Significant Changes to Insurance Regulation Loom in New Zealand

The Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) has released its final omnibus consultation paper (Omnibus Paper) on its review of the Insurance (Prudential Supervision) Act 2010 (IPSA). This update covers proposals that may be of interest to overseas or global insurers.

Scope and definitional issues

In the Omnibus Paper the RBNZ has proposed:

• To amend the definition of “carrying on insurance business in New Zealand” to remove the New Zealand policyholder requirement, so that all New Zealand-incorporated insurers will need to be licensed, even if they issue insurance only to offshore policyholders. The RBNZ’s concern is reputational damage to the RBNZ and/or the New Zealand insurance market if an insurer holds itself out as a New Zealand incorporated insurer but is not licensed. This change will explicitly exclude overseas-incorporated captive insurers and overseas companies that act only as reinsurers in New Zealand.
• To amend IPSA so that the RBNZ can require licensing for a non-operating holding company, and therefore capture corporate insurance groups headquartered in New Zealand (whether operating only domestically or across borders).
• To remove the requirement for overseas reinsurers to hold a licence to do business with New Zealand policy holders.

“Overseas” insurers – branches and subsidiaries

The RBNZ is concerned about the complications and risks that can arise in cross-border businesses. It acknowledges that the New Zealand economy significantly benefits from the presence of overseas insurers but notes that complications and risks can arise in cross border businesses. The Omnibus Paper discusses balancing the advantages of foreign presence with appropriate controls, including:

• Imposing dividend restrictions on the ability for the parent group to extract resources from the subsidiary to bolster the parent's capital position.
• Imposing a requirement for New Zealand branches to hold assets in New Zealand equivalent to the New Zealand solvency standard prudential capital requirement for their risk exposures, and life insurance branches to hold New Zealand statutory funds in New Zealand. In insolvency, these assets would then need to be applied to meet the New Zealand liabilities (with small branches being exempted, but still holding a de minimis amount).
• Imposing a due diligence duty for the chief executive officer of the New Zealand branch.
• Expanding the requirements on disclosing overseas policyholder preference (which currently only relates to home jurisdiction requirements to prefer home policyholders in insolvency) to cover any situation in which overseas policyholders may be given preference.

The RBNZ also acknowledged that the risks presented by local branches of overseas insurers increase with the size of the branch and appeared to be open to tailoring approaches relative to branch size.

Governance risk management and relevant officers

The RBNZ is also concerned about governance and risk management of an insurance company, and oversight and accountability for relevant officers in that company.

It is considering several changes to bolster their guidance supervision, including:

• Moving from non-binding guidance to rule setting through standards. These would be consulted on in more detail, but the proposed high-level topics are:
• corporate governance;
• risk management;
• internal capital adequacy assessment process/own risk and solvency assessment;
• outsourcing policy; and
• connected/related party exposures.
• Narrowing the scope of exemptions for overseas insurers exempt from certain governance and risk management standards due to home supervision. The RBNZ is considering imposing rules on New Zealand subsidiaries in the appropriate context.
• Introducing a new director duty for directors of a New Zealand incorporated licensed insurer, which, as mentioned above, will also be imposed on the chief executive officer of an overseas insurer, to exercise due diligence to ensure that the insurer complies with its prudential obligations under IPSA and regulation, standards, licence conditions and directions.

If you would like more information on how the Omnibus Paper may affect you, or would like support in making a submission on the changes proposed in the Omnibus Paper, please contact the authors. Our team in New Zealand advises insurance companies on any kind of corporate, regulatory or disputes-related issues.