Reserve Bank recommences IPSA review
Yesterday, the Reserve Bank of New Zealand (Reserve Bank) announced that it would recommence its review of the Insurance (Prudential Supervision) Act 2010 (IPSA). The review has been paused since April 2018. A policy paper outlining the resumption of the review will be published in October.
Who needs to read it? Why?
Insurers and appointed actuaries should take note of the update and closely follow the resuming review of IPSA.
What does it cover?
In his speech to the Insurance Council of New Zealand, the Deputy Governor and General Manager of Financial Stability highlighted the issues for the insurance sector and what the review will focus on:
- Definition of a ‘contract of insurance’: The current definition of a ‘contract of insurance’ under IPSA does not capture arrangements that appear to be insurance to consumers but are not regulated under IPSA. The review will consider whether the scope of IPSA should be increased.
- Capital management: The Reserve Bank considers there is scope for improvement on requirements for capital management, quality of risk management and governance in the form of more specific definitions and guidance.
- Solvency standards: Solvency standards need to be made more specific. IPSA requires an ‘all or nothing' approach where a solvency ratio above 100% is adequate and anything underneath that is inadequate. Any buffer above the minimum is at the discretion of the insurer. The Reserve Bank intends to introduce a consultation on new regulations which would reduce the risk of insurers breaching minimum solvency requirements.
- Overseas requirements: IPSA currently exempts insurers from IPSA requirements where they are subject to a similar regime. The Reserve Bank intends to review the ‘carrying on business test’ to lower the level of non-licensed insurers.
The Reserve Bank noted that there is significant turbulence for the insurance sector, particularly in relation to travel, credit and business disruption insurance, as a result of COVID-19. However, the Reserve Bank considers that it is an appropriate time to resume the review.
We welcome the Reserve Bank’s renewed attention to the IPSA regime. While we agree with the Reserve Bank that the IPSA is not broken, there are significant areas where regulations could be amended.
In conducting their review, the Reserve Bank should consider the benefit of any increased regulation with the burden on insurers, which is likely to be more keenly felt in the current economic climate. In addition, the Reserve Bank should recognise that overseas insurers and reinsurers play a key role in funding and supporting the insurance industry. Any new regulation that widens the scope of the regime to overseas insurers or introduces significant regulation will risk the participation of overseas insurers in the New Zealand market.
If you have any questions in relation to the review or how the changes to IPSA may affect your business, please contact one of our experts.