The Reserve Bank (RBNZ) is planning to review the way it regulates the insurance industry, partially in light of the Canterbury earthquakes and the development of new business models in the sector.
It’s today announced a review of the Insurance (Prudential Supervision) Act 2010 (IPSA) over 2016 and 2017.
“It is over five years since IPSA came into force and this review will examine whether the legislation and associated regulations are working as intended,” says the RBNZ’s head of prudential supervision, Toby Fiennes.
“We believe that IPSA has had a positive effect on the soundness of the insurance industry in New Zealand and that the legislation has generally worked well.”
Prior to the IPSA being enacted in 2010, the RBNZ didn’t regulate the insurance industry at all, and insurers didn’t need a licence to operate in New Zealand like they do now.
The point of the review
The RBNZ says it isn’t looking to change the legislative purpose of the IPSA, which is to promote the maintenance of a sound and efficient insurance sector, and promote public confidence in the insurance sector.
Rather it wants to assess the performance of the Act by making sure it:
- Strikes the right balance between promoting soundness and efficiency;
- Allows firms to meet requirements cost effectively;
- Doesn’t stifle innovation or prevent new entrants to the market;
- Targets the right range of insurers;
- Is flexible enough to adapt to changing circumstances and diverse business models;
- Allows for a risk-based approach by ensuring regulatory requirements and responses are proportionate;
- Doesn’t cost too much to administer and is transparent.
The RBNZ also wants to make sure the regime is consistent with international guidelines and the other legislation it administers.
How the industry’s changed since 2010
The RBNZ notes that over the last five years, since the IPSA was enacted, international guidance on insurance regulation and supervision has been updated.
The RBNZ has also reviewed the legislative regime for Non-Bank Deposit Takers and is developing a legislative regime for Financial Markets Infrastructures.
Furthermore, the RBNZ notes, “New Zealand has experienced a major catastrophe with consequences for the insurance sector” in the Christchurch earthquakes.
It says new business and distribution models have been developed, as new insurers have entered, while others have exited the market.
For example, Insurance Australia Group (IAG) has bought AMI following the Canterbury earthquakes. The Crown-owned entity, Southern Response, has taken over the management of AMI’s quake-related claims.
Warren Buffett’s Berkshire Hathaway has bought a stake in IAG, which has seen it take 20% of IAG’s premiums and pay 20% of its claims. The deal's also resulted in IAG receiving $600 million of additional reinsurance to pay for the February 2011 quake, further to it using up the last of the $4 billion of reinsurance cover it had for the disaster.
The South African insurer, Youi, has entered the market with a bang, as its sales techniques have sparked public outrage and a Commerce Commission investigation.
A number of insurers are entering or looking to enter into white-labelling agreements, whereby they’re selling their product online through household brands like the Warehouse and Trade Me.
And finally, insurance brokers and financial advisers are expecting they'll have to change their business models, as the Government's considering changing the rules around the way they're paid by insurers, as it reviews the Financial Advisers' Act.
The RBNZ says it will assess whether additional tools are needed to recognise the diversity of business models in the sector.
It confirms the review won’t cover secondary legislation (such as solvency standards), yet it is possible it may require other laws to change.
The RBNZ plans to release an Issues Paper for consultation at the end of the year. From there it will present a report to Cabinet, considering whether change is needed, and if so, propose options for change. These are expected to be detailed in an Options Paper, released for consultation in 2017.
If recommendations for change are agreed to by Cabinet, legislation will be introduced into Parliament in 2018 at the earliest.