Business Compliance Cost Statement
Source of the Compliance Cost
Compliance costs would arise from the requirement of unrated insurers to obtain an annual rating and may arise from operating changes to their financial reporting systems.
Parties Likely to Be Affected
Approximately 33 unrated insurers offering health, liability, income, mortgage and consumer credit insurance will be affected by the requirement to obtain a rating. Many of these are small companies with estimated net premiums ranging between $4,000 and $22,621,000. There are approximately 45 currently rated general insurers, include all major market players, with an estimated range of net premiums between $447,000 and $326,974,000. These companies will not be affected by the proposed regime.
Over 90% of insurance companies, both rated and unrated, currently comply with the FRS 35. Therefore, less than 10% of insurance companies would incur costs by improving their financial reporting systems.
Estimated Compliance Costs of the Proposal
AM Best and Standard & Poor's are the two ratings agencies currently approved to supply ratings to New Zealand insurers. The annual cost of a rating from AM Best is between US$8,000 and US$15,000. Standard & Poor's charges A$28,000 for a new rating and A$3,000 for a rating of a company branch. There may also be some one-off costs (e.g. hiring accounting specialists) associated with establishing improved financial reporting systems.
Longer Term Implications of the Compliance Costs
The annual cost of obtaining a rating, combined with the low rating that a small company may get because of its size and the initial costs of setting up or improving systems to satisfy the ratings authority's requirements, could well drive some small insurers out of business. It can be argued that any insurer unable to meet the increased costs and comply with the new regime should not be participating in an industry such as insurance, which requires a high degree of prudence and the ability to spread and absorb financial risk. The new regime would improve business practice across the industry and would raise consumer confidence in the insurance market.
Level of Confidence of Compliance Costs Estimates
The cost of ratings were quoted by the two rating agencies. Costs associated with setting up or improving a firm's financial reporting system cannot be accurately quantified as they largely depend on the state of the company's current financial reporting system and what adjustments would need to be made.
Key Compliance Costs Issues Identified in Consultation
No concerns were raised regarding compliance costs that may be incurred by replacing financial returns requirements under the Deposits Act with the relevant FRS. Unrated insurers opposed the ratings regime as they will face an increase in annual costs associated with obtaining a rating.
Overlapping Compliance Requirements
Any overlapping compliance requirements would be removed by repealing the requirements to prepare financial returns under the Deposits Act.
Steps taken to Minimise Compliance Costs
Replacing the reporting requirements under the Deposits Act with the relevant FRS would promote good financial reporting which may reduce compliance costs in the long term. Unrated insurers will be allowed a transitional period of two years before the new requirements are imposed. This will allow them to evaluate their position and put in place any new arrangements required to bring them within the ratings regime.
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