The Reserve Bank of New Zealand (RBNZ) has released a consultation paper on whether the penalties and enforcement tools available to it when supervising insurers and its powers to manage distressed insurers should be expanded. The consultation is the third consultation (of the proposed five) in relation to the review of the Insurance (Prudential Supervision) Act 2010 (IPSA). The RBNZ has asked for submissions by 20 May 2022.
Who needs to read it? Why?
All insurers and actuaries should read the consultation document and consider the proposed changes. The consultation broadly proposes an expansion to the RBNZ’s enforcement powers and increased powers when an insurer is in distress.
What does it cover?
The consultation focuses on the following areas:
Penalties and enforcement
The RBNZ stated in the consultation that it aims to design an effective enforcement and penalties regime under IPSA. Currently, IPSA has a wide range of offences and penalties for breaches of obligations under the Act. However, enforcement action is confined to written warnings or criminal sanctions.
The consultation proposes a wider range of penalties and enforcement tools with the aim of allowing the RBNZ to take a proportionate and escalating response to breaches of IPSA. The RBNZ is considering the following enforcement actions:
- public or private warnings;
- remediation plans of insurers in breach of IPSA;
- enforceable undertakings;
- infringement notices; and
- civil pecuniary penalties.
The consultation refers to the proposed enforcement tools available to the RBNZ in the recent Financial Markets Infrastructure Act 2021 and proposed Deposit Takers Bill. The clear intention of the proposals in the consultation is to introduce similar enforcement action for insurers under IPSA as there are for other entities regulated by the RBNZ (primarily deposit takers such as banks).
The consultation paper also proposes raising the maximum penalties in IPSA to account for inflation and for consistency with the proposed Deposit Takers Bill.
Supervisory powers
The consultation paper discusses broadening the RBNZ’s information gathering and investigation powers. The consultation points out that these powers apply in respect of licensed insurers only, and do not extend to instances where an entity is carrying on business as an insurer but is not licensed. In addition, the consultation notes that, unlike the Financial Markets Authority, the RBNZ is not authorised to request information from any person in pursuit of its statutory functions (the power currently relates to the licensed insurer only, but does not extend to brokers, outsource providers or entities that may be carrying out insurance business but are not licensed).
The RBNZ proposes an extension of its direction powers. Currently, the RBNZ can impose an enforceable requirement on an entity to perform or not perform particular actions. The RBNZ has a wide-ranging power to direct an insurer to take a number of actions (such as to carry on business in a certain way, or cease to issue new policies). However, IPSA does not currently allow the RBNZ to direct an insurer not to renew existing policies – the RBNZ proposes to introduce this power.
The consultation paper also seeks submissions on whether breach reporting should be required of insurers and whether, as proposed in the Deposit Takers Bill, the RBNZ should have the power to conduct on-site inspections.
Distress management
The consultation considers, in relation to distress management, whether:
- there should be a purpose statement included in IPSA to govern the RBNZ’s involvement in distress management of insurers;
- insurers should be required to undertake some form of resolution planning;
- IPSA provisions should include details of the RBNZ’s role in administration and liquidation;
- the current triggers for statutory management are too demanding and whether the RBNZ should be given powers of the statutory manager; and
- the provisions in IPSA addressing stays on certain contractual rights under statutory management are sufficient.
The RBNZ raises whether, given its considerable input into the statutory management process, it should have the power to exercise resolution powers itself. The consultation discusses whether, as with the proposed Deposit Takers Bill, resolution powers should vest with the RBNZ.
Ladder of intervention
The consultation also discusses what enforcement and distress management powers the RBNZ should be equipped with in the new ‘ladder of intervention” introduced by the new solvency standards.
Briefly, the solvency standards currently applicable operate on the basis of a single solvency standard (the Minimum Solvency Capital). The interim solvency standard proposed by the RBNZ includes two control levels: a higher “Solvency Capital Requirement” and a lower “Minimum Capital Requirement”. This allows the RBNZ to have an escalating response as capital levels decline i.e. a “ladder of intervention”.
The RBNZ has indicated that it will issue a policy as to what enforcement action it will take at each rung of the ladder. However, the RBNZ is taking submissions on the statutory triggers i.e., when an enforcement action can be taken by the RBNZ under IPSA.
The RBNZ considers that all powers should be available once the Solvency Capital Requirement is breached or is likely to be breached. How the RBNZ will use these powers would then be published in guidelines.
What is next for the review?
The RBNZ has indicated in the latest consultation paper how the review will proceed. The RBNZ proposes to consult on key officers and control functions, supervisory approvals in Q3 2022 and regulatory mechanisms, disclosure requirements and other issues in Q4 2022. Once the targeted consultations are completed, the RBNZ will release an omnibus consultation setting out its recommended reforms for IPSA (expected to be in the first half of 2023).
Following the omnibus consultation, the RBNZ will aim to introduce a draft amendment bill to Parliament before the end of 2024. The timing for the implementation of the Bill has not been released.
Our view
We welcome the RBNZ’s intention to create an effective and proportional penalties and enforcement regime. In particular, we welcome the broadening of the RBNZ’s enforcement toolkit so that criminal sanctions are reserved for the most serious offending. We encourage the RBNZ to consider the purpose and proportionality of these penalties and enforcement actions as it develops the new provisions.
The omission of a power to direct insurers not to renew existing policies in IPSA was highlighted in the Trowbridge report into the failure of CBL Insurance and the International Money Fund (IMF)’s review of the financial sector. However, if the RBNZ has the power to direct an insurer not to renew policies, this could create significant problems for some types of policyholders, particularly in relation to life or health insurance. As the RBNZ suggests, restrictions could be placed on this power requiring that the RBNZ have regard to policyholder interests. It will be critical that this new duty balances the need to reduce the exposure of an insurer and the interests of the policyholder in maintaining their cover and current cost of insurance.
We question the consultation’s heavy reference to the Deposit Takers Bill. The RBNZ implies in its consultation that a number of enforcement tools and distress management tools should be broadly consistent with those for banks in the Deposit Takers Bill. We generally accept this premise in relation to penalties and enforcement action. However, we consider that the same level of regulation is not warranted for the insurance industry in relation to distress management. In comparison with banking, insurers do not present the same systemic risk. For example, when an insurer fails, this is not likely to result in a broader collapse across the industry. We have seen this, for instance, with the collapse of CBL, which did not result in consequential failures. The RBNZ’s proposal to be responsible for resolutions in relation to statutory management may be overzealous.
We also recommend that the RBNZ exercises caution in creating its approach to intervention in the case of an insurer’s insolvency. The concept of the ladder of intervention is that enforcement is proportional and progresses as solvency levels decline. Therefore, should the RBNZ wish to allow the entire range of enforcement actions to be available at the first rung of the ladder (Solvency Capital Requirement), it must ensure that it adopts an approach consistent with the ladder of intervention model in its published guidance.
What next?
If you have any questions in relation to the consultation or are considering how the proposed changes may affect your business, please contact one of our experts.
This article was co-authored by Sarah Jones, a Solicitor in our Financial Services team.
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