The need to enable the insurance sector to perform better, fulfil its obligations and most important of all, insure itself against insolvency are among the finer aspects of a new regime mulled by the Reserve Bank of New Zealand (RBI).
The stress placed on insurers and reinsurers worldwide by the global financial crisis of 2008 and after years in general and the claims arising out of the Christchurch earthquakes and aftershocks since 2011 in particular, have made it imperative for the RBNZ to revisit the insurance sector.
The Insurance Prudential Supervision Act 2010, although initiated before the earthquakes, was an essential tool to augment the financial strength of the insurance sector in New Zealand and improve its ability to protect the interests of the insured.
RBNZ Head of Prudential Supervision Toby Fiennes said that regulation of the insurance sector is consistent with the Bank’s approach to regulation and supervision in other sectors.
No guarantees
“As with the banking and non-bank deposit taking sector, there is no Government or Bank guarantee against the failure of a licensed insurer. The prudential requirements of the Act significantly reduce the likelihood of failure and provide the Bank with appropriate tools to manage financial distress of an insurer,” he said, speaking at the Australasian General Insurance Exchange Conference held in Sydney, Australia on March 19.
He however cautioned that there was no such thing as a ‘zero failure regime, or a ‘Reserve Bank or Government Guarantee’ against failure.’
Non-intrusive Act
According to Mr Fiennes, the Act is comparatively non-intrusive in its application and places strong emphasis on director and senior officer obligations, as well as on accountability and market discipline.
“Our purpose is to promote the maintenance of a sound and efficient insurance sector; and promote public confidence in the insurance sector establishing a system for licensing insurers; imposing prudential requirements on insurers; providing for the supervision by the Bank of compliance with those requirements; and conferring certain powers on the Bank to act in respect of insurers in financial distress or other difficulties,” he said.
Stating that insurers are an integral part of the financial system, he said that insurers do not often consider the potential implications that their solvency position would have on the wider financial system.
The failure of a major insurer could potentially damage the soundness of the rest of the New Zealand insurance sector and possibly the wider financial system, he said.
“Certainly, confidence in the insurance sector would be lessened. Policyholders need information to understand the likelihood that their insurer will be able to pay claims. Typically, policyholders do not have the financial experience to appraise insurers’ published financial statements and make an informed assessment of an insurer’s solvency position,” Mr Fiennes said.
The new Act makes it mandatory for insurance companies to disclose information on their solvency, financial strength and similar issues, to help policyholders make informed decisions.
Advisers and commentators play a critical role in helping policyholders interpret the information, Mr Fiennes said.
Triple role
“We are charged with promoting a sound and efficient insurance sector, one in which people have confidence. Our approach is based on self-discipline, market discipline and regulatory discipline,” he said.
Responsibility for a firm’s internal risk management and governance systems rests firmly and primarily with the insurer’s board, senior managers and its appointed actuary, he said and added that RBNZ seeks to enhance self-discipline, setting governance requirements and emphasising independent scrutiny by the Board of Directors.
“Investors and policyholders are responsible for monitoring financial risk and performance of financial institutions, and influence their risk-related behaviour. We mandate various disclosure requirements to support market discipline.
“Our risk-based approach involves imposing certain rules and mandatory requirements in areas such as solvency, and general requirements in areas such as risk management and governance. The approach is risk based in that we will set tougher requirements, and/or exercise more intensive supervision where we perceive the risks to our objectives to be higher,” he said.
