4. Monitoring and Supervision
4.1 Principles of Regulatory Design for Monitoring and Supervision
218. The proposals for monitoring and supervision of the insurance sector have been designed to ensure effective monitoring and enforcement of compliance with licensing and prudential requirements, to evaluate the financial condition of insurance providers, and to take action where the requirements are breached or an insurer's soundness is at risk. An effective monitoring and supervision framework is an important means of meeting the objectives of:
- Promoting policyholder confidence in the soundness of the insurance sector;
- Encouraging soundly governed insurers; and
- Ensuring timely and orderly resolution of distressed insurers.
4.2 Criteria
219. The criteria used to assess the proposals for monitoring and supervision are whether they:
- Provide consistent reporting requirements across the insurance sector;
- Reduce time lags in reporting and increase powers to call for further information from insurers;
- Enhance regulatory powers to require reporting on both a solo and consolidated basis, where the insurer is part of a group;
- Enhance regulatory powers to monitor and enforce standards applying to insurance products and providers;
- Create regulatory powers to provide authorisation to limit duplication in reporting, or engage in information sharing, in relation to insurers also reporting to foreign regulators;
- Improve regulatory tools that enable timely intervention to manage rehabilitation or orderly exit of financially distressed insurers; and
- Provide proactive supervision of economic/financial risks to the sector that can impact on individual insurers.
4.3 Background
220. New Zealand's insurance supervisory regime is currently disclosure focused, and characterised by a high level of industry-led self-regulation. This has provided for a relatively trouble-free market.119 Hence, there is no calamity that we are seeking to remedy. Rather, we are looking for the most optimal regulatory tools which will better aid the attainment of the Government's objectives for the insurance regulatory framework.
221. Internationally, ongoing monitoring and supervision of licensed insurers is recommended.120 However, the ways and means of implementation vary across jurisdictions, there being no mandated or uniform method. The internationally preferred conditions for effective insurance supervision are a sound policy, institutional and legal framework for the financial sector, well developed and effective financial market infrastructure, and efficient financial markets.121
222. Supervision of the insurance sector by a Regulator is considered important because policyholders, who have a vested interested in the performance of their insurer, are unlike other creditors or shareholders as they are not as well placed to put pressure on an insurer to comply with prudential regulation. Policyholders are a dispersed group with little power to compel insurers to take certain actions,122 the information reported may not be provided in an easily understood fashion, and individual policyholders may lack the expertise to sift among the various technical parameters. In this sense, the power asymmetries and lack of alignment in incentives arguably cause the economic efficiency of the market to be compromised.123
223. Internationally, insurance core principles see on-going supervision as an essential criterion for a supervisory authority. The International Association of Insurance Supervisor (IAIS) lists as a core principal, that the supervisory entity:
…monitors and analyses all factors that may have an impact on insurer and insurance markets.124
224. In terms of experience with the IAIS core principles, under the financial sector assessment program, the International Monetary Fund and World Bank125 have commented that insurance supervisors began working together at the broad international level less than a decade ago. These supervisors are primarily concerned with policyholder protection rather than systemic risk or development issues. The underlying philosophy of modern insurance supervision is to identify problem entities early, act promptly, and apply effective intervention.
225. The supervision needs to include a focus on the financial soundness of an individual insurer, and the group it is a part of, as well as the market and the environment within which it operates. Market analysis of past developments, the current market environment, and identification of future trends and risks are considered important as they allow for timely and proactive supervisory action with a view to reducing the frequency and severity of future problems in the insurance market. The risks to an insurer's stability are greater in situations in which the preconditions for effective insurance supervision are not fully met and there is less than full compliance with prudential principles.126
4.4 Proposals
226. Monitoring and supervision covers two distinct areas: supervisory monitoring and supervisory powers.
227. Supervisory monitoring relates to insurers undertaking regular reporting regarding the insurer's financial position and risk management strategies, both to the public and to the Regulator, and the Regulator monitoring ongoing compliance with licensing and prudential requirements.
228. Supervisory powers relates to monitoring powers (the ability to achieve/fulfil the roles above) such as inspections, meetings with board/senior management, requiring self-certification from directors/officers (e.g. director attestation), and requiring further information, and intervention powers, (the ability to undertake enforcement) such as issuing directives to the board, requiring a self-correction plan, facilitating book transfers, seeking the appointment of a statutory manager.
229. There will be two streams of reporting under the insurance regulatory regime: public reporting and private reporting (reporting to the Regulator), as outlined below.
4.4.1 Proposal - Public Reporting
230. It is proposed that enhanced public disclosure will form an important part of the supervisory arrangements, as a mechanism for promoting stronger governance and market discipline on insurers. The main features of the proposed arrangements are as follows.
4.4.1.1 Proposal - Financial and Risk Management Reporting
231. The proposal is that financial reporting will be required in accordance with the Financial Reporting Act 1993 (FRA), and will be publicly available as currently, but will also be on a centralised register of financial providers (see the Overview of the Review and Registration of Financial Institutions). The four additions to this will be:127
- FRA reporting. The FRA requirements will be extended to cover all licensed insurance providers, so there is consistent reporting across the market. This will be done because insurance entities are seen as public interest entities; that is, they have sufficient public relevance due to the financial nature of their business to require public reporting in this manner;
- Auditing. The financial reports under the FRA of all licensed insurance providers must be audited by an approved auditor (as set out in the Institute of Chartered Accountants Act 1996 and section 199 of the Companies Act 1993);
- Half-yearly reporting. Similar reports to the FRA reports (though unaudited) must to be made by all licensed insurers to the Regulator on a half-yearly basis; and
- Risk management reporting. If this option is adopted, board attestation that the entity has sufficient risk management for the nature and scale of the business (see the Option - Risk Management Strategy section).
232. These reports will be required on a solo and consolidated group basis, and must be made public including on the website and in branches of the insurer.
233. This approach is consistent with international practices.128 For instance, all OECD member countries require annual public financial reports and the majority require quarterly reports (even of branches of foreign insurers). For examination of reports and other financial documents, in the majority of countries, the supervisory authorities co-operate more or less with the appointed actuaries and auditors (even if this is not legally regulated).
4.4.1.2 Proposal - Director Attestation
234. It is proposed that the directors and chief executive must attest in public disclosure statements that the insurer is complying with the supervisory requirements and has adequate systems and controls to identify, monitor and control its material business risks. For example, that the financial condition report has been done, and if the risk management strategy option set out in the Licensing and Prudential Requirements section is adopted, attestation that this has occurred.
4.4.1.3 Proposal - Key Information Summary
235. The proposal is that the insurer must publish a synopsis of the information shown in the public financial reporting, perhaps annually or every six months, which is a short form summary document, similar to the one required for banks. This report is in the nature of a statement of key information that sets out the financial stability and solvency position of the insurer.
4.4.1.4 Proposal - Licence Status Disclosure
236. The proposal is that the insurer must publicise (on their disclosure documents) the date they were issued their licence and whether the licence has been issued subject to terms or any exemptions. It must be updated where these terms or exemptions change. There will be penalties for failure to publicise.129
4.4.2 Proposals - Reporting to the Regulator
4.4.2.1 Reports
237. The proposal is that the following reports must be made directly to the Regulator.
- Financial reporting. The reports made under the FRA, and the half-yearly version; and
- Licensing and prudential requirements reporting. Compliance with the licensing and prudential requirements, by class of insurance business (i.e. by licence) reported half-yearly (unaudited) and annually (audited).
4.4.2.2 Proposal - Confidentiality of Reports to the Regulator
238. The proposal is that the reports to the Regulator will be subject to similar levels of confidentiality as reports to other regulators in New Zealand.
4.4.2.3 Proposal - Frequency of Reporting to the Regulator
239. The proposal is that the reports to the Regulator must be made half-yearly (unaudited) and annually (audited) based on the date of the insurer's financial year (within 3 months of the insurer's standard reporting cycle). The Regulator will have the power to require an insurer to report more regularly where this is justified for the purposes and objectives of the legislation.
4.4.2.4 Proposal - Reporting on a Solo and Consolidated Basis
240. The proposal is that the Regulator would be able to require an insurer that is part of a group, to provide reports to the Regulator on each solo entity in the group and on a group consolidated basis. This would also apply to foreign insurers.
241. In addition to the benefits for the Regulator in being able to see the "entire picture" of the organisation it will be beneficial for judging the insurance sector as a whole. The globalisation of financial markets means it is likely to be important that the supervisory authority have the capacity to monitor developments both in New Zealand and in foreign jurisdictions that could impact on the New Zealand insurance sector.
4.4.2.5 Proposal - Exemption for Certain Approved Jurisdictions
242. The proposal is that the Regulator will have the power to authorise insurers, either from a particular jurisdiction or on a case-by-case basis, to:
- Comply with some or all of the prudential requirements of the foreign insurer's home jurisdiction instead of equivalent requirements in New Zealand; and/or
- Give the New Zealand Regulator the same reports they give to their home jurisdiction Regulator to satisfy some or all of their reporting requirements in New Zealand.
243. The Regulator would need to be satisfied with the quality of the regulatory regime of the foreign jurisdiction and the insurer's compliance with this regime before this could occur.
4.4.2.6 Proposal - Require Additional Information
244. The proposal is that the Regulator will have the power to obtain information from the insurer at any time. The power will include the ability to call for information from third parties, such as the insurer's auditors, or reinsurers. As a check and balance on the Regulator's power to seek information, this will have to be justified to meet the purposes and objectives of the legislation.
4.4.2.7 Proposal - Information Sharing with Foreign Regulators
245. It is proposed that the Regulator will have the power to seek and share information about an insurer with regulators/supervisors in foreign jurisdictions, in a similar manner to that authorised under the Reserve Bank of New Zealand Act 1989. It is also intended that development of memoranda of understanding with insurance regulators in foreign jurisdictions be pursued in order to enhance the effectiveness of monitoring the New Zealand insurance sector. This will assist with the process of monitoring and supervision as it will allow the Regulator to remain abreast of developments in insurance internationally.130
4.4.3 Proposal - Intervention
246. To protect policyholders131 and enhance confidence in the insurance market, the Regulator needs to have the legal and operational capacity to bring about timely corrective action. No matter the regulatory regime and despite the efforts of regulators, situations can occur where insurers fail to meet prudential and supervisory requirements. It has long been recognised that there needs to be some form of supervision of these entities to attempt to minimise the risk of failure.132
247. Depending on the nature of the problem detected, a graduated response may be required. There also needs to be prescribed criteria for the supervisory intervention to provide checks and balances on its use, and to have structured decision-making lines that allow action to be taken immediately in the case of the rapid advancement of adverse circumstances.133
248. It has been noted internationally that remedial measures have the greatest chance of success when they are part of a comprehensive programme of corrective action developed by the insurer, with an implementation timetable.134 However, failure to achieve agreement with the insurer's management should not inhibit the Regulator from requiring corrective action or using other regulatory intervention tools in an attempt to remedy the situation or seek orderly exit.
249. The New Zealand regulatory intervention ladder for insurers will consist of an escalating series of actions that may be taken by the Regulator where justified for the purposes and objectives of the legislation. Hence, the regulatory intervention tools identified as appropriate for New Zealand to give effect to this approach are as follows.
4.4.3.1 Proposal - Meeting With the Board and Senior Management
250. The proposal is that the Regulator will have the power to call for meetings with the board and senior management to discuss issues of concern identified from the reports received or through other sources, and generally to get an update on the insurer and its stability, where justified for the purposes and objectives of the legislation.
4.4.3.2 Proposal - Directives to Board and Senior Management
251. The proposal is that the Regulator will have the power to give directives to the board and/or senior management that must be followed. Directives may include requiring the insurer to:
- Refrain from taking on new business for some or all types of contracts;
- Limit premium income;
- Refrain from certain types of investment;
- Realise certain assets within a defined period; or
- Retain sufficient assets in New Zealand to cover technical provisions.
252. This power can only be used where the Regulator's response is justified against specified criteria, such as that the breach is significant, the insurer has been given a reasonable period of time to remedy the situation but has failed, or there are a number of breaches that together present serious cause for concern.
4.4.3.3 Proposal - Regulator Required Audit
253. It is proposed that the Regulator will have the power to require an insurer to have information audited by an auditor approved by the Regulator, where justified for the purposes and objectives of the legislation.
4.4.3.4 Proposal - Self-Correction Plan
254. The proposal is that where the insurer has not complied with the licensing, prudential and/or monitoring and supervision requirements, the Regulator will have the power to call for the insurer to present a recovery plan that sets out how the insurer intends to correct the position itself within a specified timeframe. If the self-correction plan is not acceptable to the Regulator, or not complied with by the insurer, the Regulator will be able to work with the insurer to change it, or use the other regulatory intervention or exit tools available. This approach is commonly used internationally135 as a regulatory tool for assisting an insurer to be rehabilitated.
4.4.3.5 Proposal - Book Transfers
255. The proposal is that the Regulator will have the power to require the transfer of a failing insurer's book to another insurer that voluntarily accepts this transfer (subject to the rules applying to mergers and acquisitions under New Zealand law).136
256. The insurance market has for some time taken the approach of buying portions of a failing/failed insurer's book to manage the impacts of the insurer's failure on the sector even where the book may not represent best value for the purchaser. Feedback from the Advisory Groups is that this is because the reputation consequences of a participant's failure are viewed as important by the insurance industry and hence a willingness to purchase portions of a failing competitor's book exists.
4.4.3.6 Proposal - Onsite Inspections
257. The proposal is that the Regulator will have the power to undertake onsite inspections either themselves or through a third party appointed as inspector, at any time. The insurer must give all the information available and allow the Regulator/inspector to look into all business documents, so long as this is justified in terms of the purposes and objectives of the legislation. The Regulator/inspector will be subject to confidentiality in a similar manner to that applied for other regulators in New Zealand.137 This is consistent with practice internationally.138
4.4.3.7 Proposal - Sanctions and Penalties
258. The proposal is that the Regulator will have the power to apply to the courts to impose penalties of amounts pre-set in legislation that will apply to the insurer, and in some cases the directors and officers of the insurer, where:
- The insurer has failed to comply with the licensing, prudential and/ or supervisory requirements; and/or
- They have mislead the Regulator or the public, or failed to provide information in a timely fashion.
259. Where the breach is serious and/or includes a large number of breaches of the licensing, prudential and monitoring and supervision requirements, the Regulator will have the power to apply to the courts to have certain individuals barred from the business of insurance.
4.4.4 Proposals - Exit
260. To meet the core principles established by the IAIS,139 New Zealand's regulatory framework will need to define a range of proposals to use in facilitating orderly exit of distressed insurers from the marketplace. The regulatory tools identified as appropriate for New Zealand are as follows.
4.4.4.1 Proposal - Conditions of De-Licensing
261. It is proposed that the Regulator will have the power to withdraw an insurer's licence either temporarily or permanently if:
- Licensing, prudential and other requirements are not continually met, or
- The licensee does not provide products for the business licensed within 12 months of its issue.
262. Many OECD member countries have a "use it or lose it" requirement. That is, failure to offer insurance within a certain period (usually one year) after licensing means the authorisation may be withdrawn.140 This is used as a means of meeting the supervisory focus on continuing licensing requirements, and is desirable, since the insurer is prevented from obtaining a licence, then not participating in the sector until some later date, rendering the initial vetting process redundant and ineffective due to potential changes in material circumstances.
4.4.4.2 Proposal - Regulator Appointment of Statutory Manager
263. The proposal is that the Regulator will have the power to recommend to the Minister that a statutory manager be appointed in relation to an insurer. The Regulator will have the power to direct the actions of the manager, and other powers similar to those applying to banks under the Reserve Bank of New Zealand Act 1989.
264. The criteria for the Regulator's recommendation to the Minister will be, for instance, that:
- The insurer is in breach of licensing, prudential requirement and/or monitoring and supervision requirements, and has been given a reasonable period of time to remedy the situation but has failed; or
- The breach or series of breaches together are of a serious nature or at a significant level to justify the appointment of such a manager.
265. The power proposed here may become particularly important where the Regulator has de-licensed an insurer leaving policyholders and creditors in an uncertain position, and where as a dispersed group they would have difficulty in seeking the appointment of a receiver or liquidator. It would also assist with timely and orderly exit of a financially distressed insurer from the market.
4.4.5 Proposal - Checks and Balances
266. As a check and balance on the use of the Regulator's powers, directions or restrictions imposed by the Regulator under the Regulator's intervention powers, will only apply temporarily to an insurer. To impose them permanently will require de-licensing.
4.4.6 Proposal - Insurer Appeal Rights
267. To provide checks and balances on the actions of the Regulator it is proposed that the insurer have a right of appeal to the courts, under judicial review, for decisions made by the Regulator in relation to monitoring requirements and intervention powers. 141
268. Judicial review is considered more appropriate for monitoring requirements and intervention powers because merit appeal rights may interfere with the timely application of them, which is key to their success as a supervisory tool.
269. Internationally it is common for entities to have a right of appeal to an appellate authority (in most countries this is the courts).142 The right of appeal operates as an appropriate check and balance providing transparency and accountability for the regulatory decisions made. The IAIS principles state as an essential criteria that administrative decisions of the supervisory authority must be subject at least to substantive judicial review.
Questions for Submission
Q31. Will the proposals resolve the problems identified in the Introduction section of the discussion paper and enable the Regulator to achieve its supervisory objectives?
Q32. Are the checks and balances on the regulators use of its powers appropriate?
Q33. What costs and benefits will these requirements have for insurance businesses?
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