Insurance Questions and Answers
This section contains questions and answers about aspects of the Insurance (Prudential Supervision) Act 2010. These are either questions that have been asked or questions that have been created to provide additional information about the Act. Please note the information contained in the answers is of a general nature and is not intended to replace legal advice.
The Insurance (Prudential Supervision) Act received Royal assent on 7 September 2010. Different parts of the Act apply from different dates – the key parts and key dates are:
- 5 January 2011 – existing insurers (as defined by the Act) operating prior to 7 September 2010 needed to return a completed Notice of Intention form to the Reserve Bank by 5 January 2011 to be entitled to a provisional licence.
- 1 February 2011 – any entity that carries on insurance business in New Zealand (or proposes to) may apply for a licence from 1 February 2011.
- 7 March 2012 – all insurers must have a full or provisional licence by 7 March 2012.
- 7 September 2013 – all insurers must be fully compliant with the requirements of the Act, i.e. be fully licensed, by 7 September 2013.
The purpose of the Insurance (Prudential Supervision) Act is to:
- promote the maintenance of a sound and efficient insurance sector; and
- promote public confidence in the insurance sector.
This will be achieved by establishing a system for licensing insurers, imposing prudential requirements upon them, supervising compliance with these requirements and empowering the Reserve Bank to act in respect of insurers in financial distress or other difficulties.
Principles the Reserve Bank must take into account in respect of its duties and responsibilities under the Act include, but are not limited to:
- the importance of insurance to members of the public;
- the importance of maintaining the sustainability of the New Zealand insurance market;
- the importance of dealing with an insurer to adequately protect policyholder interests and the public interest, in conjunction with ensuring that the failure of an insurer does not have the potential to significantly damage New Zealand’s financial system or economy;
- that it is not a purpose of the Act to eliminate all risk of insurer failure;
- that members of the public are responsible for their own insurance decisions;
- the desirability of providing adequate information to enable members of the public to make their own insurance decisions.
Any person that falls within the Insurance (Prudential Supervision) Act’s definition of carrying on insurance business in New Zealand (section 8 of the Act) will be required to be licensed by the Reserve Bank by 7 March 2012 (section 15(1)).
Insurers carrying on insurance business in New Zealand prior to 7 September 2010 that meet certain conditions must obtain a provisional licence or full licence by 7 March 2012. Insurers seeking to enter the New Zealand market before 7 March 2012 must obtain a full licence by 7 March 2012. Insurers seeking to enter the New Zealand market from 7 March 2012 must obtain a full licence before entering the New Zealand market.
Insurers that do not meet the Act’s definition of carrying on insurance business in New Zealand are not licensed by the Reserve Bank but may still be operating in New Zealand. For example, incorporated societies may provide insurance without being licensed where they meet the criteria of section 8(3) of the Act.
Refer to the Application for a licence Guidelines.
Section 238 of the Insurance (Prudential Supervision) Act provides for exemptions from some of the licensing requirements of the Act for insurers with annual gross premium of less than $1.5 million that were carrying on insurance business in New Zealand prior to 7 September 2010 or are a friendly society.
The Insurance (Prudential Supervision) Regulations 2010 are now available – please refer to these for additional information about exemptions.
Insurers operating as branches in New Zealand with head offices subject to regulation by an overseas regulator may apply for exemptions from certain requirements of the Act. For example, section 59 of the Act allows the Reserve Bank to exempt such insurers from compliance with a solvency standard where the overseas standards or requirements cover the New Zealand business of the overseas insurer and are, in terms of achieving the purposes of this Act, at least as satisfactory as the solvency standard to which the exemption relates.
Any person that falls within the Insurance (Prudential Supervision) Act’s definition of carrying on insurance business in New Zealand (section 8 of the Act) will be required to be licensed by the Reserve Bank.
From 8 March 2012 any person that carries on insurance business in New Zealand without holding a licence commits an offence under section 15(2) of the Act. The maximum penalty for such an offence is imprisonment for up to three months and/or a fine of up to $200,000 for individuals, or up to $1 million for body corporates (section 15(2)).
Section 151(3) of the Act allows the Reserve Bank to apply to the High Court for the liquidation of an unlicensed insurer.
6. Are friendly societies and incorporated societies that provide insurance considered insurers under the Insurance (Prudential Supervision) Act?
Section 8(2) of the Act provides that incorporated societies and other associations of persons that offer insurance are not carrying on insurance business in New Zealand for the purposes of the Act where the criteria of section 8(3) are met.
These criteria include, but are not limited to:
- the primary purpose or purposes of the society or association relate to a particular profession, trade, or occupation; and
- all of the members of the society or association are to consist of persons that belong to or are associated with the particular profession, trade, or occupation and/or are bodies corporate or associations of persons that carry on the business of the particular profession, trade, or occupation; and
- the society or association is not to be carried on for profit; and
- insurance cover is to be provided by the society or association only to its members (or relatives of its members), or in respect of the activities of its members when carrying out the work of the profession, trade, or occupation; and
- the provision of insurance cover by the society or association is to be ancillary or incidental to the primary purpose or purposes of the society or association.
Refer to section 8 of the Act.
The Insurance (Prudential Supervision) Act defines a contract of insurance as being a contract involving the transference of risk and under which a person (the insurer) agrees, in return for a premium, to pay to or for the account of another person (the policyholder) a sum of money or its equivalent, whether by way of indemnity or otherwise, on the happening of one or more uncertain events.
It does not include:
- derivative transactions (e.g. credit default swaps);
- a guarantee;
- product or service guarantees or warranties in relation to goods or services given or made by the manufacturer or supplier;
- payments made under superannuation or KiwiSaver schemes;
- gambling; or
- vehicle breakdown services.
Refer to section 7 of the Act.
8. Are warranties and guarantees considered contracts of insurance under the Insurance (Prudential Supervision) Act?
Section 7(3)(d) of the Act states that “a product or service guarantee or warranty in relation to any goods or services that is given or made by the manufacturer or supplier” is not a contract of insurance for the purposes of the Act.
A warranty or guarantee provided by a manufacturer or supplier on items they manufacture or supply is not deemed a contract of insurance where the warranty or guarantee meets the requirements of section 7(3)(d).
Refer to section 7 of the Act.
A person is carrying on insurance business in New Zealand if the person:
- is incorporated in New Zealand, is an overseas company required to be registered under the Companies Act, is an overseas entity carrying on business in New Zealand within the meaning of the Companies Act, or is ordinarily resident in New Zealand; and
- acts or has acted as an insurer in New Zealand or elsewhere; and
- is liable as an insurer under a contract of insurance to a New Zealand policyholder.
The act of operating as a bailee with liability arising from the holding of goods belonging to another is not treated as carrying on insurance business in New Zealand, nor is the liability created by the owner/operator of accommodation in respect of goods belonging to another person staying at the accommodation.
Where the provisions of sections 8(2) and 8(3) of the Act are met, Crown entities, the National Provident Fund Board, public entities and certain incorporated societies do not carry on insurance business in New Zealand for the purposes of the Act.
Refer to section 8 of the Act.
10. How does the Insurance (Prudential Supervision) Act affect the Insurance Companies’ Deposits Act 1953, the Insurance Companies (Ratings and Inspections) Act 1994, the Mutual Insurance Act 1955 and the Life Insurance Act 1908?
The Reserve Bank is responsible for administering the Insurance (Prudential Supervision) Act.
The responsibilities placed on insurers by the Insurance Companies’ Deposits Act 1953, the Insurance Companies (Ratings and Inspections) Act 1994, the Mutual Insurance Act 1955 and Parts 1 and 1A of the Life Insurance Act 1908 remain in force until 7 March 2012 when these Acts (or part of the Act in respect of the Life Insurance Act 1908) are repealed by section 240 of the Insurance (Prudential Supervision) Act 2010.
Sections 237 and 238 of the Insurance (Prudential Supervision) Act allow for regulations to be made for certain purposes. Refer to Regulation of Insurance Sector for more information.
There are also various standards that insurers will need to adhere to as part of the prudential requirements of the Act. It is intended that the first of these standards will be available by early 2011 – these will be found at Regulation of Insurance Sector.
The Reserve Bank will also produce guidelines. These guidelines are not legally binding but are intended to assist insurers with compliance of regulations and standards. Guidelines can be found at Licensing for Insurers.
The use of the word “insurance” is controlled under sections 22A to 22E of the Insurance Companies’ Deposits Act 1953 until 7 March 2012.
From 7 March 2012 sections 219 and 220 of the Insurance (Prudential Supervision) Act places restrictions on the use of the word “insurance” (as well as “assurance”, “underwriter” and “reinsurance” and other terms that have the same or a similar meaning) other than for insurers, insurance brokers and other intermediaries, loss adjusters and assessors, and industry associations.
The key elements of the licensing and other prudential requirements are:
- All persons that carry on business in New Zealand (and who do not benefit from the limited exceptions in sections 8 or 9) are required to be licensed by the Reserve Bank and only persons that meet the required standards will be licensed.
- Licensing decisions will be made on the basis of requirements in relation to minimum capital, fit and proper persons, sufficient financial strength, the insurer having a financial strength rating and all other matters listed in section 19 as they apply to particular types of insurers.
- Minimum requirements apply to insurers at the time of licensing and on an ongoing basis.
The requirement to obtain and disclose a financial strength rating (“rating”) from a rating agency approved by the Reserve Bank will bring a number of important benefits to policyholders and to the insurance sector as a whole.
Ratings provide a relatively simple metric summarising in one measure the risk of an insurer defaulting on its obligation to pay claims. A rating therefore reduces the need for the public to try to understand more complex and voluminous published financial information about insurers. Ratings provide a means of enabling brokers and the public to distinguish between higher and lower risk insurers and thereby make better informed decisions in choosing their insurer. This is particularly so if ratings are disclosed prominently in ways that can be readily understood by the general public, backed by greater initiatives to promote financial literacy.
Ratings will also strengthen market disciplines on insurers and reduce the need for a more intrusive form of regulation and supervision.
Requiring insurers to obtain and disclose a financial strength rating will involve costs for insurers – both in terms of the direct cost of the rating and the indirect cost of management time. However, the costs of mandatory ratings are expected to be modest for most insurers relative to their size.
Existing insurers that meet the “small insurer” premium threshold will be exempt from obtaining a financial strength rating. These exempt entities will be required to prominently disclose that they are exempt from the requirement to have a rating.
There is currently no licensing fee or other levy imposed on insurers to cover the Reserve Bank’s costs of licensing and supervising the insurance market. However, there is provision under section 17(2)(b) of the Insurance (Prudential Supervision) Act to impose licensing fees.
A founding principle of the Insurance (Prudential Supervision) Act is to allow the Reserve Bank to impose prudential requirements on insurers with the aim of protecting the interests of an insurer’s policyholders. However, the Act clearly states that it is not its purpose to eliminate all risk of an insurer failing and that members of the public remain responsible for their own insurance decisions. This means that no insurer is guaranteed from failing.
The Reserve Bank’s website will list all insurers that are licensed. Insurers that operated in New Zealand before 7 September 2010 need to obtain a full or provisional licence by 7 March 2012. Insurers seeking to enter the New Zealand market before 7 March 2012 must obtain a full licence by 7 March 2012. Insurers seeking to enter the New Zealand market from 7 March 2012 must obtain a full licence before entering the New Zealand market.
The official register of licensed insurers will be the Financial Service Providers Register administered by Ministry of Economic Development. All insurers must be on the register, which from September 2013 will record their status as “licensed”.
Any complaints should first be directed to your insurance company. The Insurance (Prudential Supervision) Act provides the Reserve Bank with the responsibility of licensing and supervising insurers. The Reserve Bank has no authority to act on behalf of policyholders in respect of any claim issues.
Please refer to the Insurance Ombudsman for more information on what to do if you have a dispute with your insurer.
Licensed insurers are required to be registered under the Financial Service Providers (Registration and Dispute Resolution) Act and that Act requires them to be party to a dispute resolution service.