New Zealand: Financial Sector Assessment Program
Detailed Assessment of Observance-Insurance Core Principles

This paper presents an assessment of the Observance of Insurance Core Principles in New Zealand. Observance of these principles in New Zealand falls significantly short. In some areas, the implementation of initiatives that would improve observance is incomplete. Supervisory risk assessment and enhancement of regulatory reporting by insurers are limited, which compromises effective off-site supervision, macroprudential analysis, and publication of aggregate information on the market. The Reserve Bank of New Zealand should focus in regulation and supervisory work on setting standards on corporate governance, risk management, and internal controls. It should assess risk in these areas to promote the effectiveness of insurers’ governance.

Abstract

This paper presents an assessment of the Observance of Insurance Core Principles in New Zealand. Observance of these principles in New Zealand falls significantly short. In some areas, the implementation of initiatives that would improve observance is incomplete. Supervisory risk assessment and enhancement of regulatory reporting by insurers are limited, which compromises effective off-site supervision, macroprudential analysis, and publication of aggregate information on the market. The Reserve Bank of New Zealand should focus in regulation and supervisory work on setting standards on corporate governance, risk management, and internal controls. It should assess risk in these areas to promote the effectiveness of insurers’ governance.

Executive Summary

The insurance sector is small, increasingly focused on non-life business, and characterized by high concentration and extensive foreign, particularly Australian, participation. The non-life sector has recovered strongly from heavy losses due to the Canterbury earthquakes in 2010–2011, but growth in life insurance is weak and product range limited, as savings have migrated from insurance to investment products. High rates of commission paid by insurers to intermediaries may also be hampering growth. The market is dominated by the branches and subsidiaries of Australian groups, the largest accounting for almost half of total non-life premium income. Natural catastrophe risks predominate, although losses on residential property insurance are shared, within limits, with the government-backed Earthquake Commission (EQC) under a system that has generally performed well through the Canterbury crisis. The risks are also mitigated by reinsurance programs. Another government body, the Accident Compensation Corporation (ACC), covers most personal accident losses, reducing the market for private cover.

The regulation of insurance, both prudential and market conduct, has come recently to New Zealand and is still developing. The Reserve Bank of New Zealand’s (RBNZ) prudential supervision responsibilities were extended to insurance in 2010. It brought to the task its three pillar approach to regulation, which emphasizes self-discipline (by directors and senior management), market discipline (through disclosure) as well as regulatory intervention, to bolster the other two pillars and as otherwise required. The RBNZ seeks to limit as far as possible the moral hazard associated with regulation. Conduct regulation was enhanced in relation to financial advice, though mainly on investment products, in 2008 and the Financial Markets Authority (FMA) has since been given broader powers over financial products and markets, including insurance. Overall, regulation of insurance continues to develop, taking into account the lessons of licensing and the experience of conduct regulation of the wider market.

The assessment has identified a significant number of shortfalls in observance of the Insurance Core Principles (ICP). In some areas the implementation of initiatives that would improve observance is incomplete, including supervisory risk assessment and enhancement of regulatory reporting by insurers, the limitations of which compromise effective off-site supervision, macroprudential analysis and publication of aggregate information on the market. In other cases, the shortfall reflects the RBNZ’s approach to regulation, including the limited scope of its on-site supervisory work and mainly self-imposed limits on the resources it devotes to insurance regulation. There are also shortfalls where enhanced regulation, as recommended in this assessment, would be supportive of the RBNZ’s general approach, including extended disclosure obligations on insurers. The RBNZ should focus more, in regulation and supervisory work, on setting standards on corporate governance, risk management and internal controls and undertaking risk assessment in these areas to promote the effectiveness of insurers’ governance in practice.

The overall regulatory framework for prudential regulation is well-developed, though there is scope to extend the RBNZ’s powers. The RBNZ has extensive powers in relation to licensing, information-gathering, and sharing of information with other authorities, as well as supervision and enforcement. Its powers are focused on legal entities, although the demands of group supervision are limited given the market structure. The RBNZ’s effectiveness would be strengthened by supplementing its existing powers to impose binding standards in relation to insurer solvency and fit-and-proper requirements with powers to cover all areas of prudential regulation, and potentially also with powers to impose administrative sanctions. The framework for licensing of overseas insurers (branches) could be strengthened, to ensure the RBNZ takes a robust case-by-case view of the equivalence of foreign regulatory regimes.

The authorities should consider a broadening of the RBNZ’s mandate for policyholder protection. The RBNZ is already mandated to take into account policyholders’ interests in key parts of its work, including crisis management, although its objectives in law focus on stability and confidence in the sector. An explicit policyholder protection objective would provide underpinning for its peacetime supervision as well as crisis management, consistent with the emphasis on policyholder interests in its supervisory work in practice. It would also support the increased policyholder protection recommended in this assessment, which could include the extension of statutory fund protection to non-life policyholders and making policyholder preference explicit in insolvency. Policyholder compensation schemes are only one form of policyholder protection and are outside the scope of the assessment.

The RBNZ’s approach to licensing, supervision, and enforcement in practice could be further developed, building on the experience since 2010. The RBNZ has taken a thorough approach to licensing and has since been ready to intervene in cases where it has identified shortcomings, including in relation to the risks from Canterbury earthquake exposure. It has required some insurers to hold solvency margin above the minimum. It has built sound supervisory processes (and strong expectations on management) around insurers’ financial condition reporting supported by the role of the Appointed Actuary. There is scope for the RBNZ to increase transparency over how it uses powers, including where it requires additional solvency margin, and clarity regarding its approach to enforcement. It should also develop an internal policy setting out its approach to supervisory action and use of powers in relation to two solvency control levels, in particular its approach to taking the strongest actions when an insurer fails to maintain the lower solvency control level, so as to constrain supervisory discretion as appropriate. Supervisory engagement with insurers is developing and needs to move even further, especially with larger insurers, towards communicating supervisory expectations, and requiring appropriate action.

There are challenges as well as benefits from the high degree of exposure to Australia and the RBNZ should keep the risks and appropriate responses under review. The Australian presence has been a source of strength, for example, parental support following the Canterbury earthquakes. However, it also exposes New Zealand to shocks originating in Australia and particularly to a common shock or simultaneous separate shocks. There is a particular exposure in the case of life insurance because of the significant Australian presence in branch form, the disapplication to branches of many RBNZ prudential requirements and the direct dependence on Australian insolvency law and practice in case of failure. The RBNZ needs to keep the risks under review, for example, in considering the scope and nature of statutory fund requirements. It already cooperates and has an open relationship with the Australian authorities, which is being significantly deepened through the extension of trans-Tasman cooperation arrangements from banking to insurance and the inclusion within their scope of insurer resolution issues. This should be accorded a high priority in the RBNZ’s work plan.

The RBNZ benefits from a high degree of formal and operational independence, although it should clarify day-to-day cooperation with government and it should be free to increase its supervisory resources appropriately. There are clear accountability mechanisms in relation to determining RBNZ priorities and to the spending of its resources. Cooperation with government on individual insurers in distress has worked effectively in crisis in the past. It would be appropriate now to clarify and constrain the circumstances in which information on individual supervisory issues is reported by the RBNZ, avoiding the risks to independence of increased government engagement in supervisory issues. It would also be timely to clarify the limits of government involvement in the development of insurance regulation. The RBNZ needs to increase its supervisory resources, taking into account the extent of existing challenges and the need to develop its regime in the future.

There is a need for more focus on the regulation of insurance intermediaries and insurance conduct, which is likely to require increased resources. The government and the FMA have been moving in this direction under recent legislation and in the FMA’s supervisory initiatives, including on high life insurance commissions. The current approach takes account of the relatively limited conduct risks in insurance, given the product range, while self-regulation by industry bodies is developing and there is a well-established system for disputes resolution. However, there is a need, which the government is addressing, to enhance the deliberately low intensity regime currently applying to most independent insurance advisers and brokers, which does not include even basic competence and disclosure requirements; to extend the range of conduct of business requirements specific to insurance beyond the current focus on advice; and to ensure that the appropriate requirements apply to all insurance activity, including sales without advice and ancillary sales. The FMA functions with clear objectives within a generally sound framework of powers and processes and its responsibilities relative to those of government are clearly differentiated. The FMA would benefit from enhanced enforcement powers and would need to add insurance-specific expertise and maybe greater overall resources.

Assessment of Insurance Core Principles

A. Introduction and Scope

1. This assessment of insurance regulation and supervision in New Zealand was carried out as part of the 2016 New Zealand Financial Sector Assessment Program (FSAP). It was conducted by Ian Tower and Mimi Ho (both external experts engaged by the IMF) from August 16 to September 7, 2016.

2. The assessment is benchmarked against the ICPs issued by the International Association of Insurance Supervisors (IAIS) in October 2011, as revised in November 2015. The ICPs apply to all insurers, whether private or government-controlled. Specific principles apply to the supervision of intermediaries.

3. The assessment excludes personal accident and earthquake schemes provided by government entities. There are two bodies (with the status of “Crown agents” under the New Zealand Crown Entities Act 20041) responsible for damages due to natural disasters and accidental injuries:

  • The EQC, established under the Earthquake Commission Act 1993, provides natural disaster coverage in relation to residential property and associated land up to specified limits.

  • The ACC, established under the Accident Compensation Act 1972, provides no-fault personal injury coverage for all New Zealand residents and visitors.

Both have been excluded from the scope of this assessment due to the nature of their functions which is similar to social insurance schemes: both are funded by a range of compulsory levies, which can include levies on individuals, employers, insurance policies, trade licenses, etc.; and both are backed by the government (with EQC having an explicit guarantee that the government will make up any deficiency in its assets). These public schemes are, however, included in the market statistics in this report because they form an integral part of financial protection in New Zealand and excluding them would understate overall available insurance and hamper international comparison.

B. Information and Methodology Used for Assessment

4. The level of observance for each ICP reflects the assessment of its standards. Each ICP is rated in terms of the level of observance as follows:

  • a) Observed: where all the standards are observed except for those that are considered not applicable. For a standard to be considered observed, the supervisor must have the legal authority to perform its tasks and exercise this authority to a satisfactory level.

  • b) Largely observed: where only minor shortcomings exist, which do not raise any concerns about the authorities’ ability to achieve full observance.

  • c) Partly observed: where, despite progress, the shortcomings are sufficient to raise doubts about the authorities’ ability to achieve observance.

  • d) Not observed: where no substantive progress toward observance has been achieved.

5. The assessment is based solely on the laws, regulations and other supervisory requirements and practices that are in place at the time of the assessment in August 2016. While this assessment does not reflect new and ongoing regulatory and supervisory initiatives, key proposals for reforms are summarized by way of additional comments in this report. The authorities provided a comprehensive self-assessment, supported by examples of actual supervisory practices and assessments, greatly enhancing the robustness of the assessment.

6. The assessors are grateful to the authorities and private sector participants for their cooperation. The assessors benefitted from valuable input and insightful views from meetings with the relevant authorities, insurance companies and industry and professional organizations.

C. Overview—Institutional and Macroprudential Setting

Institutional Framework and Arrangements

7. The RBNZ commenced prudential supervision of the insurance sector in 2010 after the passage of the Insurance (Prudential Supervision) Act (IPSA). The decision to regulate the insurance sector was based on the work of a working group established in 2005 to review the regulatory frameworks for nonbank financial institutions, financial intermediaries and financial products. The working group was established partly in response to one of the recommendations from the 2003–2004 New Zealand FSAP.2 Insurance activities conducted by Crown entities are exempted from IPSA. Therefore, ACC, EQC and Southern Response Earthquake Services,3 which collectively represent 45 percent of the non-life insurance market, are not supervised by the RBNZ (refer to ICP 4 for more details on exempted insurers).

8. The RBNZ adopts a principles-based, low-intensity supervisory philosophy. The emphasis is on the board’s accountability and the consumer’s responsibility in selecting financial products and providers. Consistent with this philosophy and with its powers under IPSA, the RBNZ has issued standards on solvency and fit-and-proper requirements; guidelines on governance and carrying on insurance in a prudent manner; and it has consciously refrained from conducting in-depth on-site supervision, in order to encourage self-discipline on the part of insurers’ boards and management.

9. The responsibility for insurance market conduct supervision lies with the FMA. The FMA administers three laws: (a) The Financial Markets Conduct Act 2013; (b) The Financial Advisers Act 2008 (FA Act); and (c) The Financial Markets Authority Act 2011. While these laws are not specific to the insurance sector, the FMA’s oversight of insurers and insurance intermediaries is embedded in its general oversight of financial advisers and financial products. Established in 2011, the FMA took over the functions of the former Securities Commission of New Zealand and the Government Actuary. The responsible ministry for the FMA is the Ministry of Business, Innovation, and Employment (MBIE).

Market Structure and Industry Performance

10. The RBNZ is in the process of refining its data collection from insurers. Data prior to 2012 is not available because insurers were not required to be licensed until March 7, 2012. Aiming to reduce insurers’ compliance burden, the RBNZ has collected supervisory information from 2012 based on published financial data, which lack the necessary granularity and consistency to facilitate in-depth analysis for supervision purposes. As a result, there are limitations to the data presented in this report. For example, classification of insurers is by their predominant types of business, rather than by actual business lines. The breakdown between life and non-life business is not precise. The RBNZ is undertaking a project to improve the quality and consistency of routine data collection.

Industry Structure and Recent Trends

11. The New Zealand insurance industry is relatively small. In terms of assets in its domestic financial system, the banking sector is the largest, with total assets equivalent to 200.9 percent of GDP as at March 2016, followed by the managed funds and trusts sector at 49.7 percent of GDP. By contrast, the private insurance sector is small at 11.9 percent of GDP. The market is, however, developed as measured by insurance penetration (premium as percentage of GDP) and density (premium per capita), particularly in the non-life sector (Table 1). Comparison of the life insurance sector to other countries is complicated by the absence of savings elements in currently-sold life products, as discussed in the paragraph below.

Table 1.

New Zealand: Insurance Penetration and Density: Comparison to World Average (2015)

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Converted from USD at USD 1= NZD 1.3707.

Including health insurance

Mainly ACC and EQC: see paragraph 3 above.

Source: RBNZ and Swiss Re World Insurance publications.

12. New sales of life insurance are for protection only, without savings elements (Table 2). This accounts for the low level of new life insurance premiums relative to non-life premiums in New Zealand. Traditional life insurance with savings elements has been discontinued.4 Most life insurers have established fund management subsidiaries and now manage their insurance and fund management business out of separate entities. Although there is an inforce block of participating whole life and endowment policies (and some investment-linked business), new-life business is mostly confined to pure protection. Group business is relatively limited. KiwiSaver,5 a tax efficient (non-insurance) work-based retirement savings product with some early withdrawal flexibility, has attracted savings that might have otherwise gone into insurance.

Table 2.

New Zealand: Breakdown of Life Insurance Business

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Source: Financial Services Council

13. There is no compulsory class of non-life insurance because of the role of the ACC. The ACC provides universal no-fault protection against work and non-work related injuries. The compensation covers medical expenses, replacement of lost earnings, cost of changes to homes and vehicles required as a result of a person’s injury, and financial assistance for fatal accidents. Consequently, there is no compulsory insurance often seen in other markets such as motor insurance and workers compensation insurance. Individuals may take up additional private insurance to supplement the ACC’s coverage. According to the Insurance Council of New Zealand (ICNZ), which is an industry association whose members account for 95 percent of the total non-life market, the largest class of non-life business is motor, followed by the domestic (private property) and commercial (material damage and business interruption) lines (Figure 1).

Figure 1.
Figure 1.

New Zealand: Breakdown of Gross Written Premium for Non-Life Business

(NZD millions)

Citation: IMF Staff Country Reports 2017, 121; 10.5089/9781475599954.002.A001

Source: ICNZ. Data is based on 12-month period to September of each year.

14. There are various intermediation channels for insurance. Products are distributed through direct sales (including internet offerings), agency arrangements (tied agents and banks), and particularly for corporate business, through brokers. Although certain intermediaries are required to report information to the FMA, there are no comprehensive data on intermediation channels.

15. The industry is highly concentrated in a few large insurers (Table 3). The number of insurers has declined since the RBNZ started licensing in 2012. The total number of licensed insurers was 96 at the end of 2015, which appears high, given the size of the market. Further industry consolidation may be expected. However, the industry is also highly concentrated. The top 8 life insurers account for 87 percent of life premium income and 93 percent of life industry assets. The top 8 non-life insurers account for 91 percent of non-life premium income. In fact, the top 2 non-life insurers have a 67 percent market share, while in life insurance the top two insurers account for 47 percent of the market.

Table 3.

New Zealand: Number of Insurers

(Dec 31)

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16. The industry has experienced a steady increase in premiums in the past five years. Total private sector premiums increased from NZD 7.6 billion in 2011 to NZD 9.8 billion in 2015 (Table 4).

Table 4.

New Zealand: Gross Premium

(NZD millions)

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17. Assets in the life sector are about 45 percent of the total insurance sector, reflecting the lack of savings elements in the life products (Table 5). There are no data available on breakdown of investments by asset classes.

Table 5.

New Zealand: Total Assets

(NZD millions)

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18. A substantial part of insurance business is conducted via branches of overseas insurers. Of the 96 insurers operating in New Zealand, 35 are branches, 18 of which are of Australian insurers.6 Total premiums collected by branch operations in 2015 were NZD 2,030 million (23 percent of total industry premium income), and assets of NZD 9,583 million (33 percent of total industry assets).

19. Australian insurers dominate the market. Australian-owned operations in New Zealand (branches and subsidiaries combined) represent 66 percent of market by premium and 75 percent by assets. The RBNZ has extensive cooperative arrangements with the Australian authorities as the home supervisor (Table 6 and Figures 2, 3, and 4).

Table 6.

New Zealand: Direct Insurers by Ownership

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Figure 2.
Figure 2.

New Zealand: Number of Private Direct Insurers by Country of Ownership

Citation: IMF Staff Country Reports 2017, 121; 10.5089/9781475599954.002.A001

Figure 3.
Figure 3.

New Zealand: Gross Premiums of Private Direct Insurers by Country of Ownership

(NZD millions)

Citation: IMF Staff Country Reports 2017, 121; 10.5089/9781475599954.002.A001

Figure 4.
Figure 4.

New Zealand: Assets of Private Direct Insurers by Country of Ownership

(NZD millions)

Citation: IMF Staff Country Reports 2017, 121; 10.5089/9781475599954.002.A001

Assets of Private Direct Insurers by Country of Ownership (NZD millions)

20. ICNZ data shows that the performance of non-life business in aggregate is still adversely affected by the Canterbury earthquakes in 2010 and 2011. Other than the earthquake line, all lines of non-life business are comfortably profitable, with combined ratios in the 50 to 60 percent range (Table 7). However, claims from the Canterbury earthquakes are still trickling into insurers, following the assessment undertaken by EQC (Box 1). Total private sector claims are estimated at NZD 21.5 billion, of which NZD 18.3 billion has been paid.

Table 7.

New Zealand: Industry Combined Ratios

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Source: ICNZ. Data is based on 12-month period to September of each year.

21. There are 14 foreign-owned insurance groups, 6 domestic insurance groups and 15 financial conglomerates operating in New Zealand. IPSA does not apply to holding companies, and the RBNZ exercises minimal group-wide supervision.

Earthquake Commission

The EQC, a Crown Entity (see footnote 1 above) established under the Earthquake Commission Act 1993, provides natural disaster insurance to residential properties in New Zealand. Its predecessor was the Earthquake and War Damages Commission, a government body established in 1945.

The EQC’s functions are to: (a) manage the Natural Disaster Fund; (b) educate New Zealanders about disaster preparedness; (c) conduct research that improves the detection and understanding of geological hazards; (d) settle claims for natural disaster damages; and (e) obtain reinsurance in respect of coverage provided under the Act.

How It Works

The EQC provides insurance, called the EQCover, against damages caused by earthquakes, landslides, volcanic eruptions, tsunamis, and geothermal activities. The maximum coverage is NZD 100,000 for home, NZD 20,000 for contents, and cover for land. The amount of coverage is for each event of natural disaster.

The EQCover is integrated with private insurance. When a homeowner takes up a home and household contents policy with a private insurer, he/she is automatically covered by EQCover. Part of the premium he/she pays to the insurer is transferred to the EQC and goes into the Natural Disaster Fund.

The EQC is a first loss insurer. In a natural disaster, the EQC will pay the first NZD 100,000/20,000 for damages to a home/contents, and cover storm and flood damages to land. The land cover is complex, but primarily relates to land under and within eight meters of an insured home and any appurtenant structures (such as garages), and certain retaining walls, bridges and culverts.

The EQC is also the first point of contact in the case of a claim. The EQC processes the claim and passes the remaining portion of the claim to the private insurer for settlement.

Government Guarantee

EQCover is government guaranteed. Should the Natural Disaster Fund and its reinsurance be insufficient to meet the claim payments, the government will pay the shortfall. As at June 30, 2016, the Natural Disaster Fund had a negative balance of NZD 457 million, compared to negative NZD 424 million at the end of 2015.

The Canterbury Earthquake Claims

The EQC has paid NZD 9.4 billion to date, while private insurers have paid NZD 18.3 billion. Claims are still emerging after 6 years. The slow processing is due to the high volume of claims, the complexity of restoration, and legal proceedings affecting claims resolution. For example, rebuilding is not possible until land is restored.

EQC Reform

In July 2015, the Treasury invited public comments on the proposed reform to the EQC Act. The key proposals are:

  • The EQC claims to be lodged with private insurers.

  • Monetary cap on building cover to be increased to $200,000 + GST.

  • The EQC land cover to apply only where rebuilding is not practicable.

  • Scheme terms and conditions to be better aligned with usual insurer practice.

  • The EQC no longer provide contents insurance.

  • EQC premiums to reflect the costs of running the EQC and the costs and risks of the EQC scheme; monetary caps, prices and excesses to be reviewed at least every 5 years.

Key Risks and Vulnerabilities

22. The non-life insurance sector is exposed to earthquake and other natural disasters. New Zealand is highly vulnerable to natural catastrophes: earthquakes, volcanic eruptions, and the resulting landslides, tsunamis, fires, floods, etc. The Canterbury earthquakes in 2010–11 resulted in the government bail-out of one insurer and the failure of another (these events predated the full introduction of insurance regulation). Most of the Canterbury claims fell to the private insurance market, as the EQC only covers residential properties up to limits. The Canterbury events highlighted some uncertainties regarding the boundary between the EQC and private insurer coverage, particularly in relation to the costs of restoring land.

23. The risks have been mitigated to an extent since the Canterbury earthquakes. Insurers and reinsurers have continued to provide cover, but have taken steps to limit exposure to future earthquakes, for example, by placing limits on coverage such as moving away from full replacement value. The RBNZ has strengthened the solvency requirement relating to natural catastrophes. The government is planning reforms to EQC legislation including but not limited to coverage and the claims handling process, the results of which are likely to have significant implications for insurers’ risk management (Box 1).

24. Non-life insurers are exposed to other risks, excluding those related to personal accident. Exposures include weather-related events such as windstorm, and also cyber risk. New Zealand insurers (and the EQC) are particularly exposed to developments in international reinsurance markets as they have used reinsurance programs extensively to manage and mitigate natural catastrophe risks. The role of ACC (see above) means that personal accident risks are limited to top-up policies extending the coverage provided by ACC.

25. The life insurance sector is exposed to mortality and disability morbidity risk and risks associated with its commission paying practices. New sales of life insurance products are largely for term life. The second largest class of life insurance (22 percent of total new premiums) is disability income policies whose liability is also long-term in nature. In addition, there are risks associated with distribution practices in this market, where payment of high-levels of upfront commission to distributors has become prevalent. Insurers are exposed to lapse risk, where they are unable to recoup acquisition costs, while the apparent unsustainability of current commission practices (which the FMA is investigating) exposes life insurance companies to significant business risk as practices eventually change. There are already challenges from the low growth rate of new sales of life insurance in recent years.

26. There also remain blocks of traditional life business with market risks. There remains a stock of inforce traditional life insurance policies, which, after many transfers of books of closed business in recent years, expose a small number of life insurers to market risks, including low interest rates. These are mitigated by the participating nature of much of this business, where future bonuses are not guaranteed and insurers have reduced bonus rates in light of the recent prolonged low interest rate environment. However, exposure is likely to differ across insurers, depending on the exact nature of their past business. The new regulatory regime is addressing these risks through solvency standards and financial condition reporting. All life and non-life insurers are to varying degrees exposed to investment risk. However, there appears to be limited direct exposure to the property market.

27. New Zealand policyholders are exposed to risks from the limited protection in the case of the failure of an insurer. There are no policyholder protection schemes and no policyholder priority of claim in case of insolvency for non-life policyholders. The public policy objective is to make consumers responsible for their financial decisions, drawing on published information, including requirements on the disclosure of financial strength ratings, to facilitate informed decisions. However, consumers do not always have access to advice they may need, even when buying pure life protection policies, which reflects in part the relatively complex financial advisers regulatory regime as well as low financial literacy (the subject of a government financial capability initiative).

28. There is a high degree of exposure to Australia through various channels. Some of the largest insurers in New Zealand are branches or subsidiaries of Australian insurers. This has proved a source of strength to the New Zealand market, as seen in the availability of parental support in the response to the Canterbury earthquakes. However, it does also expose New Zealand to shocks originating in Australia and it exposes them to the particular risk, however low, of a common shock or simultaneous separate shocks in Australia and New Zealand. There is particular exposure in the case of life insurance because of the significant Australian presence in branch form, the disapplication of many New Zealand prudential requirements and the direct dependence on Australian insolvency law and practices in case of failure. There are also links to Australian banks (all the large four banks have insurance companies in New Zealand, one of which is the largest life insurer by premium income). Otherwise, the interconnectedness with banks is limited by the requirements on banks operating in New Zealand to limit their interest in insurers to one percent of assets. However, New Zealand insurers also hold bank-issued bonds (data are limited on the extent of this exposure).

29. There may also be risks associated with the openness of the New Zealand regime to insurance provided on a cross-border basis into New Zealand. Most countries accommodate the insurance of domestic risks being done abroad, for example, commercial lines business for internationally active companies and reinsurance. This is often handled via domestic brokers, facilitating the assessment of risks in such business via intermediary oversight. In New Zealand, such oversight is limited and there are no requirements to notify business placed abroad. The risk is of individuals or smaller business buying insurance cover abroad, unaware of any additional risks compared with insurance cover provide by a domestic insurer. Again, data are not available on the extent of such business.

30. The market conduct risk is exacerbated by intense competition in a small market. The regulatory regime covering financial advisers is complex. The majority of (individually registered or authorized) financial advisers (6,500 out of 8,300) are subject to a low degree of regulation: no demonstration of competence and a limited degree of disclosure are required, although all must be members of a disputes resolution scheme. The strong competition for life business and high-levels of upfront commission may have led to “churning” of policies to the detriment of policyholders if their resulting cover has not been in line with their requirements. There is limited oversight of insurance conduct beyond the advice function. The conduct risks in insurance may, however, be lower than in many other developed markets due to the relatively limited and less complex product range, both in life insurance (with limited new sales of savings products) and in non-life (given the role of the ACC).

D. Preconditions for Effective Insurance Supervision

Sound and Sustainable Macroeconomic and Financial Sector Policies

31. There is a well-established policy framework centered on the New Zealand Treasury, the RBNZ, and FMA. The primary purposes of the RBNZ, as set out in the RBNZ Act 1989, are to ensure price stability and to promote the maintenance of a sound and efficient financial system. Its responsibilities include prudential regulation and supervision of the banking system and insurance sector; acting as the resolution authority for banks; macroprudential policy (in relation to the banking system); regulation of nonbank deposit-takers; the oversight and designation of payments systems, and monetary policy. The Treasury is responsible for execution of the government’s economic policy. Its three key outcomes are a stable and sustainable macroeconomic environment, improved economic performance and a higher performing state sector. Responsibilities for oversight of organized financial markets and conduct of business across the financial sector falls to the FMA. The Commerce Commission administers general consumer protection law.

32. There are established and transparent frameworks for agreeing monetary and fiscal policy objectives.

  • For monetary policy purposes, price stability is defined in the Policy Targets Agreement (PTA) signed by the Minister of Finance and the Governor of the RBNZ, the last version of which (2012) commits the RBNZ to an inflation target of between 1 and 3 percent on average over the medium term. The RBNZ is operationally independent with respect to the PTA’s objectives. It must have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.

  • The operation of fiscal policy is governed by the Public Finance Act 1989, which requires the government to reduce total debt to prudent levels and to manage fiscal risks prudently. The government must present an annual Budget Policy Statement with its short term goals and a Fiscal Strategy Report focusing on longer term objectives. In addition, the Treasury must publish, at least every four years, a Statement of the Long Term Fiscal Position, identifying how demographic and other changes may impact the fiscal position over 40 years.

A Well-Developed Public Infrastructure

33. There is a well-developed infrastructure, including a legislative framework that supports insurance regulation. The laws on business organisation, insolvency, property registration and transfer, and consumer protection are well-established. The Companies Act 1993, for example, provides procedures for the liquidation or voluntary administration of companies. There is a framework of competition law administered and enforced by the Commerce Commission. Property and contract law is well developed, through statute or common law, and is enforced by the courts. The judiciary is independent and of high standing and there is a developed legal profession.

34. The accounting and auditing frameworks follow international standards and there is a well-developed profession. New Zealand has implemented international accounting and auditing standards (IFRS and ISA). The External Reporting Board is a “Crown Entity” (an independent entity within the government sector) responsible for the issuance of accounting, auditing and assurance standards. Through its sub-board, the New Zealand Accounting Standards Board, the External Reporting Board is also the standard-setting body. New Zealand standards (NZ-IFRS) are identical to IFRS with a small number of additional New Zealand-specific standards. There is a well-developed accounting profession; a single body, Chartered Accountants Australia and New Zealand (CAANZ), is taking over as the professional body for both countries on the merger of the New Zealand Institute of Chartered Accountants (NZICA) and CPA Australia. CAANZ is a member of the International Federation of Accountants. The large international accounting firms are all represented in New Zealand.

35. Auditors and audit work are subject to oversight. Members of the accounting professional body are subject to its oversight and disciplinary processes. The FMA has responsibility under the Auditor Regulation Act 2011 for the regulation of “auditor accredited bodies” (currently NZICA and CPA Australia). The Act also requires registration of auditor firms and for auditors to be licensed where they audit the financial statements of “FMC reporting entities” — those subject to the reporting requirements in Part 7 of the Financial Markets Conduct Act 2013 (FMC Act), which include issuers of securities (and other regulated products) and all licensed banks and insurance companies. The FMA is required to carry out quality reviews of the systems, policies and procedures of registered audit firms and licensed auditors in relation to audits of FMC reporting entities at least once every four years and to report annually on its review work. The FMA is a member of the International Federation of Independent Audit Regulators (IFIAR).

36. There is an independent actuarial profession. The New Zealand Society of Actuaries (NZSA) has around 350 members, of whom around half are full members (fellows), including many who are practicing outside New Zealand. Qualification for fellowship is by examination, which may be satisfied in practice by full membership of a number of overseas professional bodies. The NZSA issues competence and conduct standards applicable to its members as well as actuarial standards and guidance (insurers are required by the RBNZ to have regard to certain NZSA standards: see the assessment of ICPs 14 and 17). NZSA has a process for receiving and investigating complaints against its members and for taking disciplinary action, where appropriate. It is responsive to approaches about members, but has not taken disciplinary action to date. The profession is not subject to independent oversight or regulation.

37. A wide range of statistics are published, including on mortality experience and life expectancy. Statistics New Zealand is the government office responsible for collecting and publishing statistics on a wide range of social and economic indicators. Mortality tables are available based on both period and cohort life expectancy measures, based on an extensive database of New Zealand lives. Statistics New Zealand is funded by government but operates independently. The RBNZ also publishes detailed monetary and economic statistics. The NZSA commissions periodic mortality investigations, which draw on insurance company data to assess mortality trends in relation to insured lives. The reports (most recently “Insured Lives 2008 to 2010”) are published in summary on the NZSA website, with the detailed findings being made available for sale.

Effective Market Discipline in Financial Markets

38. There are extensive general corporate governance standards in laws, codes, and guidelines. The Companies Act 1993 sets outs the role and responsibility of the board, the rights of shareholders (including in relation to the appointment and removal of directors) and the conduct of general meetings. It includes disclosure requirements in relation to staff remuneration (including numbers of staff paid over $100,000 per annum). The FMC Act sets out governance obligations that apply to issuers of debt securities, managers of managed investment schemes and their supervisors. The FMA has also published corporate governance principles and guidelines that are addressed to a wide set of entities, including those which have some accountability to the public such as regulated financial services providers and public sector bodies (which are encouraged to disclose how they comply with the guidelines in annual reports or on websites). For companies listed on the New Zealand Exchange (NZX), the corporate governance principles issued by the NZX apply.

39. There are disclosure requirements associated with company law and regulation and listing on the stock exchange. There is a general requirement for audited financial statements to be produced and made available to the public via the Companies Office register. Entities that do not have public accountability (and smaller for-profit public sector entities) may choose to be subject to reduced requirements in line with the IFRS regime for reduced disclosure. Companies listed on the New Zealand Stock Exchange (NZX) are subject to its disclosure requirements. There is extensive provision of ratings for securities issuers and their issues from ratings agencies (which are not subject to regulation except where they provide ratings to entities subject to regulation by the RBNZ in relation to its requirements on disclosure of financial strength ratings).

Mechanisms for Consumer Protection

40. The policy framework emphasizes the need for policyholders to take informed decisions and the avoidance of moral hazard. The broad regulatory approach, particularly in the case of prudential regulation, emphasizes the importance of minimizing the moral hazard associated with regulation itself and reducing the public perception of any implicit government guarantee. There is no depositor protection for the banking system, for example, and the RBNZ makes clear in its publications that it does not aim to prevent all failures of regulated entities in the sectors which it regulates. Regulation in other areas places particular emphasis on the importance of appropriate disclosure, to investors, customers etc. However, levels of financial literacy are low and there is a national strategy to develop financial capability.

41. In line with the general regulatory philosophy, there is no insurance policyholder protection scheme that would provide a safety net in the event of insurer failure. In the event of an insurer suffering distress or financial difficulty, the insurance legislation requires the RBNZ to recognize the importance of dealing with an insurer in a manner that aims adequately to protect the interests of its policyholders. There is also a requirement for all life insurance business (except for a few smaller insurers) to be carried out in a statutory fund (see the assessment of ICP 12). There is no corresponding provision for non-life insurance. However, unlike in many other jurisdictions, New Zealand does not mandate insurance cover for particular risks (such as motor third-party liability), often the starting point for policyholder compensation. This reflects the role of the ACC (see above, paragraph 3).

42. There are dispute resolution schemes available to retail customers, membership of which is compulsory. Insurers and intermediaries are required to be members of a dispute resolution scheme (there are three covering insurance), except where they are undertaking only wholesale business (for example, where they write reinsurance only).

Efficient Financial Markets

43. There are deep and liquid financial markets, although they are relatively small by international standards and limited, for debt issues, to shorter maturities. New Zealand insurers invest largely in NZD-denominated assets and mostly in debt securities. Equity and bond markets are small by international comparison (relative to the size of the economy) and the range of instruments limited. Government and financial institutions dominate debt issuance. Life insurers do not have access to domestic fixed interest securities or derivatives with terms long enough to match all their liabilities. Government securities are issued only out to ten years and the resulting lack of long-term risk-free benchmark rates constrains longer term private issuance. There are limited inflation-indexed products which would help insurers to manage inflation risks: the Treasury issues an inflation linked bond, but volumes are small (see assessment of ICP 14 for the implications for valuation practices and the regulatory approach).

44. New Zealand insurers also have access to investment markets outside New Zealand. There are no restrictions on foreign investment, subject to regulatory requirements in relation to risk management, solvency, etc. (most insurers’ liabilities are NZD-denominated). Given the significance of foreign-owned insurers to the New Zealand market, many insurers make use of their head office or parent company to source and manage foreign investments.

Table 8.

New Zealand: Summary of Compliance with the ICPs

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Table 9.

New Zealand: Summary of Observance Level

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Table 10.

New Zealand: Recommendations to Improve Observance of the ICPs

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E. Authorities’ Responses to the Assessment

The New Zealand authorities (the FMA, MBIE, RBNZ, and Treasury) wish to thank the IMF and the insurance assessors for their thorough assessment of New Zealand’s compliance with the IAIS Core Principles for Effective Insurance Supervision. The New Zealand authorities welcome the opportunity to comment on the IMF’s Detailed Assessment Report (DAR).

The New Zealand authorities strongly support the FSAP as a means of promoting and improving both the quality of financial sector regulation and the outcomes that this regulation aims to achieve.

At the time of the last New Zealand FSAP conducted during 2003–04, regulation of the insurance sector was very limited. In part as a response to the recommendations of the previous FSAP, a working group was established in 2005 to examine the existing regulatory frameworks for nonbank financial institutions and financial products. As a consequence of that review, the Reserve Bank became the prudential supervisor for the insurance sector with the passage of the Insurance (Prudential Supervision) Act 2010 (IPSA). The review also contributed to a major overhaul of New Zealand’s approach to capital market regulation, and the establishment of the FMA as a general market conduct regulator with responsibilities encompassing the insurance sector.

The DAR has acknowledged that the implementation of IPSA and a prudential regime for the insurance sector was a major achievement. The New Zealand authorities are pleased that the insurance assessors have judged that this new regulatory framework is reasonably “well-developed.”

The implementation of IPSA was a very demanding exercise for the Reserve Bank, particularly in the initial licensing phase which lasted three years. In addition, the 2010–11 Canterbury earthquakes were an unfortunate but timely reminder of the significance of robust solvency requirements, given the importance of catastrophe risk in the New Zealand market. Today, the insurance sector is in a much better position to absorb a shock of this nature.

Following the completion of the licensing process in September 2013 the Reserve Bank began developing and embedding a supervisory framework appropriate for New Zealand conditions that broadly aligns with the approach taken for the prudential regulation and supervision of the banking sector.

For the banking sector there is a long-standing ‘three pillar’ approach tied to the interplay between self, market and regulatory discipline. This framework is also appropriate for achieving the Reserve Bank’s statutory objectives for the insurance sector – to promote a ‘sound and efficient insurance sector,’ and to ‘promote public confidence in the sector.’ This systemic focus means the Reserve Bank does not direct its policy and supervisory resources at eliminating all the risks that face individual insurers. Moreover, IPSA is not a zero failure regime – i.e., the Reserve Bank is not required to ensure that no insurer will fail or that there will be no losses to policyholders.

The supervisory counterpart to this emphasis on self and market discipline is a risk-based approach reflecting the fact that not all insurers are equally important to the sector or the wider financial system. Moreover, on-site inspections are an inherently more intrusive and costly form of supervision and can, in the Reserve Bank’s view, potentially undermine the incentives on the insurance firm’s own directors and management to identify and manage risks.

The DAR has noted a number of areas where the prudential regime falls short of full observance with the IAIS’s core principles. In part, this is due to the on-going implementation of supervisory initiatives in a regime that is still maturing (such as supervisory risk assessments and regulatory reporting by insurers). In other areas the DAR acknowledges the gap in full observance is a function of the emphasis the Reserve Bank places on self and market discipline, reflected in the limited scope for on-site inspections and the relatively lightly resourced approach to supervision more generally.

The New Zealand authorities note the recommendations designed to improve the Reserve Bank’s three pillar approach to insurance regulation. Examples relating to improving self and market discipline include enhanced disclosure from insurers and the Reserve Bank, and the expansion of powers to develop standards for corporate governance, risk management and internal controls.

A number of the IMF’s recommendations are helping to inform the review of the statutory framework for insurance prudential regulation that is currently underway. The terms of reference for this review were released in April 2016 and an Issues Paper was released in March 2017. The review aims to assess the performance of IPSA to ensure it continues to create the preconditions for a cost-effective supervisory regime that helps achieve a sound and efficient insurance sector.

The New Zealand authorities note the IMF’s recommendations regarding conduct regulation for insurance, bearing in mind that the FMA’s reach into insurance is limited to incidences of mis-selling or misrepresentations and the regulation of financial advice as it relates to insurance agents and brokers.

The review of the FA Act that is currently underway will go some way to address the IMF’s recommendations relating to intermediaries. However, it is acknowledged that these changes will not affect conduct regulation of insurers themselves or non-advised sales of insurance.

The New Zealand authorities will, as priorities allow, consider the IMF’s recommendations and examine the issues relating to the broader question of the scope of conduct regulation for insurance considering all aspects of the insurance product life cycle.

As the law reforms for financial advisers are completed, the FMA will reassess resource requirements and the need to consider any insurance-specific work alongside its other strategic priorities and program of work.

Detailed Assessment

Table 11.

New Zealand: Detailed Assessment of Observance of the ICPs

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