the interests of the legal entity that is backing liabilities to policyholders (that is, the insurer) rather than the interests of related parties.
- Recourse to directors following a breach of statutory duty: giving the courts the power to consider whether it was appropriate for all or some proportion of civil pecuniary penalties imposed due to a breach of due diligence duty (by a director or appointed actuary) to be paid to policyholders.
- Requirement for policyholders’ rights to be documented under section 53 novation rules: amending section 53 of IPSA to make sure that RBNZ takes into account policyholder interests in deciding whether to approve an allocation of liabilities in respect of the transferring contracts and to ensure that policyholders are entitled to written confirmation of the impact of any allocation so that they have a clear legal record of what has taken place.
5. Further information
Additional information on the review of the IPSA and the current consultation are available on RBNZ’s website here.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.