By Gareth Vaughan

With the Reserve Bank having taken on the prudential regulation of insurers last March, the question arises as to whether it'll want this country's biggest insurers, which like the major banks are Australian owned, to have similar standalone capability.

The major Australian owned banks - ANZ, ASB, BNZ and Westpac - must abide by the Reserve Bank's Outsourcing Policy, which was introduced in January 2006.

This is broadly designed to ensure the New Zealand arm of an Australian owned bank can standalone, both operationally and financially. This policy came after the Reserve Bank made Westpac incorporate in New Zealand in 2004, with the central bank and prudential regulator saying all systemically important, or too big to fail, banks must be locally incorporated.

Like the banking industry New Zealand's insurance sector is Australian dominated. IAG New Zealand, owned by Insurance Australia Group, owns NZI, State and AMI after buying the latter's good book following a taxpayer funded bailout after the big Christchurch earthquakes. Lumley General New Zealand's parent is the Wesfarmers owned Lumley Insurance Group. Vero is owned by Suncorp and in turn owns 68% of AA Insurance Ltd. Last year's acquisition of AMI lifted IAG's share of the general insurance market to about 40% from 31%, with Vero at about 23%, and Lumley third with about 9%.

In some cases the Australian owned New Zealand insurers outsource IT infrastructure and insurance funds management to Australia, from where their reinsurance contracts are also managed.

Do insurance policyholders need the same protection as bank depositors?

So will the Reserve Bank, currently consulting with the insurance industry on insurance solvency standards, ultimately want to introduce a bank industry style outsourcing policy for insurers? Or will the decision be made that insurance policyholders don't require the same level of protection as bank depositors?

Asked about this a Reserve Bank spokeswoman told interest.co.nz that, with the regulatory regime still in its infancy, the key focus is currently on moving the insurance industry into its full licencing regime by a September 7, 2013 deadline.

"Our insurance regulatory regime does not contain any outsourcing requirements similar to those that apply to large banks. There are no current intentions to introduce outsourcing provisions to apply to insurers, although the (Reserve) Bank will be undertaking a review of outsourcing requirements across all regulated sectors within the next couple of years," the Reserve Bank spokeswoman said.

Is there such a thing as too big to fail insurers?

And asked whether the Reserve Bank believes there are systemically important insurers, as there are systemically important banks, the spokeswoman said the Reserve Bank was monitoring overseas developments. She said  international debate was going on among regulators, including through the International Association of Insurance Supervisors, on the too big to fail question, and whether or not any insurer would be deemed a systemically important insurer, either at a global or domestic level.

"At present, the (Reserve) Bank is monitoring international developments on this subject and has not made any decisions on whether any particular insurer carrying on business in New Zealand would be considered as a SIFI (systemically important financial institution)," she said.

The insurance regulatory regime contains no mandatory local incorporation requirement for insurers carrying out business in New Zealand. Even though all of IAG Insurance NZ Ltd, Vero Insurance NZ  Ltd and Lumley General Insurance (NZ) Ltd, are locally incorporated, one insurance expert suggests some major insurers run what he terms "quasi" local boards that fulfil an advisory, rather than true governance role with internal audit, risk management, asset management, and reinsurance contracts managed at group level.

A question Reserve Bank staff may want to ask is; should a Christchurch earthquake type event strike again, and be compounded by say, floods in Australia and the parent company of a New Zealand insurer gets into difficulty, then how could/would you segment off the New Zealand business?

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