Submissions on the Reserve Bank's (IPSA) are due by 30 June 2017.
We comment on some of the key issues for submission.
Definition of “carrying on insurance business in New Zealand" outdated
The current jurisdictional scope, which requires some physical presence in New Zealand according to case law, should be reviewed in light of changes in technology and the increase in online offerings of insurance products. In our view, the scope should instead be focussed on the degree and scale of the insurer's business with New Zealand policyholders. Relief for compliance overseas and lesser New Zealand licensing requirements for reinsurers should be considered.
Broader exemption powers for Reserve Bank
“One size fits all" rules are not appropriate for the diverse New Zealand insurance market. A broad exemption regime would allow the Reserve Bank to make class or individual exemptions where compliance would be unnecessarily onerous or burdensome. This would provide flexibility, allow the Reserve Bank to consider individual circumstances and make it easier to deal with new “insure-tech" products and distribution models as they emerge.
Any exemption would need to be consistent with the purposes of IPSA and no broader than reasonably necessary.
Greater mutual recognition for overseas insurers
There should be fewer requirements for overseas insurers licensed in their home jurisdiction, particularly if they do not reside in New Zealand and are regulated solely because they offer insurance products from offshore. This would make the New Zealand market attractive to overseas operators and reduce the costs of supervision duplication.
Penalties not always suitable
The review should consider the suitability of director penalties, the adequacy of director defences, the nature of penalties generally, and the maximum penalties for certain compliance failures.
The Financial Markets Conduct Act (FMCA) reforms addressed excessive director potential liability, and could provide the model.
The FMCA has raised the threshold for substantial director liability to recklessness. It also provides for infringement notices and warnings, stop orders and direction orders for lower tier 'administrative' contraventions. Directors should not be personally liable for oversights in disclosing statutory fund names and financial strength ratings to individual policy holders, or website omissions.
Directors should be able to rely on employees
The IPSA defence for relying on another person currently excludes other directors, an employee or an agent of the insurer charged with the offence.
This limitation is not suitable in all cases. There are situations where the Board should be able to rely on employees, particularly for more administrative compliance matters.
Financial strength rating disclosure requirements unduly onerous
The insurer's financial strength rating (FSR) should not need to be disclosed in writing to every policyholder before entering into or renewing a contract of insurance. Website publication should suffice. Insurers incur significant costs in rewriting and printing policy documentation when there is a change in their FSR.
Distress management tools should remain flexible
The Reserve Bank has sufficient distress management capability under IPSA to supervise and manage a distressed insurer. The legislation should avoid being excessively prescriptive and provide flexibility so that responses to insurers in distress can be tailored to achieve an optimal outcome.
overview of the issues paper
The Issues Paper outlines the rationale, terms of reference and intended process for the review. The potential issues identified fall under the following categories:
- entities required to be licensed
- treatment of overseas insurers under IPSA
- statutory funds and enhanced protection of life insurance policyholders
- role of key officers and key control functions (this includes systems of governance and internal control functions)
- enforcement regimes
- distress management
- solvency requirements
- supervisory processes – regulatory approvals
- general disclosure and financial strength rating requirements
- appropriate regulatory mechanisms, and
- other matters (stakeholder identified areas to be taken forward under the review and areas which are considered by stakeholders to unduly restrict competition and innovation).
The legislative purposes of IPSA are not under review, nor is any secondary legislation (such as solvency standards). But the Reserve Bank has acknowledged that changes to IPSA could require subsequent changes to secondary legislation.
- Phase 1 - this current stage. Identification of the issues to be taken forward in the review, which includes submissions on the Issues Paper.
- Phase 2 - later this year and next year. The areas agreed to be brought forward from Phase 1 will be considered in more detail, and additional consultation will occur.
- Phase 3 – 2018 onwards. Exposure drafts of legislation published for consultation followed by enactment and implementation. Transition periods can be expected before any new requirements come in to full effect.