New Zealand’s largest general insurance company is supporting a proposed law change to see policyholders better protected in the event of their insurer's parent going belly-up overseas.
IAG’s Senior Government and Stakeholder Relations Manager Bryce Davies says introducing legislation requiring all insurance companies operating in New Zealand to hold, or have access to, a certain number of assets in New Zealand, is a “starting point”.
Speaking to interest.co.nz in a Double Shot Interview, Davies says some of the exemptions given to overseas insurers that operate as branches, rather than locally incorporated companies like IAG, need to be looked at.
“[These mean] they’re buying potentially less reinsurance and therefore less protection,” he says.
“We think that needs to be looked at to make sure that actually, if you’re writing business in New Zealand, you’ve got the assets sitting behind you to actually deliver on those promises. And then making sure those assets are actually here and earmarked for New Zealanders.”
IAG, which trades under the State, NZI, AMI and Lumley brands, makes these comments as the Reserve Bank is in the process of consulting with stakeholders around how it should update the Insurance Prudential Supervision Act 2010.
An issues paper on the RBNZ’s review released in April, reveals that as well as considering the introduction of a New Zealand assets test, it’s looking at requiring all insurers to be locally incorporated.
Davies says: “I don’t get the sense that the Bank has the appetite to go that far.
“For us it comes down to the issue of policyholder protection. If an insurer gets into trouble, the assets are there to meet the policyholder needs and they’re not being whipped off somewhere else.”
QBE and AMP are among the larger insurers that operate as branches in New Zealand. IAG's main competitor - Vero - is locally incorporated.
A matter of policyholder protection not competition
Davies says it’s hard to put your finger on just how much more robust an assets test will make insurers, which already need to meet the RBNZ’s solvency requirements, but says: “If an insurer ever gets into distress, someone’s going to step in and try and manage their way out of the situation.
“They need to be able to get their hands on the assets… if those assets aren’t in New Zealand, or aren’t legally owned by the New Zealand entity, or there’s difficulty getting hold of them, then that’s not protecting New Zealanders.”
Asked whether competition is actually at the heart of IAG’s position, in that it wants to level the playing field between itself and rivals that operate in New Zealand as branches of overseas insurers under more lax regulation, Davies says: “Not necessarily, no. No, not really. For us it’s more of a consumer issue.”
“Let’s be real about this, most New Zealanders don’t read their insurance policies. They wouldn’t know whether their insurer is a branch or is locally incorporated. They wouldn’t know that their insurer might have a policyholder preference to Australian policyholders and not New Zealanders…
“It’s probably unrealistic to expect that they’re going to do that level of due diligence in making their decision. So, we’ve got to do that work for them. We’ve got to make sure, at least a minimum set of protections are in place…”
Transparency key to solvency oversight
When it comes to the RBNZ tweaking the way it regulates insurers’ solvency, Davies says the key thing is that insurers are kept in the loop in terms of what the regulator expects from them.
The RBNZ acknowledges that its current approach may be seen as too “binary”, whereby insurers are simply seen as meeting its standards and continuing business as usual or being in distress.
Davies supports the possibility of the RBNZ taking a more graduated approach to the way it intervenes if it sees an insurer’s solvency position change.
“Insurers want more clarity and a bit more certainty about how the bank views solvency and what sort of actions they’re going to take.”
Yet he notes IAG and the RBNZ are already in constant communication and if the bank has concerns about its solvency position, it has tool to require it to hold more capital.
Furthermore, he says: “I think we’d want to be really clear about, what are the circumstances under which they would want to use an additional power? When would you want to vary a standard for a particular insurer?
“So understanding what would be the circumstances under which that occurs... Which kind of goes to the transparency of the whole regime.”
More disclosure not up for debate
Davies admits there’s room for the RBNZ to require insurers to disclose more information about themselves.
“What we produce versus what we would need to produce in other jurisdictions is quite a lot less. And inevitably, we’ll need to move towards more disclosure. I don’t think that’s up for debate.”
Noting the fact banks are required to share more data about themselves than insurers, Davies says: “I think the Reserve Bank’s looking across those sectors and trying to get a degree of consistency.”
He maintains a lot of what insurers could be required to be more open book about would involve governance standards and policies and information around directors for example.
He says this should be “pretty easy” to disclose. What’s more, the fact the Australian regulator already requires IAG to disclose much more information in its home jurisdiction, means meeting higher standards here “should be” manageable.
“But we’d want to make sure that… we’re really clear about the requirements are, so there’s no confusion about what they’re actually asking us for.
“There has been a bit of bedding down in some of the [disclosure] requirements so far in terms of understanding exactly what they’re after and making sure that we can produce it.”
Furthermore, Davies says the RBNZ needs to be clear about why it wants more information disclosed and for whom.
“I think there needs to be a pretty strong ‘use test’ with this information. Disclosure for disclosure’s sake doesn’t add anything.”
For more on the RBNZ’s take on the law reform, see this story Jenée Tibshraeny wrote after interviewing its head of prudential supervision, Toby Fiennes.