The consultation on the Options Paper is the first in a planned series of five consultations on specific options for reforming the existing legislation, which will take place over the next two years.
The feedback from these consultations will be factored into the Reserve Bank's final policy decisions on any legislative changes, alongside the findings of recent external reports, such as the 2016 IMF review of New Zealand's insurance sector and John Trowbridge and Mary Scholtens QC's review of the supervision of CBL Insurance.
New legislation is expected in 2023-2024.
Options Paper 1: Scope of IPSA and overseas insurers
This first Options Paper explores the scope of the IPSA's regulatory net, addressing questions relating to which businesses should be required to comply with which rules. This includes asking whether:
- the Act's definitions of “contracts of insurance" and “carrying on business in New Zealand" adequately ensure that the rules cover all the businesses that should be covered,
- the current legislation appropriately balances different policy objectives, such as encouraging overseas insurers to do business in New Zealand without creating additional risk for New Zealand policyholders,
- any changes are necessary to increase scrutiny of overseas insurers (refer to our commentary below),
- reinsurance should be treated differently from other overseas insurance for the purposes of the IPSA,
- legislation should confer on the Reserve Bank expanded powers to supervise insurance companies' corporate groups, and
- there should be specific requirements relating to insurance companies outsourcing functions to other business partners.
Proposals for overseas insurers
The Options Paper is particularly relevant for current licensed overseas insurers. The paper acknowledges that the current prudential regulation regime permits overseas insurers to operate in New Zealand using a branch structure, and 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.
The paper does, however, recognise that this approach creates risks that policyholders will not receive the same degree of protection when insuring with overseas insurers. At the same time, it notes that introducing more stringent New Zealand regulation may leave New Zealand-based insurers at a competitive disadvantage. In the Options Paper, the Reserve Bank proposes some potential measures to address these issues, including:
- requiring overseas insurers to set up subsidiaries, which would be subject to the full IPSA regulatory regime,
- requiring overseas insurers to hold a certain level of assets in New Zealand,
- strengthening overseas policyholder protections by imposing more simple administrative penalties for non-compliance,
- subjecting branches to additional reporting requirements concerning their parent and home country jurisdiction or a requirement to notify the Reserve Bank of any notable changes in the regulatory framework of their home jurisdiction, or
- periodic review of the status of overseas jurisdictions that are exempt from IPSA requirements.
The Options Paper sets out a series of additional specific questions relating to these proposed measures.
The Reserve Bank invites submissions from stakeholders on any, or all, of the above issues and associated questions.
The second consultation paper explores minimum solvency capital requirements for insurers. The review of the solvency standards is planned to take three years and will take account of new accounting rules coming into effect in two years' time. The issues the consultation paper raises include:
- whether the solvency standards should begin with a purpose statement,
- to what extent the Reserve Bank will need to ask insurers to alter their accounts when making solvency calculations, in light of new accounting rules coming into force,
- whether the rules should provide for two control levels relating to Reserve Bank supervision of insurers' abilities to maintain solvency capital, and if so, how the Reserve Bank should set those levels, and
- how the analysis of minimum solvency capital should be undertaken.
The current solvency standards have been in place since 2014. As with the consultation on the scope of the IPSA, the purpose of the consultation on solvency standards is to bring New Zealand's insurance regulations up-to-date.
Submissions and further information
The consultation papers are open for feedback until 18 February 2021. While the Reserve Bank particularly seeks feedback from stakeholders on the points set out in the two consultation papers, it also invites comments of a more general nature.
Additional information on the review of the IPSA and the current consultations are available on the Reserve Bank's website here, including the details of a webinar to discuss the consultations which is planned for 14 December 2020.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.