Insurance Prudential Supervision Bill - draft for consultation
20 April 2009
On 20 April the Reserve Bank announced the release of a draft Insurance (Prudential Supervision) Bill for stakeholder consultation.
This draft Bill reflects policy approvals provided by Cabinet in December 2007 and August 2008, and is being released for consultation with an expectation that respondents will focus on legal, drafting and operational issues. Responses on matters of policy, other than those detailed later in this note, are not sought in this consultation and therefore will not in general be addressed in the Reserve Bank's further considerations prior to formal introduction of the Bill to Parliament.
The Bill is only being distributed electronically. Hard copies are not being printed or distributed.
Stakeholder comments in response to this draft Bill and the additional specific matters detailed below are sought from stakeholders by no later than 22 June 2009. This date will not be extended.
Following receipt of submissions to this consultation, the Reserve Bank will finalise the Insurance (Prudential Supervision) Bill for introduction to Parliament later in 2009.
- Consequential amendments to repeal other Acts are not yet included in the
Bill, but the following legislation will be repealed upon enactment of the
Insurance (Prudential Supervision) Bill:
- Parts 1 and 1A and ss 78-79A of the Life Insurance Act 1908;
- the Insurance Company Deposits Act 1953; and
- the Insurance Companies (Ratings and Inspections) Act 1994.
- Transitional provisions are not yet included in the Bill but will likely
- statutory schemes to enable transfer of insurance policies without requirements for novation or Court approval;
- "path to compliance" process for existing insurers unable to meet licensing requirements at time of commencement;
- different commencement dates for different parts of the Bill.
- The following areas are highlighted for your particular attention:
- correct capturing of insurance concepts in the Bill, e.g. definition of life insurance, definition of "continuous disability policy";
- workability of the statutory fund provisions, and
- the treatment of "composite policies" as referred to in Section 118.
In addition to the content of the draft Bill, the Reserve Bank is also seeking stakeholder input on the following specific matters:
- Ministerial consent for directions by the Bank to insurers in distress
In the Bill, Part 4, Subpart 2 allows the Reserve Bank to give specific directions to insurers or their associated persons who are in distress. Grounds for giving the direction are specified in clauses 144 and 145. The scope of directions is provided in clauses 147and 148.
The power to give directions is consistent with sections 113 – 113B of the Reserve Bank of New Zealand Act. APRA has similar powers under s 106 of the Insurance Act 1973 and 230B of the Life Insurance Act.
Based on the Reserve Bank Act precedent, clause 148 would require ministerial consent to the issue of a direction. We seek views on whether this is appropriate.
The argument in favour of this ministerial role is that it allows for an extra level of accountability for the Reserve Bank.
The argument against is that supervisory decisions will become, or will be perceived as, political. This conflicts with the intention to establish the Reserve Bank as an arms-length, independent regulator. It can also be argued that the Minister may not have the day-to-day expertise gained by the Reserve Bank in supervising the insurer, and the process of gaining consent for directions and amendment to directions may make the process less timely and flexible.
- Controls over owners and changes in owner
The Bill requires consideration of "ownership structure" at the time of licensing. The Reserve Bank must be satisfied that the ownership structure is satisfactory having regard to the size and nature of the applicant's proposed business including the size and nature of the insurance business and the size and type of risks proposed to be insured.
The Bill does not require the Reserve Bank to make an assessment as to the suitability of owners. Nor does the Bill provide any ongoing controls over changes in ownership.
The argument in favour of assessing the suitability of ownership is that it may allow the Reserve Bank to prevent criminals or other unsuitable persons owning shares in insurers.
The argument in favour of the Reserve Bank being required to approve ongoing changes in ownership and ownership structure is that the Reserve Bank would be in a position to deal with aspects of the insurer that have materially changed since the Reserve Bank accepted it for licensing purposes. Otherwise, matters could change after licensing in a way that is not consistent with the prudential framework and the Reserve Bank may be left with little remedy.
Against these arguments must be balanced the ongoing cost to both insurers and the Reserve Bank in complying with and administering change in ownership controls. This also has the potential to interfere with ordinary corporate activity, the vast proportion of which is unlikely to present a prudential risk.
If the Bill is to contain more extensive controls on ownership than currently drafted, then options for amending the Bill include:
- Require the Reserve Bank to approve ongoing changes in ownership and ownership structure beyond an appropriate threshold based on percentage shareholding. See s 77A of the Reserve Bank of New Zealand Act 1989 for a precedent.
- Provide as grounds for the delicensing of an insurer:
- Changes in the insurer's ownership structure to the extent that it is no longer satisfactory having regard to the size and nature of its business including the size and type of insurance business carried out and risks insured.
- Changes in ownership resulting in demonstrably unsuitable persons holding controlling stakes in an insurer (e.g. a person with a conviction for a money laundering offence).
The second option would not require approval from the Reserve Bank at the time ownership changes occur.
- Restriction on content of constitutions of licensed insurers who are companies incorporated under the Companies Act 1993
The Reserve Bank seeks views as to whether it is necessary or appropriate to include a provision that, where an insurer is a subsidiary company, the constitution of the insurer must not include any provision under which directors of the insurer may act otherwise than in the best interests of the insurer (despite Section 131(2) of the Companies Act 1993).
The argument in favour is that it may provide some additional protection to policyholders when a licensed insurer is facing solvency problems and the interests of the holding company may be preferred to those of policyholders.
It may also mitigate any adverse impact upon policyholders of complex group structures with cross-directorships, where such structures may reduce a director's focus on acting in the best interest of the licensed insurer as opposed to wider group interests.
The following should also be considered:
- Clause 100 already provides that directors have specific duties to policy owners of life policies referable to statutory funds.
- The provision would only apply to New Zealand incorporated companies, and would not apply to overseas insurers operating as branches in New Zealand, or to other corporate forms, such as friendly societies.