Reserve Bank reviews insurance rules

A review is under way of the rules insurers must abide by in this country – and one industry expert says it could lead to consolidation if the capital requirements are altered.

Thursday, April 6th 2017, 6:00AM

by Susan Edmunds

The Reserve Bank has released an issues paper for its review of the Insurance (Prudential Supervision) Act.

It said it had been more than six years since the Act was enacted and it was timely to make sure it was operating efficiently and effectively.

It said the law had resulted in an improvement in the soundness of the insurance sector.

Most insurers are now subject to legally enforceable minimum standards and supervision, there is more independent representation on governing bodies, and some insurers have increased the amount of capital they hold or improved the quality of the funding.

But it said some had pointed out concerns with the regime.

One relates to overseas insurers. Insurers carrying on insurance business in New Zealand must be licensed but the Reserve Bank said, in some cases, arrangements that looked to the general public like they would expect to be licensed did not meet that definition.

It was aware of concern about a growing non-licensed sector of insurance. “Entering into a contract of insurance with a New Zealand policyholder is not, of itself, sufficient to trigger a need for registration, irrespective of the size or extent of coverage of an individual insurance or reinsurance policy.”

The Reserve Bank said it was worth considering whether the legislation gave the right balance between protecting New Zealand interests if an overseas firm hit trouble, and recognising the extent to which New Zealand insurers were supported by global players.

It is also interested in insurers' capital requirements.

At the moment the Reserve Bank issues solvency standards that set out the methods for determining or calculating a solvency margin.

It also set a condition of licence requiring insurers to maintain a minimum solvency margin in accordance with an applicable solvency standard.

Licensed insurers are required to notify the Reserve Bank if they have grounds to believe that a failure to maintain a solvency margin is likely to occur at any time within three years.

“The Reserve Bank considers that it may be appropriate to consider the framework for the application of minimum capital requirements and the ability to vary or alter prudential capital requirements in response to an insurer’s individual circumstances. The review could also consider if a more pre-defined response to differing levels of reported solvency would have merit and for consistency with the enforcement approach.”

Milton Jennings, former chief executive of Fidelity Life, said it would be any change to the capital requirements that would have the biggest effect.

"If they increase the capital requirements for insurers, that may make it difficult for some to make a decent return. Some of the companies in the market are struggling to get a good rate of return on their capital and that's a big worry."

He said, in Australia, new capital requirements had prompted banks to offload their life companies.

“If the Reserve Bank goes down that same route we could see a bit more consolidation in the industry.”

Tags: Life insurance