Prudential regulation of insurers in NZ - Reserve Bank of NZ proposals

Cabinet has approved the Reserve Bank of New Zealand (RBNZ) as the regulator of the insurance sector in New Zealand. The RBNZ has now released a Consultation Paper seeking input on its proposals for prudential regulation of the sector.

The RBNZ is proposing the following regulations:

Statutory Fund

Life insurers must operate their business through a statutory fund. This separate fund is to ensure that assets held by the insurer are sufficient to meet its liabilities to policyholders.  General insurance liabilities can be included in the fund but only up to 5% of the capital value of the fund.  A similar approach is adopted in Australia.

No statutory fund is required for general insurance. Health insurance can operate either within the statutory fund or outside it like general insurance.

Branches of foreign insurers

Foreign owned branches operating in New Zealand must have a financial strength rating that takes into account any foreign policyholder preferences that disadvantage New Zealand policyholders.  The implications of this must be disclosed as part of the rating.

The RBNZ reserves the right to require local incorporation of a foreign owned insurer.

Distress management of insurers

The current law has a number of procedures for an insolvent, or near insolvent, insurer to resolve its position. These include receivership, voluntary administration or liquidation. The RBNZ recommends retaining this status quo but with the following reforms:

• The RBNZ can, itself, apply to liquidate a company for breaching the prudential regulations.
• RBNZ invoked liquidation cannot be suspended by voluntary administration.
• The RBNZ can apply to have a company put in voluntary administration.
• The RBNZ is entitled to attend all procedures. 
• An RBNZ appointed liquidator with have certain additional powers.

Connected party exposures

An exposure can occur when the funds of an insurer are lent to a related party or another insurer. If they are not repaid, the financial position of the insurer can be undermined.

The RBNZ proposes to work with the New Zealand Society of Actuaries to agree appropriate standards for the treatment of connected party exposures. These standards will be given the force of law.

Non-insurance activities

Significant non-insurance activities could substantially change the nature and risk profile of an insurer.

The RBNZ proposes that insurers are prohibited from conducting non-insurance activities except where they are minor and within a financial limit of 2.5% of the insurer's previous year's gross premium income. Prior approval of the RBNZ is required.

Amalgamations and transfers

The RBNZ must approve all amalgamations, purchases, sales, transfers or other corporate transactions that change the ownership of policyholder liabilities.

Where the transaction, or a series of linked transactions, amounts to less than the larger of NZ$10 million or 10% of the total balance sheet size of either party, the RBNZ must merely be notified.

Confidentiality of information

All prudential information in respect of a licensed insurer supplied to the RBNZ either by the insurer or any other third party, which is not otherwise publicly disclosed, will be strictly confidential and not accessible under the Official Information Act 1982.  

Conclusion

The Consultation Paper is available from the RBNZ's website.

The RBNZ is calling for submissions, with the submission closing date set at 20 June 2008.  DLA Phillips Fox is happy to assist clients with their submissions.

For more information, please contact:

Crossley Gates, Special Counsel
Tel +64 9 300 3823
crossley.gates@dlaphillipsfox.com

Peter Leman, Partner
Tel +64 4 474 3240
peter.leman@dlaphillipsfox.com