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Bringing financial stability legislation to the insurance industry - the Insurance (Prudential Supervision) Act 2010

Richard Dean

Insurers face a number of significant areas of risk in the operation of an insurance business. As well as pure insurance risk, there are credit risk, investment (or market) risk, liquidity risk and operational risks to consider. Financial weakness or failure of an insurer can have significant impacts on large numbers of policyholders of all descriptions. In order to properly protect policyholder interest, it is therefore clear that the financial strength of the insurance industry should be subject to appropriate prudential regulation. Until the enactment of the Insurance (Prudential Supervision) Act 2010 (the Act) in September, there had been no previous comprehensive prudential regulatory regime covering the activities of insurers carrying on insurance business in New Zealand. Now the industry is subject to a world-class regulatory model administered by the Reserve Bank. This article explores the reasons behind the introduction of the new legislation, its objectives and the Reserve Bank’s intended approach in achieving these.