New Zealand Legislation: Bills
Bills are proposed Acts
The primary purpose of this Bill is to encourage the maintenance of a sound and efficient insurance sector that promotes confidence among policyholders and the general public. The Bill establishes a licensing regime for insurers and prudential regulations that place strong reliance on self-discipline so that compliance is largely self-administering although supervised by the Reserve Bank of New Zealand (the Reserve Bank or the Bank).
The Bill will replace existing outdated legislation and fill gaps where no prudential regulation currently exists, as well as remove inconsistent legislative application between different insurance sectors.
The Bill achieves its purposes by requiring insurers that carry on insurance business in New Zealand to—
obtain a licence (having met the criteria for eligibility):
maintain solvency as defined by regulatory standards:
obtain and publish financial strength ratings:
meet fit and proper standards for directors and relevant officers:
have and comply with a risk management programme:
appoint an actuary:
prepare an annual financial condition report and annual and 6-monthly financial statements. The 6-monthly financial statements are for regulatory purposes and need not be registered unless required under regulations:
maintain at least 1 statutory fund that relates to their life insurance business and is solely for the purpose of meeting the life insurance liabilities.
In key areas the Bill recognises and accommodates supervision of overseas insurers based in New Zealand by the home regulator, subject to such regulation meeting the satisfaction of the Reserve Bank. The Bill allows for co-operation with overseas regulators.
The Bill obliges the Reserve Bank to supervise insurer compliance with the Bill and regulations. In the event of non-compliance, the Bill enables the Reserve Bank to escalate supervision through investigations and ultimately distress management and liquidation.
Some regulations will be new to insurers and a transitional period of 2 to 3 years will follow enactment to facilitate a path to compliance for insurers that are unable to meet licensing requirements at the time of enactment.
Clause 1 relates to the Title.
Clause 2 relates to commencement. In summary, the Bill comes into force as follows:
the preliminary provisions, some transitional provisions, and the regulation-making powers in the Bill will come into force on the day after the date of the Royal assent:
the provisions dealing with the process for obtaining a licence will come into force by Order in Council. This must not be later than 18 months after the date of the Royal assent. These provisions will come into force after insurers have had an adequate opportunity to become familiar with the Bill, after the Bank has had an adequate opportunity to get licence processing systems in place, and after regulations have been made to give effect to some parts of the Bill:
the rest of the Bill comes into force 18 months after the date of the Royal assent. This includes the fundamental requirement to hold a licence if the person is carrying on insurance business in New Zealand, most of the other substantive requirements of the Bill, and the repeal of various enactments.
Clause 3 relates to the purposes of the Bill. The purposes of the Bill are to—
promote the maintenance of a sound and efficient insurance sector; and
promote public confidence in the insurance sector.
Clause 4 relates to the principles that the Bank must take into account when acting under the Bill (for example, recognising the importance of insurance, the need to maintain competition, the need to avoid unnecessary compliance costs, and the desirability of sound governance of insurers).
Clause 5 contains an overview of the Bill.
Clauses 6 to 9 define the main terms used in the Bill, including the meaning of contract of insurance and carrying on insurance business in New Zealand.
The definition of contract of insurance in the Bill is based on the common law. Accordingly, it includes (for example) house and contents insurance, motor vehicle insurance, life insurance, professional indemnity insurance, health insurance, marine insurance, and reinsurance.
The courts have recognised that the concept of insurance is difficult to define with precision (see, for example, Department of Trade and Industry v St Christopher Motorists Association Ltd [1974] 1 All ER 395). The definition in the Bill already specifies a list of specific exclusions. However, to recognise this difficulty and to provide certainty, the Bill allows regulations to declare transactions or matters that are not by way of insurance.
Clause 10 provides for the Bill to apply to friendly societies and credit unions as if they were bodies corporate.
Clause 11 relates to the Bank's functions under this Bill. These include—
issuing licences to insurers; and
undertaking prudential supervision of licensed insurers; and
taking appropriate action in respect of licensed insurers that are in financial or other difficulties.
Clause 12 requires the Bank to have regard to Government policy that relates to the Bank's functions under the Bill.
Clause 13 provides that the Act will bind the Crown.
Clause 14 provides that it is an offence to carry on insurance business in New Zealand without holding a licence issued under the Bill. Clause 15 provides that it is an offence for an unlicensed person to hold itself out as being a licensed insurer.
The penalty for an offence under these clauses is,—
in the case of an individual, imprisonment for a term not exceeding 3 months or a fine not exceeding $200,000 (or both):
in the case of a body corporate, a fine not exceeding $1,000,000.
Clauses 16 to 19 set out the process for obtaining a licence. In summary—
an application for a licence must be made to the Bank. Only bodies corporate can apply for, and hold, a licence:
an applicant must provide a copy of its fit and proper policy to the Bank. A fit and proper policy is a policy for the purpose of ensuring that only a fit and proper person may be appointed to, and continue to hold, office as a director or relevant officer of the insurer. Relevant officers include the chief executive officer, the chief financial officer, and the appointed actuary. An applicant must also provide a certificate that confirms that its directors and relevant officers are fit and proper persons:
an applicant must provide a copy of a risk management programme to the Bank. A risk management programme sets out the procedures that the insurer will use for the effective identification and management of various risks:
an applicant is entitled to be issued with a licence if it satisfies the requirements in clause 18. These include that—
the applicant holds a current financial strength rating (unless the rating requirement does not apply); and
the applicant has the ability to carry on its business or proposed business in a prudent manner (see clause 19); and
the applicant has the ability to comply with subparts 2 and 3, the regulations, and the proposed conditions of licence (if any); and
the fit and proper policy and risk management programme are satisfactory; and
the applicant's incorporation and ownership structure, ownership, governance structure, and financial strength are appropriate; and
in the case of an overseas applicant, the relevant insurance law, regulatory requirements, and prudential supervision of the applicant's home jurisdiction are appropriate; and
the applicant is, or is entitled to be, registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008; and
the applicant has the ability to comply with legislation relating to money laundering and the countering of financing of terrorism (if the applicant is, or will be, a reporting entity under that Act); and
the applicant complies with any other prescribed requirements.
Clauses 20 and 21 provide for conditions of licence, including conditions—
requiring an insurer to maintain a solvency margin in accordance with certain solvency standards that will be issued by the Bank. A life insurer will also be required to maintain a solvency margin in relation to each statutory fund that it is required to maintain under subpart 3; and
relating to carrying on business in a prudent manner; and
requiring a certain amount of the insurer's business to be New Zealand insurance business; and
requiring an insurer that has not yet commenced business in New Zealand to commence business within a certain time; and
requiring the insurer or directors to certify compliance with conditions.
Clause 22 provides that a failure to comply with a condition is an offence with a penalty of a fine not exceeding $500,000.
Clause 23 requires an insurer to report to the Bank a future likely failure to comply with the requirements relating to its solvency margin.
Clause 24 provides for the Bank to notify the applicant of its decision on an application for a licence.
Clauses 25 to 27 require notification to be given to the Bank before a controlling interest in a licensed insurer is acquired or obtained (for example, the insurer becomes a subsidiary) and before the insurer's corporate form is changed (for example, through demutualisation). The Bank must then consider whether it is still satisfied of the licensing matters. If the Bank is not so satisfied, the licence may be cancelled under clause 28 if, despite that fact, the controlling interest is acquired or obtained or the corporate form is changed.
Clauses 28 to 31 provide for the cancellation of a licence. The Bank may cancel a licence if the insurer has no liabilities under any contracts of insurance in respect of insurance business carried on by it in New Zealand and any of the following applies:
the insurer has asked the Bank to cancel its licence:
a controlling interest has been acquired or obtained or the insurer has changed its corporate form in the circumstances referred to in clauses 25 to 27:
the insurer has been deregistered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and has not been reregistered within 3 months:
the insurer does not or has ceased to carry on insurance business, or the insurer has been wound up or otherwise ceased to exist.
The provisions allow the Bank to direct an insurer to arrange, subject to the Bank’s approval, to assign its liabilities to 1 or more other licensed insurers in order to allow a cancellation to take place. A failure to comply with a direction is an offence with a penalty of a fine not exceeding $500,000.
Clauses 32 and 34 relate to the fit and proper policy that an insurer must have in respect of its directors and relevant officers. The fit and proper policy must—
take into account the matters set out in clause 34 (for example, whether a person has the qualifications and experience reasonably expected for the position, whether a court has made a finding that a person has engaged in serious wrongdoing, and whether a person has at any time been adjudged bankrupt or been convicted of an offence); and
include the processes to be undertaken in assessing whether a person is fit and proper to be appointed to, and hold, a position; and
provide for reassessments.
Clause 33 allows an insurer that is part of a group of insurers to rely on a policy that applies to the group.
Clause 35 requires an insurer to give the Bank a fit and proper certificate if a director or relevant officer is appointed and also if the Bank requires a certificate to be given for a specified director or relevant officer. A fit and proper certificate states that the director or officer is, in accordance with the fit and proper policy, a fit and proper person to hold the position.
Clause 36 allows the Bank to grant an exemption to an overseas insurer from the requirement to provide a fit and proper certificate in relation to new directors. See clause 228, which contains specific provisions relating to exemptions under the Bill.
Clauses 37 to 41 provide a power to the Bank to remove a person as a director or relevant officer if the Bank has reasonable grounds to believe that the person is not a fit and proper person to hold the position. The relevant person may appeal to the High Court against the decision, and appeal again to the Court of Appeal on a point of law.
Clauses 42 to 51 provide that an insurer must obtain the approval of the Bank before—
transferring all or part of the insurer's insurance business to another person (or, in the case of an overseas insurer, transferring all or part of its New Zealand business); or
amalgamating with another person.
In considering a request for approval, the Bank must have regard to the ability of the transferee, or the amalgamated entity, to comply with subparts 2 and 3, the interests of the policyholders of the insurers that are parties to the proposed transfer or amalgamation, and any other relevant matters.
A failure to comply with the requirement to obtain approval is an offence with a penalty of a fine not exceeding $1,000,000. Under clause 48, a failure to comply with any conditions of an approval is an offence with a penalty of a fine not exceeding $500,000.
The requirement to obtain approval is in addition to any other requirements for the transfer or amalgamation under any other enactment.
Clause 51 provides that an assignment of liabilities under contracts of insurance for the purposes of an approved transfer has effect as if the contracts were transferred by novation.
Clause 52 requires the Bank to publish its policies relating to how it acts, or proposes to act, in relation to licensing matters.
Clauses 53 to 59 allow the Bank to issue solvency standards. A solvency standard is a regulation for the purposes of the Regulations (Disallowance) Act 1989 but not for the purposes of the Acts and Regulations Publication Act 1989. The Bank must make standards available by making copies of them available for inspection at the head office of the Bank and on its Internet site, and for purchase at all reasonable times and at a reasonable price. This is considered more appropriate than publication in the Statutory Regulations series (the SR series), given that the standards contain highly technical and complex matters relevant to insurers, rather than obligations that are of general application or interest to the public. Publication of the standards on the Bank's Internet site, in particular, will ensure that the standards are readily available to all persons that are affected by the standards and to the public.
The Bank must consult with persons that will be substantially affected by the solvency standards before they are issued.
Solvency standards may prescribe—
matters relating to the solvency margin or margins that an insurer must maintain:
requirements relating to reports about the financial condition of insurers. This may involve, for example, requiring an insurer to provide to the Bank a report relating to its financial condition as at its balance date that is prepared by its actuary:
methods for valuing or estimating the assets and liabilities of an insurer:
the assets of an insurer that must be disregarded for the purposes of valuing or estimating the assets of an insurer:
any other matters relating to the assessment, or disclosure, of matters relating to an insurer's financial condition:
matters relating to actuarial reviews.
Clause 58 allows solvency standards to incorporate by reference such matters as technical standards, requirements, or practices of international or national organisations. Schedule 1 sets out some requirements relating to this material.
Clause 60 allows the Bank to exempt an overseas insurer from compliance with certain solvency standard requirements if the Bank is satisfied that the insurer is required to comply with equivalent overseas standards or requirements and the prudential supervision in respect of those overseas standards or requirements is satisfactory. See clause 228, which contains specific provisions relating to exemptions under the Bill.
Clauses 61 to 71 require most insurers to have a current financial strength rating that is given by a rating agency approved by the Bank under clause 62. The requirement does not apply to—
friendly societies or credit unions with an annual gross premium income less than an amount to be prescribed by regulations; or
insurers that exclusively carry on reinsurance business; or
captive insurers.
Clause 63 requires an insurer to notify the Bank of a change in its rating or of a credit watch warning.
Clause 64 requires insurers to disclose the rating to policyholders before entering into or renewing contracts of insurance. Under clause 65, if an insurer is not required to have a rating, the insurer must instead disclose this fact and the reason why it is not required to have a rating.
Clause 66 provides that a failure to comply with these disclosure obligations allows a policyholder to cancel the contract within 20 working days after entering into or renewing the contract.
Clause 67 requires disclosure of an insurer's rating on the insurer's Internet site.
Clause 68 requires advertisements that refer to the rating to also disclose certain other information relating to the rating.
Clause 69 requires an insurer to disclose a downgrading in its rating to policyholders under contracts of insurance that have a duration of more than 1 year.
Clause 70 prohibits an insurer from disclosing to policyholders, or advertising, ratings given by agencies that are not approved by the Bank.
Clause 71 provides that an insurer commits an offence if it fails to comply with any of clauses 63 to 70 and is liable to a fine not exceeding $500,000.
Clause 72 requires overseas insurers to disclose, in the manner prescribed in regulations, the nature and the extent of any overseas policyholder preference that may apply. An overseas policyholder preference is an overseas law or regulatory requirement that—
relates to the recognition and priorities of claims of creditors in the event of the insurer's insolvency; and
has the effect of being materially disadvantageous to New Zealand policyholders as compared to policyholders in the insurer's home jurisdiction.
Clauses 73 to 75 require insurers to have a risk management programme. The programme must—
set out the procedures that the insurer will use for the effective identification and management of various risks (for example, insurance risk and credit risk); and
describe the steps that the insurer will take to ensure that the programme remains current; and
be appropriate to the operations of the insurer.
The Bank will check that the programme complies with the various requirements before issuing a licence.
Clause 76 requires an insurer to have an appointed actuary. The actuary must be a fit and proper person under its fit and proper policy and a Fellow of the New Zealand Society of Actuaries Incorporated (or the holder of an equivalent qualification).
Clauses 77 to 79 require an insurer to ensure that the actuarial information in, or used in the preparation of, its financial statements is reviewed by its actuary. The actuary must give an opinion as to whether the statements comply with the solvency standards in respect of the actuarial information and whether the insurer is complying with its solvency margin obligations.
Clause 80 provides for the appointed actuary and other actuaries who are acting under the Bill to have access to information and explanations required to perform their duties as an actuary.
Clause 81 requires an insurer to—
send to the Bank financial statements and group financial statements prepared under the Financial Reporting Act 1993. The definition of issuer in the Financial Reporting Act 1993 has been amended in Schedule 3 to include all licensed insurers (with the effect that insurers will be required to comply with the preparation, audit, and registration requirements of an issuer under that Act); and
prepare half-yearly interim financial statements and send these to the Bank within 5 months of the end of the first half of each accounting period.
Clause 82 provides that a life insurer must have at least 1 statutory fund in respect of its life insurance business. A statutory fund is a fund that—
is established in the records of a life insurer; and
relates solely to the life insurance business of the life insurer or a particular part of that business.
Clause 83 contains an overview of the subpart.
Clause 84 defines the term life policy for the purposes of the Bill.
Clause 85 deals with contracts of insurance that contain both life insurance and other insurance. If the contract predominately relates to life insurance (that is, less than 25% of the premium relates to non-life insurance), the contract as a whole must be treated as a life policy. If the contract predominately relates to non-life insurance (that is, less than 25% of the premium relates to life insurance), the contract as a whole must be treated as a non-life contract. In other cases, the contract must be treated as 2 separate contracts (one being a life policy and the other being a non-life contract of insurance).
Clause 86 defines various other terms used in the subpart.
Clause 87 provides that in the investment, administration, and management of the assets of a statutory fund, a life insurer must comply with the subpart and give priority to the interests of policyholders of life policies referable to the fund.
Clause 88 requires a life insurer to notify the Bank when a statutory fund is established.
Clause 89 specifies what the assets of a statutory fund are at a particular time (for example, investments relating to the business of the fund).
Clause 90 requires a policy document to specify the statutory fund or funds to which the life policy is referable.
Clause 91 requires various amounts in respect of the business of the statutory fund to be credited to the fund (for example, premiums payable under life policies referable to the fund and income from the investment of the assets of the fund).
Clause 92 allows a life insurer to make a capital payment to a statutory fund.
Clause 93 provides that the assets of the statutory fund are only available for expenditure relating to the business of the fund (for example, to meet liabilities (including policy liabilities) or expenses incurred for the purposes of the business of the fund).
Clause 94 prohibits reinsurance between statutory funds.
Clauses 95 and 96 deal with the consequences of a transaction entered into in contravention of clause 93. Generally, the transaction is of no effect (unless the High Court declares that it is effective). However, if the transaction is included in a class that is specified by regulations, the transaction will not be ineffective (unless the High Court declares that it is of no effect).
Clause 97 contains a limit on investment performance guarantees.
Clause 98 relates to the investment of statutory funds. A life insurer may invest the assets in any way that is likely to further the business of the statutory fund subject to certain qualifications (for example, restrictions on investing the assets in associated persons of the insurer).
Clause 99 requires a life insurer to maintain records of its investment of the assets of a statutory fund in its related parties.
Clause 100 contains restrictions on the transfer of assets between statutory funds.
Clause 101 contains a restriction on the restructure or termination of a statutory fund.
Clause 102 allows regulations to be made for the purpose of specifying what constitutes the income and outgoings of a statutory fund.
Clause 103 imposes a duty on the directors of a life insurer to take reasonable care, and use due diligence, to see that, in the investment, administration, and management of the assets of the fund, the life insurer complies with this subpart and gives priority to the interests of policyholders of life policies referable to the fund. A director that fails to comply with the duty can be liable for any resulting loss.
Clauses 104 to 106 allow the Bank to give a written notice requiring a life insurer to take specified action to remedy a failure to comply with the subpart. The directors of the insurer may be liable for any resulting loss if the insurer fails to comply with the notice. The Bank is given the power to sue in the name of the life insurer to recover the amounts that a director is liable to pay.
Clauses 107 and 108 provide for the restructure and termination of statutory funds with the approval of the Bank.
Clause 109 contains requirements relating to when a life policy that is referable to a statutory fund becomes referable to another statutory fund or when a policy that is referable to 1 statutory fund becomes referable to a further statutory fund or funds.
Clauses 110 to 113—
require an insurer to allocate the operating profit or loss of a category of business of the fund in the manner prescribed by regulations:
contain requirements relating to the allocation of capital payments made to a statutory fund:
require an insurer to distribute retained profits and shareholders' and members' capital in the manner prescribed by regulations.
The main object of these provisions is to ensure that profits and losses are dealt with in a manner that protects the interests of policyholders and is consistent with prudent management of the fund.
Clause 114 applies to a liquidation or other winding up of a life insurer. After discharging various liquidation fees and expenses, the assets of a statutory fund are to be applied—
first in discharge of the policy liabilities of the insurer referable to the fund:
then in discharge of other liabilities that are referable to the business of the fund:
then as the High Court directs.
Clause 115 provides that if a life insurer contravenes this subpart and the contravention causes a loss to a statutory fund and the insurer is in liquidation, the directors are liable for the loss.
Clause 116 provides that a life insurer commits an offence if it fails to comply with this subpart and is liable to a fine not exceeding $500,000.
Clause 117 allows the Bank to exempt an overseas insurer from compliance with this subpart if it is required to comply with statutory-fund-type arrangements in its home jurisdiction, there is no overseas policyholder preference in respect of payments out of the fund or arrangement, and the level of prudential supervision is satisfactory. See clause 228, which contains specific provisions relating to exemptions under the Bill.
Clause 118 requires the Bank to undertake prudential supervision of licensed insurers.
Clauses 119 to 122 empower the Bank to require insurers, associated persons of insurers, and certain other persons to supply to the Bank information, data, or forecasts for the purposes of prudential supervision (for example, information about matters relating to the business, operation, or management of the insurer). Under clause 123, the Bank can require the information, data, or forecasts to be audited or reviewed.
Clause 124 empowers the Bank to require an insurer to supply the Bank with a report or reports, prepared by an approved person, on any matters relating to the business, operation, or management of the insurer or an associated person.
Clauses 125 to 127 require auditors and actuaries to disclose to the Bank information relating to the affairs of an insurer or associated person obtained in the course of holding the office of auditor or actuary if—
the insurer or associated person is insolvent or is likely to become insolvent, is in serious financial difficulties, or is or has been operating fraudulently or recklessly; and
the disclosure of that information is likely to assist, or be relevant to, the exercise by the Bank of its powers under the Bill.
Auditors and actuaries are protected from civil, criminal, and disciplinary action arising from the disclosure in good faith of information to the Bank.
Clause 128 empowers the Bank to require the supply of information or data or to appoint an investigator if it has reasonable cause to suspect that—
an insurer is not maintaining a solvency margin (as required by the conditions of its licence and the solvency standards); or
the business of an insurer has not been, or is not being, conducted in a prudent manner; or
an insurer has been or is operating fraudulently or recklessly; or
an insurer or an associated person has failed to comply with any requirement to supply information, data, or forecasts; or
an insurer has failed, or is failing, to comply with any other requirement imposed by or under the Bill or the regulations.
Clause 129 allows an investigator to require the supply of information or data, and to inspect documents, relating to the business, operation, or management of an insurer or associated person.
Clause 130 allows an investigator to enter and search a place for the purposes of an investigation if the occupier consents or the investigator obtains a warrant. Schedule 2 contains various provisions relating to this power.
Clause 131 contains certain offences relating to investigations (for example, hindering, obstructing, or delaying an investigator in the carrying out of an investigation). The penalty, in the case of an individual, is imprisonment for a term not exceeding 3 months or a fine not exceeding $200,000 (or both) and, in the case of a body corporate, is a fine not exceeding $500,000.
Clause 132 relates to proceedings about the lawfulness of the exercise of various investigation powers.
Clauses 133 to 135 contain provisions relating to protecting the confidentiality of information, data, and forecasts supplied or disclosed to, or obtained by, the Bank or an investigator for the purposes of, or in connection with the exercise of powers conferred by, the Bill.
This subpart empowers the Bank to direct an insurer to prepare a recovery plan if it has reasonable grounds to believe that—
the insurer is not maintaining a solvency margin; or
the business of an insurer has not been, or is not being, conducted in a prudent manner; or
an insurer has failed, or is failing, to comply with any other requirement imposed by or under the Bill or the regulations.
The recovery plan must—
set out the actions that the insurer will take to effectively address the matters that caused the Bank to give the direction; and
be provided to the Bank for approval.
After approval, the insurer must take all practicable steps to comply with the plan.
A failure to comply with the various requirements is an offence punishable by a fine not exceeding $500,000.
Clause 141 empowers the Bank to give a direction to an insurer if it has reasonable grounds to believe that—
an insurer is not maintaining a solvency margin; or
the business of an insurer has not been, or is not being, conducted in a prudent manner; or
an insurer, or a director or relevant officer, has failed, or is failing, to comply with any other requirement imposed by or under the Bill or the regulations; or
the governance structure of the insurer has significantly changed since its licence was issued; or
the insurer is an overseas insurer in relation to which an overseas prudential supervisor has taken, or is taking, regulatory action; or
the insurer is an overseas insurer and the overseas law, requirements, or prudential supervision that applies to the insurer has significantly changed since its licence was issued.
Clause 142 provides that the directions may require the insurer to—
consult with the Bank:
cease entering into any new contracts of insurance:
carry on, or cease to carry on, its business, or any part of its business, in accordance with the direction:
take the action that is specified in the direction to address a failure, or potential failure, to comply with any requirement imposed by or under the Bill or the regulations:
ensure that any officer or employee ceases to take part in the management or conduct of its business except with the permission of the Bank:
take specified action to address any financial difficulties.
Clause 143 empowers the Bank to give a direction to an associated person of an insurer if it has reasonable grounds to believe that—
the person, or a director or chief executive officer, has failed, or is failing, to comply with any requirement imposed by or under the Bill or the regulations; or
the circumstances of the person are such as to be prejudicial to the solvency of the insurer or its ability to comply with the Bill or the regulations, or the affairs of the person are being conducted in a manner that is so prejudicial.
Clause 144 provides that the directions may require the associated person to—
consult with the Bank:
take the action that is specified in the direction to address a failure, or potential failure, to comply with any requirement imposed by or under the Bill or the regulations:
ensure that any officer or employee ceases to take part in the management or conduct of its business except with the permission of the Bank:
take specified action to address any financial difficulties.
Clause 145 requires a direction to state the grounds on which it is given.
Clause 146 provides that it is an offence to fail to comply with a direction or, being an officer or employee, to hinder or prevent the insurer or associated person from giving effect to a direction. In the case of an individual, the penalty is imprisonment for a term not exceeding 3 months or a fine not exceeding $200,000 (or both). In the case of a body corporate, the penalty is a fine not exceeding $500,000.
Clause 147 provides that if the circumstances for giving a direction exist, the Bank may—
remove or replace a director, an auditor, or an actuary of an insurer or of an associated person; or
appoint a person as a director, an auditor, or an actuary of an insurer or of an associated person.
Clause 148 provides that it is an offence to disclose that a direction has been given under subpart 1 or this subpart or that a notice has been given under clause 147. In the case of an individual, the penalty is imprisonment for a term not exceeding 3 months or a fine not exceeding $200,000 (or both). In the case of a body corporate, the penalty is a fine not exceeding $500,000.
Clause 149 empowers the Bank to apply to the High Court for the appointment of a liquidator of—
a licensed insurer (on the grounds that the insurer is unable to pay its debts, the insurer is failing to maintain a solvency margin, the insurer has persistently or seriously failed to comply with any requirement imposed by or under the Bill or the regulations, or that it is just and equitable that the insurer is put into liquidation):
a person that is carrying on insurance business in New Zealand without a licence.
Clause 150 allows the High Court to reduce the value of an insurer's contracts of insurance if it is satisfied that 1 or more of the grounds specified in clause 149 apply.
Clause 151 empowers the Bank to apply to the High Court to put a licensed insurer into voluntary administration (on the ground of failing to maintain a solvency margin or on the grounds specified in section 239L of the Companies Act 1993).
Clause 152 provides that the Bank's approval is required before a licensed insurer—
is put into liquidation pursuant to a special resolution of its shareholders or by the insurer's board:
is put into voluntary administration by the insurer's board.
Clause 153 allows the Bank to—
make certain applications to the High Court in respect of insurers that are in voluntary administration, subject to a deed of company arrangement, or in liquidation (for example, applications to the court relating to the supervision of the administrator, deed administrator, or liquidator):
appear and be heard in relation to High Court applications made by other persons (for example, applications to appoint a liquidator or an administrator for an insurer).
Clause 154 provides for the Bank to appear and be heard in respect of High Court applications relating to arrangements, amalgamations, and compromises under the Companies Act 1993.
Clause 155 provides for the Bank to be sent copies of High Court applications made under Parts 14 to 16 of the Companies Act 1993 in respect of licensed insurers. (Parts 14 to 16 relate to compromises with creditors, the approval of arrangements, amalgamations, and compromises by the High Court, voluntary administration, and liquidations.)
Clause 156 provides that the Bank must be sent copies of certain documents prepared under the Companies Act 1993 in respect of a licensed insurer that is in voluntary administration, subject to a deed of company arrangement, or in liquidation (for example, an administrator's report of misconduct, notice of the termination of a deed of company arrangement, and the accounts of an administrator or a liquidator).
Clause 157 provides for the attendance of a representative of the Bank at certain meetings for a licensed insurer that is in voluntary administration, subject to a deed of company arrangement, or in liquidation.
Clause 158 allows the Bank to require the liquidator of a licensed insurer to call a meeting of creditors or shareholders to vote on a proposal that a liquidation committee be appointed to act with the liquidator.
Clause 159 provides for the High Court to reduce the value of a licensed insurer's contracts of insurance if an application has been made—
to appoint a liquidator or an administrator for the insurer; or
by a liquidator or an administrator of the insurer.
Clause 160 allows the High Court to require an actuarial report to be prepared for the purposes of clause 159.
Clause 161 requires the liquidator of a life insurer to carry on its business so far as it consists of continuing the insurer’s life policies with a view to that part of the business being transferred as a going concern to another insurer.
Clauses 162 to 165 provide for the liquidator or deed administrator of a licensed insurer to apply to the High Court for the approval of a scheme under which all or part of the insurer's insurance business is transferred to another person. If the scheme is approved, it becomes binding on all persons.
Clause 166 allows the Bank to apply to the High Court for the court to give directions to the liquidator, administrator, or deed administrator of a licensed insurer.
Clause 167 requires a liquidator of an insurer, and permits a deed administrator of an insurer, to value the liability of the insurer to each policyholder under its contracts of insurance. The amount of the liability of the insurer, as determined by the liquidator or deed administrator, is binding on a policyholder unless the policyholder appeals to the High Court against the determination.
Clauses 168 to 172 provide that the Governor-General may, by Order in Council, on the advice of the Minister given in accordance with a recommendation of the Bank,—
declare that an insurer is subject to statutory management; and
declare that an associated person of an insurer is subject to statutory management.
Generally, every subsidiary of an insurer declared to be subject to statutory management is also subject to statutory management.
Under clause 171, the Bank may make a recommendation in relation to an insurer only if it is satisfied on reasonable grounds—
that the failure of the insurer may cause significant damage to the financial system or the economy and that 1 or more of the following apply:
the insurer is not maintaining a solvency margin:
the business of the insurer has not been, or is not being, conducted in a prudent manner:
the insurer, or a director or relevant officer, has failed, or is failing, to comply with any other requirement imposed by or under the Bill or the regulations:
the governance structure of the insurer has significantly changed since its licence was issued:
the insurer is an overseas insurer in relation to which an overseas prudential supervisor has taken, or is taking, regulatory action:
the insurer is an overseas insurer and the overseas law, requirements, or prudential supervision that applies to the insurer has significantly changed since its licence was issued; or
that the insurer is, or may be, operating fraudulently or recklessly, and that it is desirable that the insurer be declared to be subject to statutory management.
Under clause 172, the Bank may make a recommendation in respect of an associated person of an insurer if it is satisfied on reasonable grounds that—
the person, or a director or chief executive officer, has failed, or is failing, to comply with any requirement imposed by or under the Bill or the regulations; or
the circumstances of the person are such as to be prejudicial to the solvency of the insurer or its ability to comply with the Bill or the regulations, or the affairs of the person are being conducted in a manner that is so prejudicial; or
the business and affairs of the insurer are so closely connected with the associated person that the statutory manager would be unable to exercise effectively the powers conferred by this subpart in relation to the insurer unless the statutory manager is appointed as statutory manager of the associated person; or
the associated person is, or may be, operating fraudulently or recklessly in a manner prejudicial to the solvency of the insurer or its ability to comply with the Bill or the regulations, and that it is desirable that the person be declared to be subject to statutory management.
However, the Bank must not make a recommendation in respect of an insurer or associated person unless it is satisfied on reasonable grounds that the public interest, the financial system or economy of New Zealand, or the relevant policyholders cannot be adequately protected under the other provisions of the Bill or under the Companies Act 1993.
Clause 173 requires the Bank to give notice of its recommendation.
Clause 174 relates to the application of this subpart to joint statutory managers, associated persons, and subsidiaries.
Clause 175 provides for the continuation of statutory management of companies that have been restored to the New Zealand register under the Companies Act 1993.
Clauses 176 and 177 provide that the statutory manager must,—
in exercising the powers conferred by this subpart, have regard to the purposes of the Bill, the relevant principles set out in the Bill, and the Bank's advice; and
consult with the Bank and provide the reports that the Bank may require; and
comply with the Bank's directions.
Clause 178 provides that various statutory management provisions in the Corporations (Investigation and Management) Act 1989 apply for the purposes of this subpart.
Clause 179 provides that this Bill does not limit the Corporations (Investigation and Management) Act 1989. Therefore, insurers can still be investigated, declared to be subject to statutory management, or declared to be at risk under that Act.
Clause 180 provides that a statutory manager has certain powers conferred on a liquidator under the Companies Act 1993 to obtain documents or information.
Clause 181 requires a statutory manager to obtain the Bank's approval before selling certain assets (for example, the business of the insurer or a substantial part of it).
Clause 182 provides that if the Bank has approved a sale, further permission or consent under any enactment or agreement is not required.
Clauses 183 to 186 relate to overseas licensed insurers. Under the provisions, the Governor-General may, by Order in Council, on the advice of the Minister given in accordance with a recommendation of the Bank, declare that the whole or any part of the overseas insurer's New Zealand business will vest in a company formed by the statutory manager.
Clause 187 provides that—
the statutory manager does not incur personal liability for any obligations incurred in the course of his or her duties:
in the liquidation of a person in statutory management, all amounts required to satisfy obligations incurred by the statutory manager must be paid in priority to all other debts.
Clause 188 permits a statutory manager to value the liability of the insurer to each policyholder under its contracts of insurance. The amount of the liability of the insurer, as determined by the manager, is binding on each policyholder.
Clause 189 provides for the value of contracts of insurance to be reduced by Order in Council.
Clauses 190 to 192 provide for the statutory manager to appoint and remove an auditor and an actuary.
Clauses 193 and 194 relate to the statutory manager preparing financial statements and annual reports.
Clauses 195 to 197 provide for the termination of statutory management by Order in Council or on the appointment of a liquidator.
Clauses 198 to 208 contain special provisions relating to Lloyd's (being a society of that name incorporated by the Imperial Act known as the Lloyd's Act 1871). In the case of Lloyd's, insurance is underwritten by its individual members.
These provisions allow Lloyd's to apply for a licence on behalf of all of its members. Lloyd's underwriters must not carry on insurance business in New Zealand unless Lloyd's obtains a licence.
If a licence is issued, its members—
may carry on insurance business in New Zealand and are each treated as being a licensed insurer:
must comply with the conditions of the licence, the Lloyd's fit and proper policy, and the Lloyd's risk management programme.
Under clause 205, the Bank may direct Lloyd's underwriters to cease entering into, or renewing, contracts of insurance if the Bank has reasonable grounds to believe that there has been a substantial change in the United Kingdom legislation that applies to Lloyd's or in the prudential supervision that applies to Lloyd's in the United Kingdom.
The various requirements of the Bill (for example, those relating to fit and proper requirements and risk management programmes) are modified to fit the particular circumstances of Lloyd's.
Clauses 209 and 210 provide for the Bank to authorise an overseas prudential supervisor to do the following for the purposes of its supervisory functions:
conduct an inspection of any overseas licensed insurer:
require any overseas licensed insurer to supply information, data, or forecasts.
Clause 211 provides for an offence of making false or misleading declarations or representations for any purpose relating to the Bill. In the case of an individual, the penalty is a fine not exceeding $200,000. In the case of a body corporate, the penalty is a fine not exceeding $500,000.
Clause 212 provides that a director of a body corporate that is convicted of an offence may also be guilty of an offence if—
the offence took place with his or her authority, permission, or consent; or
he or she knew, or could reasonably be expected to have known, that the offence was to be or was being committed and failed to take reasonable steps to prevent or stop it.
Clause 213 provides that in any prosecution under this Bill, it is a defence if the person proves that—
the failure to comply with the Bill was because of the act or omission of another person, or some other cause beyond the person's control; and
the person took reasonable precautions and exercised due diligence to avoid the failure.
Clauses 214 and 215—
prohibit New Zealand persons and overseas companies from falsely holding out overseas that they are regulated by New Zealand law:
prohibit persons that do not carry on insurance business from using certain words (such as “insurance”
) in their names.
Clause 216 provides that the prohibition does not apply in certain circumstances (for example, insurance intermediaries and insurance industry associations).
Clause 217 provides that if an insurer is a subsidiary, its constitution must not permit a director of the insurer to act in the best interests of the insurer's holding entity rather than in the best interests of the insurer.
Clauses 218 to 224 provide a power to a District Court to ban a person from participating in insurance business (for example, being a director, manager, shareholder, or employee of an insurer) if the person—
has, in connection with an insurance business, engaged in conduct that constitutes serious wrongdoing and the person is not a fit and proper person to participate in insurance business; or
as a director of an insurer, has persistently or seriously failed to comply with the Bill or the regulations; or
is a director of an insurer, being an insurer that has persistently or seriously failed to comply with the Bill or the regulations, and the person has persistently failed to take reasonable steps to prevent or stop that failure; or
is prohibited under overseas law from participating in an insurance business.
A person against whom a banning order is made may appeal to the High Court. There may be a further appeal to the Court of Appeal on a question of law.
The Bank is required to keep a public register of banned persons.
It is an offence to participate in insurance business in breach of a banning order. In the case of an individual, the penalty is imprisonment for a term not exceeding 3 months or a fine not exceeding $200,000 (or both). In the case of a body corporate, the penalty is a fine not exceeding $1,000,000.
Clause 225 provides for the notice and service of documents under the Bill.
Clause 226 protects the Bank, statutory managers, officers and employees and directors of the Bank, and investigators from being liable for acts or omissions done or omitted to be done under the Bill in good faith.
Clause 227 provides a Crown indemnity to the Bank and the persons referred to in clause 226.
Clause 228 contains general provisions relating to exemptions. The provision requires the Bank to make exemptions available at its head office and on its Internet site and for purchase at a reasonable price.
The clause clarifies that the exemptions are not regulations for the purposes of the Regulations (Disallowance) Act 1989 and the Acts and Regulations Publication Act 1989. The exemptions are administrative in character (rather than legislative). The Bank can only give exemptions to individual insurers or persons (rather than a class) and the exemptions may be given only on the application of specific criteria specified in the Bill (including the purposes and principles in clauses 3 and 4). The exemptions are limited to specific obligations and in most cases the exemptions relate only to overseas insurers that are subject to equivalent obligations, and equivalent supervision, in their home jurisdiction. The exemptions are not of general application or interest to the public and, accordingly, publication on the Bank's Internet site is more appropriate than publication in the SR series.
Clause 229 relates to regulations that may be made for the purposes of the Bill.
Clauses 230 and 231 repeal—
Parts 1 and 1A, sections 78 to 79A, and related Schedules of the Life Insurance Act 1908:
Insurance Companies' Deposits Act 1953:
Insurance Companies (Ratings and Inspections) Act 1994:
Mutual Insurance Act 1955.
Clause 232 relates to amendments to other enactments.
Clauses 233 to 237 allow the Bank to issue provisional licences to insurers that are carrying on business before commencement. There are 2 types of provisional licence—
a provisional licence that is issued to an insurer pending the consideration of its application for a full licence. The licence must be issued provided that the insurer has taken reasonable steps to make a proper application:
a provisional licence for insurers that intend to leave the market.
A provisional licence remains in force for up to 3 years (but ceases to be in force earlier if, for example, a full licence is issued or the insurer ceases to carry on insurance business in New Zealand).
While the provisional licence is in force, the insurer is required to comply with certain requirements imposed under the Bill only to the extent required by the conditions of the licence. However, the conditions will require a provisional licence holder to take steps to bring the licence holder into full compliance with the requirements of the Bill as soon as is practicable (unless the insurer intends to leave the market).
Clauses 238 and 239 provide for Public Trust to return the deposits that have been made by insurers under the Insurance Companies' Deposits Act 1953 or the Life Insurance Act 1908 when a full licence has been issued (such that the insurer is fully subject to the new prudential supervision system under the Bill).
This regulatory impact statement is a short executive summary that builds upon more comprehensive regulatory impact statements that accompanied Cabinet papers approved in December 2007 and May 2008. The following links access the full text of those documents:
http://www.rbnz.govt.nz/finstab/nbdt/insurance/3197254.pdf:
http://www.rbnz.govt.nz/finstab/nbdt/insurance/3400502.pdf.
Copies of those regulatory impact statements are also available on The Treasury’s website at: http://www.treasury.govt.nz/publications/informationreleases/ris.
Insurance provides financial protection for private individuals, businesses, and other entities against risks that can have catastrophic impacts for the people concerned if they are not protected. The financial stability of the insurers that provide this protection is central to a sound insurance sector. Due to information complexities that are especially material, consumers are poorly placed to monitor the financial strength of insurers, both on their own and collectively.
New Zealand does not have a framework for the prudential regulation and supervision of insurers. Current insurance legislation is outdated and inconsistent in its application across the diversity of the New Zealand insurance market. Although the New Zealand insurance sector is not generally in distress, recent global events have demonstrated the vulnerability of the financial sector as a whole.
The Bill will deliver an effective framework of prudential regulation and supervision appropriate to the New Zealand insurance sector. The approach will be generally aligned to internationally accepted insurance regulatory practice and will recognise the diversity of the New Zealand insurance market.
The overall regulatory approach has been the subject of extensive public consultation in bringing it to this point.
The main areas of regulation covered by the Bill, and associated benefits, are as follows:
licensing ensures a consistent set of minimum standards is met by all insurers. The standards must be obtained to receive a licence and once a licence is granted an insurer is able to be monitored against those standards. This reduces the need for consumers to make complex inquiries regarding an insurer’s financial strength and other indicators:
risk management places responsibility on insurers to fully identify key risks associated with their businesses and to prepare a risk management programme that adequately addresses these risks. The Bill provides the areas the programme should cover but leaves it to insurers to formulate the detail and implementation of the plan:
guided by standards detailed in the Bill, insurers will be required to consider the qualifications, background, and experience of key personnel and to consider any matters indicating unsuitability for designated roles:
the Reserve Bank may remove persons from designated roles when fit and proper requirements have not been met:
the Reserve Bank’s role in reviewing and approving programmes ensures that minimum standards can be attained across the industry:
the combination of enhanced fit and proper assessment by insurers and powers to remove held by the Reserve Bank limit the possibility of unsuitable people holding positions of influence in insurers:
statutory fund separation strengthens and mandates universal application of a protection already in place for some life insurance policyholders and includes other long-term insurances, which share the long-term liability profile of life insurance, within the statutory fund regime:
clear rules are provided for in the legislation allowing insurers to implement the requirements without significant structural changes:
appropriate standards encourage insurers to maintain strong financial positions, and financial information and solvency assessments are reported consistently across different insurers:
financial information is made available to the Reserve Bank and potentially to the public (those who value it) for monitoring insurers and comparing insurer financial performance:
credit ratings provide the public and the Reserve Bank with an independent and straightforward indication of insurer strength consistently applied across the whole sector. A rating provides a simple metric that consumers can substitute for the detailed examination of financial accounts:
consistent regulatory discipline replaces the limitations of inconsistent market discipline:
the Bank has a range of powers to take remedial action in the event of insurer distress or failure, thus assisting in the protection of the policyholder position.
The new insurance prudential supervision regime will inevitably generate transitional and ongoing compliance costs that are associated with the introduction of any new regulatory regime into a largely unregulated industry. However, the overall marginal cost to industry of the regime is mitigated by its relatively light-handed and comparatively non-prescriptive approach, plus the fact that foreign-owned insurers operating in New Zealand are already subject to a degree of regulation by their home country supervisors. The new costs will be largely incurred at the transition to the new regime. The steady state is not expected to materially increase compliance costs over the status quo for insurers that comply with the regulations.
The regime has generally been designed around a self-managing approach. For instance, insurers are expected to devise and adhere to their own fit and proper and risk management policies, subject to Bank oversight. Rules for solvency and statutory funds are clearly laid out in the law for insurers to follow. Alternative approaches, such as prescribed risk management procedures or pre-approval by the Bank of all director appointments, have been rejected. For compliant insurers, ongoing contact with the Bank is expected to be minimal.
The detailed costs and risks of the regulatory regime are set out as follows:
insurers will incur a cost in applying to be licensed under the regime. This includes the cost of familiarisation with the new regulatory requirements, self-assessment against the regime, preparing an application, dealing with the Bank as supervisor, and making any organisational and business changes needed to qualify for a licence:
the proposed regulatory and supervisory requirements will impose additional compliance costs on insurers, including the need to maintain structures to verify compliance with requirements, to maintain capital in line with minimum standards, and to report regularly to the Bank. These costs are not expected to be significant relative to insurers’ revenue and profits and are not likely to affect the ability of insurers to continue to provide insurance services at current levels, although the impact on small insurers may be proportionately greater than for large insurers. Once insurers are licensed, these costs are likely to be routine costs of doing business, and not to represent a material increase in costs over the status quo:
compliance with capital adequacy and solvency requirements may place constraints on insurers’ business operations to some degree. These requirements and the associated costs are generally aligned to internationally accepted prudent practice for the insurance industry:
the regulatory reporting and public disclosure requirements will impose some additional costs on insurers beyond existing levels, but these are not expected to be significant relative to insurer revenue and existing public reporting requirements. The costs will be higher for those insurers that do not currently have to comply with the Financial Reporting Act 1993:
the proposed mandatory requirement for insurers to have a financial strength rating will impose additional costs on those insurers that are not currently rated. Ratings are already mandatory for most general insurers and a number of other insurers have voluntary financial strength ratings. The annual cost to insurers of having a rating is expected to be in the range of $30,000 to $40,000. There will be indirect costs associated with ratings, such as management time and the provision of information. In some cases, the costs of ratings will be absorbed by insurance providers, while in other cases some or all of the costs might be passed on to policyholders. In order to minimise costs for those who can least afford it, the Bill proposes an exemption for certain very small insurers with annual gross premium below a prescribed threshold:
the mandatory ratings requirement and its associated disclosure requirement could place commercial pressure on some insurers and lead to some insurers merging with others or leaving the sector. This is not considered a negative outcome since highlighting relative financial strength will encourage a more soundly managed insurance sector:
the Bank has the power to require information from insurers, which the Bank can require to be audited, at the insurer’s expense. There will be costs incurred by insurers, on a case-by-case basis, who breach regulatory requirements. In both cases, the Bank will adopt a risk-based approach to supervision, meaning only non-compliant or at-risk insurers will face the specific costs.
Licensing requirements may represent a barrier to entry for potential new market participants.
Increased supervision may reduce market discipline on insurers and increase moral hazard.
The fiscal costs for the Reserve Bank associated with the insurance proposals are estimated to be in the range of $2.5 million to $4 million per annum on an ongoing basis, once the prudential regulation proposals for insurance have been fully implemented. This funding will be obtained through the Bank’s funding agreement.
The Bank will not be charging a licensing fee nor fees for the exercise of its regulatory functions during the first 3 years after the Bill's enactment.
It is considered that the benefits of the proposals contained within the regulatory regime outweigh the costs.
