Insurance (Prudential Supervision) Bill — In Committee Third Reading 
Insurance (Prudential Supervision) Bill — In Committee Third Reading 
[Volume:666;Page:13591] 
Insurance (Prudential Supervision) Bill 
In Committee 
JO GOODHEW (Junior Whip—National) 
: 
 I seek leave to have all parts of the Insurance (Prudential Supervision) Bill taken as one question. 
The CHAIRPERSON (Lindsay Tisch) 
: Leave is sought for that purpose. Is there any objection? There is no objection. 
Parts 1 to 5 schedules 1 to 3 and clauses 1 and 2 
Hon NATHAN GUY (Minister of Internal Affairs) 
: 
 I think it is appropriate to acknowledge that this bill has good cross-party support. It had its first reading in December 2009 and it received 57 submissions 31 of which were heard by the Finance and Expenditure Committee. The committee worked particularly well through this process and made some useful refinements to the bill. 
The bill generally focused on licensing and prudential regulation for all insurers carrying on insurance business in New Zealand. All insurers are to be licensed and supervised by the Reserve Bank. They must comply with prudential requirements and the Reserve Bank will be both the regulator and the supervisor. The bill aligns New Zealand with international regulatory benchmarks and expectations. It is a stand-alone measure rather than an adjunct of the Reserve Bank of New Zealand Act. 
The bill’s primary purpose is the promotion of a sound and efficient insurance sector and the promotion of public confidence in the sector which as I am sure the Committee would agree is particularly important. The bill covers all categories of insurers carrying out business in New Zealand: life non-life and medical. All insurers must have a financial strength rating except the very small insurers and the friendly societies. All insurers must have a satisfactory fit and proper risk management programme and life insurers must maintain a statutory fund to protect their long-term policy liabilities. 
As I mentioned before the Reserve Bank will have broad information-gathering powers of supervision including an active role in the management of distressed insurers. The bill has had extensive stakeholder consultation and its purposes and approach have generally been accepted by the industry. 
Hon SHANE JONES (Labour) 
: 
 Morena Mr Chair. Without wanting to protract our deliberations the record of Parliament must show that this side of the Chamber supports the Insurance (Prudential Supervision) Bill. Although it deals with a very technical area the underlying theme is common with what we said yesterday in relation to improving the quality of administration and the safeguards around the broader elements that comprise the commercial sector. For those reasons the Reserve Bank is viewed by us as being a very suitable location from which the prudential powers should be located and exercised. 
The difficulty as I recall hearing from Mr Garrett is that from time to time if insurance companies are not adequately supervised they will be like a host of other commercial institutions and be prone to whim fancy or whatever passes as the mood in the investment community—that which is enjoying vogue at that point in time. These are very important institutions and indeed a number of speakers earlier in the debate made reference to the fact that insurance companies are critical to their lives because they have a type of insurance that they are entitled to gain access to if they are without a job. I do not fit into that category because I never imagine that I will be without a job. The difficulty may be that I am not paid for the job that I end up with but such is the life associated with assuming a role outside the paid workforce. My relation Hone Harawira and I can speak at length about those matters. 
Of course the deeper problem that I have alluded to earlier in relation to this bill is that we are applying another responsibility to the Reserve Bank of New Zealand Act but we are not dealing with the underlying writ of the Reserve Bank of New Zealand Act which a number of my colleagues have referred to publicly. That is if we are to promote an export-led level of growth if we are to promote—[ 
Interruption 
]—perhaps a type of lashing is needed. My train of thought was disturbed not only by looking at Mr Foss but by the whips ringing Dr Blue. 
Craig Foss 
: You’re looking for guidance and expertise. 
Hon SHANE JONES 
: No I can rest assured. I will repeat what I said yesterday. Out of  
The Wizard of Oz 
 comes the story of someone looking for a heart another person looking for a brain and another looking for courage. I will leave Mr Foss to determine which of those qualities he seeks in his political career. However let me come back to the deeper problem which is the ambit— 
Paul Quinn 
: Are you going to do that 58 times? There are 58 of us. 
Hon SHANE JONES 
: I accept that Mr Quinn when he originally heard the story did not quite know what I was talking about but he did pick up on the reference to Gonzo the Muppet. However the broader challenge in terms of the responsibilities of the Reserve Bank concerns whether we have the right mix of focus in our current monetary policy over which the Reserve Bank has an exclusive level of authority. That largely is its writ. 
We look forward to actually engaging in a broader debate beyond the refinement of the prudential obligations that the insurance industry should observe which will be located in the Reserve Bank. But at a broader level if the current Government is good for its word and is interested in fostering an export-led economy I ask it what ideas and remedies it has to deal with the volatility and the current arc that our currency is going through. I want to know whether it is time for monetary policy which has been in place for 20 to 25 years to be opened up and debated in a very robust way to see whether it can play a more useful function in relation to advancing an export-led recovery. 
There is a real contrast between the type of sophistication that has been brought to the economic area by the current Government and that brought by the previous Labour Government. In changes of this nature broadly the current Government has built on what Labour did in its time in office. We were particularly interested to ensure that we laid down the broad architecture for those policies whether they were savings policies or measures to improve the institutions that really are the pillars of our commercial communities such as insurance and the administrators’ insurance. This Government over the last 18 months in the absence of any radical or sustainable ideas about how to grow the economy has ended up exhausting energy and time both on cutting taxes and on other issues. 
STUART NASH (Labour) 
: 
 As my colleague Mr Jones alluded to the Insurance (Prudential Supervision) Bill amends the Reserve Bank of New Zealand Act and gives the Reserve Bank prudential supervision over the insurance industry. I suppose we can have no discussion at all about the Reserve Bank without mentioning monetary policy. As Mr Jones alluded to monetary policy I suspect will be one of the election issues where National wants to keep the status quo thereby inhibiting the potential of our exporters to really really grow and achieve their potential in this day and age of globalisation. Labour conversely has a bold new plan—that is p-l-a-n; but I know that those chaps on the other side do not know how to spell it let alone what it means—to really deal with one of the three major problems that the New Zealand economy has at the moment which is a volatile exchange rate. A volatile exchange rate at this point in time means that exporters have no ability to plan with any type of certainty in relation to how much they are going to produce where they are going to sell to and how they are going to do that. The only way to do it is to work with the Reserve Bank and with the Reserve Bank of New Zealand Act. 
The introduction of this legislation the Insurance (Prudential Supervision) Bill 2009 is another significant step towards achieving clear robust regulatory arrangements across the financial sector. Again when we talk about what has happened in the financial sector we can say it has been an absolute disaster—an absolute disaster—as many thousands of Kiwis have lost literally millions and millions of dollars. I am talking about the financial sector here— 
The CHAIRPERSON (Eric Roy) 
: You should be talking about the bill. 
STUART NASH 
: I am Mr Chairperson; it is very much to do with the financial sector. 
Amy Adams 
: Yeah but the insurance part of it? 
STUART NASH 
: We are talking about the financial sector. 
Amy Adams 
: We’re talking about insurance. 
STUART NASH 
: I will get to that. If that member had something worthy to say then we might listen but she should keep quiet and wait for her turn. 
What this bill does—[ 
Interruption 
] If people listen they might actually learn something. The bill will replace outdated and disjointed legislation. It will fill gaps where no prudential regulation currently exists. If that is not part of the financial system then I am not too sure what is. Having said that I say that Government members of the Chamber have no idea at all; they want to retain the status quo when it comes to the financial systems of this country but we know that the status quo has not worked. People always go back to the status quo when they do not have a plan on how to move things forward—but anyway! 
This bill will remove the inconsistent application of requirements between different insurance sectors. The purpose of the bill is to encourage the maintenance of a sound and efficient insurance sector that promotes confidence among policyholders and the general public. Of course confidence among the general public in the financial industry has been at an all-time low due to a dreadful state of governance maintenance and management to date. 
Hone Harawira 
: Hear hear! 
STUART NASH 
: Thank you very much. The bill establishes a licensing regime for insurers and prudential regulators with compliance being largely self-administered while supervision is provided by the Reserve Bank. As mentioned this is another tool in the Reserve Bank’s arsenal of tools. We think the Reserve Bank could do a hell of a lot more in driving the economic growth of this country but it does not have the statutory power to do that. The Labour Government which we will have here in the next—I do not know—12 or so months will change things; we have a plan. The bill will cover most entities that undertake insurance business in New Zealand including life insurance health insurers captive insurers and the insurance activities of incorporated societies. It is a sensible bill and it is one that we support. It establishes as we have mentioned a prudential regulatory framework for the insurance industry and in doing so it gives a number of powers to the Reserve Bank to carry out its new role. 
I will mention some of the key provisions of the bill. It will require insurers for example to obtain a licence—and criteria for eligibility will have to be met in order to do that—and to maintain solvency. Well that makes sense does it not? Of course we want our financial institutions to maintain solvency because if that does not happen we will get what happened with the finance companies: they were insolvent so Kiwis lost millions and millions of dollars. In fact I hope the new Minister of Consumer Affairs will take a call on this bill because this legislation does affect consumers and consumers are at the heart of it. 
Hon Ruth Dyson 
: And he’s actually very passionate about that. 
STUART NASH 
: He is passionate about it; he is indeed. So I hope he comes to the Chamber. 
The bill also requires insurers to obtain and publish financial strength ratings which allow consumers to have choice but not the sort of choice that they had in respect of financial companies. This means that an insurer is transparent it is out there and consumers can look at it and understand what they are getting into. 
Those companies will have to meet fit and proper standards for directors and relevant officers. Again that is most important. If we look at the financial sector in the past 3 or 4 years we could very strongly make the case that one of the reasons why it acted so dismally—in fact it failed—is that there was not a sound governance structure at all. In fact the structure was deficient; it was missing. Insurers also have to comply with a risk management programme. Again that was a provision that was missing from finance companies. Insurers have to appoint an actuary and they have to prepare an annual financial condition report and annual and 6-monthly financial statements. 
Hon Ruth Dyson 
: Is this all in the new bill? 
STUART NASH 
: This is all in the new bill; it is a fantastic bill because it provides certainty for the consumer. Insurers also have to maintain at least one statutory fund that relates to their life insurance business which is solely for the purpose of meeting life insurance liabilities. 
This bill recognises and accommodates supervision by the home regulator of overseas insurers based in New Zealand—subject of course to such regulation meeting the satisfaction of the Reserve Bank. The bill also allows for cooperation with overseas regulators. In essence this means that if an insurance company with a parent overseas meets a whole lot of conditions deemed necessary by its governance authority—say an authority in Australia for example—then that company does not have to go through the whole rigmarole in New Zealand if the company can prove that it is good sound and robust as a lot of those key provisions that I mentioned allude to. 
The bill obliges the Reserve Bank to supervise insurer compliance with the bill and with regulations. In the event of non-compliance the bill enables the Reserve Bank to escalate supervision through investigations and ultimately through distress management and liquidation. Some regulations will be new to insurers and a transition period of 2 to 3 years will follow enactment to facilitate a path to compliance for insurers that are unable to meet the licensing requirements at the time of enactment. The insurance market is very large and diverse in this country so the transition period is important to make sure that we give every company the opportunity to comply. More specifically the bill sets out a framework of prudential regulation and supervision for the New Zealand insurance sector. The approach is generally aligned to internationally accepted insurance regulatory practice and will recognise the diversity of the New Zealand insurance market. 
I will go through some of the main areas of the bill and these are as follows— 
Paul Quinn 
: Oh! Wake me up when you’re finished. 
STUART NASH 
: The member over there yawned; that is astounding is it not? Many of that member’s constituents have lost hundreds of thousands of dollars due to a very very lax set of regulations governing the financial sector. But he does not care one bit at all. I challenge that member to call a public meeting and invite to that meeting every single person in his area—I know he does not hold an electorate and has no hope of holding one of the Hutt electorates—who has lost money to one of the finance companies and explain to them why this sort of financial regulation is not important and why it is not needed. 
The CHAIRPERSON (Eric Roy) 
: This legislation is about insurance not finance companies. The member will continue. 
STUART NASH 
: I will cover some of the main areas of this bill. In respect of the licensing of insurers licensing ensures that a consistent set of minimum standards is met by all insurers. The standards must be obtained to receive a licence and once a licence is granted insurers are able to be monitored against those standards. There is a minimum set of standards that every insurer must meet. That is most important but it is also common sense as legislation should be. That reduces the need for consumers to make complex inquiries regarding an insurer’s financial strength and other indicators. 
One of the criticisms I have is that there is such a DIY mentality to investment in this country that we need to make that licensing incredibly clear: the level of financial literacy is low so we need to make it very clear and very simple so that consumers know what they are getting into. This bill does that. Insurers covered by this new regime will need to be licensed before the legislation comes into force. The bill will come into effect 18 months after it has received its Royal assent. After that date it will be an offence to carry on or hold out that one can carry on an insurance business in New Zealand without a licence. That is most sensible. Thank you. 
CRAIG FOSS (National—Tukituki) 
: 
 Well that speech from Stuart Nash was the best indication that voodoo economics is on the way back. The platform of the Labour Party at the next election will be monetary policy apparently. Its platform will not be tax cuts affordability the cost of living climate change or jobs; its policy going around the traps will be monetary policy. 
I look forward to seeing Mr Raymond Huo Mr Choudhary etc. going around the traps and talking about monetary policy. At every meeting we will furnish our candidates and MPs with the report of the inquiry into future monetary policy which was started and completed under the previous Government at the whim of Dr Cullen and the Labour members on the Finance and Expenditure Committee what was it 2 years ago? In September 2008 I think that report was presented to the House. 
Hon Member 
: I thought this bill was about insurance. 
CRAIG FOSS 
: It was very interesting because the terms of reference of that inquiry—I am just replying to Stuart Nash the previous speaker—were agreed to and formulated by the National members including me on the Finance and Expenditure Committee and members of the previous administration. As two other speakers have already brought this debate into the realm of monetary policy for some reason— 
The CHAIRPERSON (Eric Roy) 
: It was my error to allow the previous speaker Stuart Nash a second call. I regret that but that does not mean—[ 
Interruption 
] That member can go outside for half an hour. I am on my feet; I mean that. That does not give any other member the opportunity to move the debate away from the bill. We are on the Insurance (Prudential Supervision) Bill. Members will speak to the bill in the Committee stage. 
Paul Quinn withdrew from the Chamber. 
CRAIG FOSS 
: Thank you Mr Chairman; I totally agree with you—I reiterate that the Insurance (Prudential Supervision) Bill falls under the ambit of the Reserve Bank. I make one qualification: the bill has nothing whatsoever to do with the Reserve Bank of New Zealand Act as some members have indicated although the Reserve Bank sponsored the bill and its officials helped the Finance and Expenditure Committee during the bill’s select committee process. As we are now in the Committee of the whole House it is appropriate that the officials are in the Chamber to assist the Minister and the Committee of the whole House where necessary. 
It is very pertinent to not confuse this Insurance (Prudential Supervision) Bill with any type of regulation to do with finance companies. I think I am correct in saying that not one cent has been lost within New Zealand or even in the United States from memory from collapses of insurance companies. Attention has been focused on the need for this type of supervision and for a more generic approach to all things financial. But Mr Chairman is quite right to say that bringing the debate into the realm of finance companies in Lower Hutt or somewhere has absolutely nothing to do with insurance. I reiterate that I do not believe that even one cent has been lost by New Zealanders from their funds held by insurance companies in New Zealand. 
This bill is a preventive measure and it is quite a prudent measure—the word “prudential” is in the bill’s title. Prevention is better than cure. This bill is a recognition that in modern finance where funds in finance companies and companies in the insurance industry are exposed or where there is any cross-pollination or exposure of each other’s funds it is good to have the same regulator at the top of the tree keeping an eye on everything. There are some common themes between how this bill works and how banking supervision works. Even though some of the funds involved are ring-fenced in many aspects their supervision needs strengthening. Many of these funds are quite substantial and they dwarf the funds in some of the institutions that members opposite were speaking about in those two earlier speeches. 
As tempting as it is to discuss that matter—and I note Mr Chairman’s comment earlier about sticking quite narrowly to the bill but goodness gracious me—I look forward I suppose to hearing further speeches from members opposite to counter some of the comments made. However I agree with Mr Chairman’s ruling that the previous speaker went outside the scope of the debate. Basically my assertion is that those members were totally wrong. That those members are putting monetary and fiscal policy into one bucket and giving it to the Reserve Bank—which is kind of what I heard—is very interesting indeed. 
The Finance and Expenditure Committee had 57-odd submissions on this bill. I acknowledge the process the officials who were involved and the members of the committee. I realise that members opposite are voting for this bill and once we got to the nitty-gritty there was only one point of real interest or angst perhaps in the bill for one or two select committee members. I recall them speaking about that point in the second reading debate. 
We opened for submissions on 8 December 2009 and closed on 10 February 2010. The point is that there was ongoing consultation. There was the normal process of a bill coming to the committee and then the committee opening it up for public submissions particularly from those who had not been involved in any process pre-consultation or discussions with the Reserve Bank or whoever might be running the bill. If it were a tax bill the discussions would have been with Inland Revenue Department officials. Really parallel conversations were going on. That was the correct process because the committee was totally informed as to who was involved in those discussions what material or policy changes had been made and which strong debates discussions or areas of disagreement there still were. 
Efficiency in the public sector if you like took one great leap forward in so far as this bill was concerned because it is quite substantive. If we look at just some of the background documents and some of the organisations that were involved we see overall that only one particular sector was not as happy at the outcome as others and that sector was the captive insurance industry. To its credit it made its case very very strongly. But I made the point in the committee I think that the control missing from some of those arguments was in trying to quantify the risk to New Zealand and to our reputation and aspirations as a First World financial centre if we were to be included in the same group as the Cayman Islands Jersey Guernsey and various other places like that. That would be a deliberate choice for New Zealand. On balance I am quite confident that we made the right choice. 
The committee made some substantive changes. Initially we had quite interesting discussions and debate about what insurance was in fact. We talked about whether insurance was discretionary. Members would not believe how many organisations that discussion picked up. Even if someone contributes to a fund a trust or a friendly society the key point was whether that person would have discretion on payout. Some professional bodies were included in that discussion including some Wellington organisations like the Loyal Britannia Lodge from memory. All sorts of interesting things came out of that discussion. These were organisations where fund members had put in a few dollars every week for their funeral costs intending that fund to mature in 10 20 or 30 years or whenever it might be. Originally those organisations were picked up by this bill. It is a credit to the select committee process and the Reserve Bank officials that those organisations were carved out. I think we put the cap at $1.5 million or was it $3 million? But basically there was no mischief whatsoever. The risk to the insurance part of the New Zealand financial system was very very small in so far as those bodies were concerned. 
As it turned out there were two or three types of groups. There were the very small groups. There were professional bodies such as those that offer some medical insurance veterinary insurance or dental insurance. Then there were the larger players whom we all know about such as AMI Insurance and the big-end-of-town insurance companies. Overall I still attest that on the whole they were generally comfortable. There was some detail that they were not comfortable with and some are still not very happy but all the rhetoric and allegations around this bill have quietened down quite massively. Some of the allegations about there being an increase in premiums because of this bill etc. have not come to pass because those who made the allegations were being a wee bit facetious. They had built in those premiums and made changes anyway because of other changes to the taxation treatment of the life insurance side of their businesses and the normal insurance side of the business. One side is the balloon side and the other side is the user-pays “pay as you go” - type stuff. 
One point I will raise is that other members had concerns about the impact on the balance sheets of large New Zealand insurance companies. As I said in my speech in the second reading debate that concern has been flagged for quite some time. I cannot quite remember when the bill was first introduced to the House but there have been discussions on it for quite some time. With regard to the effect of the bill having an impact on insurance companies’ balance sheets I say it will be something like 3 or 4 years all up from the first discussion of this measure to when those companies must comply. There have been allegations as to the cost for some of the policyholders trust holders or unit holders if you like for those institutions. Actually—and this came into the discussion of New Zealand regulation versus Australian regulation—after 3 or 4 years of lead time a balance sheet moves around and investment decisions are made. Some companies make those decisions based on regulatory arbitrage perhaps and others make them based on tax arbitrage. 
This is a very good bill. I acknowledge the Opposition for supporting it. Thank you. 
Hon MARYAN STREET (Labour) 
: 
 I am pleased to speak in the Committee stage of the Insurance (Prudential Supervision) Bill. Without wishing to try the Committee’s patience I want to take my few minutes in this call to describe the bill in terms of what it is not because sometimes describing something in the negative is as beneficial as describing it in the positive. We will see how we go and how much I try members’ patience in the process. 
Clearly Labour supports this bill. Our main concern was to ensure that it benefited insurance policyholders through ensuring the security the transparency and the fairness of a supervision scheme. Of course we are in agreement with that. We also support the Minister of Finance’s Supplementary Order Paper Supplementary Order Paper 155. There is a 200-page bill and a 10-page Supplementary Order Paper and both of them reflect what the bill could have been but did not go into. 
We support the bill and we support the Supplementary Order Paper but the question arises from the Supplementary Order Paper as to whether this bill seizes the opportunity that was before the Government—and before the Finance and Expenditure Committee but at the direction of the Government. In doing something essential which this bill does it achieves what it sets out to do and that is to encourage by its own purpose the maintenance of a sound and efficient insurance sector that can promote confidence amongst policyholders and the general public. 
However these are extraordinary times. To improve the insurance sector and the transparency and security of it is good in these extraordinary and uncertain times. But in fact the Government could have taken the opportunity to do something even more substantial. Here in this bill a portion of our economic structures are being given into the hands of the Reserve Bank in order for that monitoring and supervisory function to be performed. That is a good thing. 
But what the Government could have done was to take another look at the functions of the Reserve Bank and to expand its functions in a way that addresses— 
Craig Foss 
: I raise a point of order Mr Chairperson. 
The CHAIRPERSON (Eric Roy) 
: There is a point of order. I think I can anticipate what it is and without even hearing it I will uphold it. The member needs to clarify the argument she is putting in relation to the bill before us. 
Hon MARYAN STREET 
: Speaking to the point of order. 
The CHAIRPERSON (Eric Roy) 
: No. I have spoken. I have just said that the member must talk about the bill. You can make a comparative example but you must draw it into the bill. 
Hon MARYAN STREET 
: The treatment of the insurance sector as I have already said is a valid important and justifiable thing to do. But why do we not accompany that with some additional measures that relate to comparable sectors in the financial structures that we have and deal with a comprehensive range of the financial tools that are available to this Government—or that could be available to the Government with some imagination and boldness? 
In this bill we have a cringing timidity on the part of this Government that restricts it from looking at the creation of other financial and economic institutions or powers within the Reserve Bank and limits it only to the purpose of this bill which is in fact to encourage the maintenance of a sound and efficient insurance sector. We do not disagree with that but it cannot go unnoticed in the context of describing what this bill does that the Government could have done more. 
The question was put that the amendments set out on Supplementary Order Paper 155 in the name of the Hon Bill English be agreed to. 
Amendments agreed to. 
Parts 1 to 5 schedules 1 to 3 and clauses 1 and 2 as amended agreed to. 
Bill reported with amendment. 
Report adopted. 
Third Reading 
Hon NATHAN GUY (Minister of Internal Affairs) 
: 
 I move  
That the Insurance (Prudential Supervision) Bill be now read a third time 
. I wish to thank all of those who have contributed to the smooth process of this sensible and well-targeted bill through its parliamentary process. Although this morning we heard a lot of political point-scoring during the debate of the Committee of the whole House generally speaking this bill has very much cross-party support. The collaborative approach taken firstly by the industry and the stakeholders in their active engagement with officials through the developmental phase of the bill and subsequently between the industry officials and also the Finance and Expenditure Committee through the select committee process has meant that overall everyone has made a very valid contribution to the appropriate and effective outcomes that this bill will achieve. 
The purposes of the bill are to promote the maintenance of a sound and efficient insurance sector and to promote public confidence in the overall sector. The bill takes a number of steps to achieve these purposes. It establishes a framework for the prudential regulation of insurers and it requires insurers to be licensed and subject to prudential requirements. It makes the Reserve Bank responsible for supervising insurer compliance with the bill and it provides certain powers to the Reserve Bank to act in respect of insurers in financial distress. By taking these steps the bill will bring New Zealand into general alignment with established international insurance regulatory practice. 
The bill recognises the diversity and the comparatively small New Zealand insurance market and it seeks to maintain the balance of the market through regulation and making sure that that regulation is appropriate in the New Zealand context. We do not want to impose excessive or unnecessary compliance costs on the industry and overall we need to deliver an appropriate level of regulatory effectiveness. Once the transitional implementation phase is completed compliance costs will be comparatively light for compliant insurers. The financial reporting requirements contained in the bill the emphasis on governance and senior management accountability and on involvement in the process and the outsourced viewpoint of insurers’ financial strengths from independent rating agencies all contribute to a cost-efficient yet effective mode of delivery of this new regulatory model for New Zealand insurers. 
The enactment of this legislation will see the repeal of a number of existing outdated and poorly linked pieces of insurance legislation that date back in some cases to 1908. It will remove inconsistent legislative application between the different insurance sectors. In summary it will deliver to New Zealand a current relevant and international-standard model of insurance prudential regulation. As I mentioned during the Committee stage the first reading of the bill in December 2009 had wide-ranging cross-party support and general support from those within the industry. This demonstrates that across the political spectrum and within the industry there is a clear recognition of the purpose of this bill. The means by which it will achieve those purposes are appropriate to the New Zealand market that it will regulate. I commend the bill to the House. 
Hon DAVID PARKER (Labour) 
: 
 As earlier speakers on behalf of the Labour Party have said we support the Insurance (Prudential Supervision) Bill as far as it goes. It does improve the prudential supervision of insurance companies. It will help protect New Zealand consumers by ensuring that those insurance companies act prudently maintain prudent balance sheets and do not fail. That is important because insurance companies are repositories of not just contracts of insurance which people expect them to honour—for example if people have life insurance they expect the insurance company to honour the contract when they die—but also money through endowment policies and the like. So we need to ensure that they are robust. That is good as far as it goes. 
I think the bill has been brought forward because of the effects of the global financial crisis and the failures we have seen around the world of some very large insurance companies which have cost many billions of dollars not just to consumers through insurers not being able to honour their contracts of insurance— 
Craig Foss 
: I don’t think any insurance companies failed. 
Hon DAVID PARKER 
: —but also to taxpayers who have had to bail out those insurance companies. Well there have actually been some multibillion-dollar Government investments in respect of some of the insurance companies in the United States. 
In terms of how this bill works it increases the powers of supervision of the Reserve Bank of New Zealand which is the body that has been given increased supervisory powers to maintain prudential supervision of insurance companies. The point has probably been made by prior speakers that there is a lost opportunity here to go further in respect of prudential supervision of our banking sector which could assist our export sector through influence on monetary policy. At the moment the Reserve Bank has an almost singular focus when it comes to monetary policy on interest rates. It tries to take the excesses out of the economy by putting interest rates up and therefore suppressing consumption in order to ameliorate the effect of asset bubbles and to take the heat out of the economy which is inflationary. The bank’s reliance on that single instrument has had a detrimental effect on the export economy. The export economy of New Zealand has suffered a number of detriments. For a start the way in which we have implemented monetary policy in New Zealand means that we have structurally higher interest rates than our competitors. So whether one is a farmer or an exporter in the manufactured goods area one is facing higher interest rates than those faced by competitors overseas. 
That has a number of detriments. The first is that the exporter or the investor in a New Zealand enterprise has a higher cost structure than competitors overseas in respect of interest rates. So if all other things are equal a widget manufacturer in New Zealand has a higher cost structure than overseas competitors because New Zealand has structurally higher interest rates. After 20 years of monetary policy in its current incarnation we do have to question in my view whether the higher interest rates that we have structurally in the economy now are actually partly an outcome of current monetary and Reserve Bank policy. This legislation which changes the prudential requirements for insurance companies could have taken a similar approach in respect of banks so as to introduce more tools to the Reserve Bank so that it does not have to rely exclusively on the interest rate tool. 
The second detriment that is suffered by New Zealand businesses as a consequence of those higher interest rates—which also undermine their ability to invest in productive plant which is needed to improve the overall productivity of the New Zealand economy—is that we are effectively creating an unlevel playing field in a world where there are global flows of capital. A bidder who is sourcing funds overseas to bid for a profitable New Zealand business pays a lower interest rate in his or her home country than a New Zealand borrower pays when borrowing in New Zealand—unless it is a multinational like Fonterra which borrows from the international market. In the case of a small to medium sized business facing competition from an overseas purchaser for the purchase of the same assets—again if everything else is equal; if it is facing the same wage costs the same sale price for its goods the same cost for its raw materials—the overseas buyer can afford to pay more for those productive New Zealand assets compared with the New Zealand purchaser of those assets because the overseas purchaser has a lower cost of funds. So all other things being equal overseas purchasers can afford to pay a higher capital sum for that same business enterprise and I do not think that is in the long-term interests of New Zealand. So we need to have a different mechanism for the Reserve Bank in order to take the pressure off the interest rate device. 
We also know that the sole reliance on the interest rate device is according to the exporters causing volatility in our exchange rate which is difficult for them. The volatility of the New Zealand exchange rate is extreme. The New Zealand currency is the fourth most traded currency in the world. It is an astounding statistic. Our currency is traded more than the Indian rupee a vastly bigger currency than New Zealand’s. It is traded more than the Brazilian real. It is traded more than the South African rand. These economies are vastly bigger than New Zealand’s economy yet there is more trade in the New Zealand dollar than there is in any of those currencies. I think it is even traded more than the Russian rouble. 
Hone Harawira 
: Why is that? 
Hon DAVID PARKER 
: Perhaps it is because we have structurally higher interest rates and people are speculating on their knowledge that the Reserve Bank pulls that trigger harder than most other countries in the world have done historically. So the exporters say they need some more tools in the tool kit other than the interest rate and they say we need to be using prudential tools in respect of banks more than we do. That is why is this matter is relevant to this discussion. Here we have the Reserve Bank being given more tools in respect of prudential supervision of the insurance sector yet in the banking sector we have very limited ways in which those prudential tools can be used by the Reserve Bank. 
The Reserve Bank has two main functions. The first is the maintenance of stable prices and the second is the maintenance of stability in the financial sector. There is not much doubt that although relative to the rest of the world we did pretty well during the global financial crisis we were not perfect. We had to have Government guarantees of banks in terms of both retail deposits and wholesale deposits and we had to have the Reserve Bank buying packets of securities from financial institutions. So although we might have done better relative to some other countries—partly because of the savings history of Australia and the strength of its banks not because of our own New Zealand - based savings I would note—it is true that we are not perfect. I think it is worth considering increasing the powers of the Reserve Bank in respect of not just insurance companies but also banks so that the banks can use prudential ratios to stop the rapid growth of credit in boom times. 
In New Zealand we ratchet up the interest rate. The interest rate that New Zealand borrowers including exporters have to pay goes up and their cost structure goes up. Actually most of that money ends up going overseas because it is owed to overseas lenders. It does not stay in the New Zealand economy. The Labour Party believes we should be conferring on the Reserve Bank and making explicit that instead of relying purely on interest rates it can actually adjust prudential ratios for the banks so that they have to source more of their money offshore. Sometimes they will have difficulty doing that and we will stop some of these flows of “hot” money in and out of the country which is what really caused the over-inflation of the property market. The over-inflation of the New Zealand property market was not based on New Zealanders’ saving more money and therefore having more money in the bank to spend on assets; it was actually because the liquidity in the New Zealand economy increased because of the banks borrowing a lot of money offshore and lending it in New Zealand. That was good for the banks—they earned an extra margin—but it was not good for the New Zealand economy because it inflated the property bubble and added to the imbalance in the New Zealand economy. 
This bill is good as far as it goes but the Government is missing an opportunity to make it explicit that the Reserve Bank can use prudential ratios for monetary policy purposes. It can do that only tangentially at the moment; it can use prudential policy first and foremost only for the prudential supervision of the banks. We say that the Reserve Bank needs to be doing more than that and use prudential ratios to control the growth of credit. Thank you. 
CRAIG FOSS (National—Tukituki) 
: 
 That was an incredibly scary scary speech from the Opposition’s spokesman on finance the Hon David Parker on the Insurance (Prudential Supervision) Bill. If people offshore are listening to that speech—they are probably not up at the moment; it is very good if they do not hear it though I guess they can access  
Hansard  
at some stage—my goodness gracious me! The only saving grace is that Labour is somewhat behind in the polls so the impact of what it is saying will probably not be reflected in the New Zealand markets. 
H V Ross Robertson 
: It won’t be long. 
CRAIG FOSS 
: Perhaps it will not be long but I say to the seasoned member from Auckland over there that we have just heard that essentially the party that would like to be Government—the second-largest party in New Zealand—is saying we should get rid of the inflation target. It says we should no longer target inflation. That is essentially what that party is saying. It wants to fix the currency or something because the implication of taking volatility out of the currency is a fixed exchange rate. Members opposite talk about volatility in the currency and then they talk about exporters. Here is a question: would they like the currency to be volatile around 40c to US$1 or would they like it to be stable at 80c to US$1? Which one? 
Hon Member 
: 60c. 
CRAIG FOSS 
: Would they like it stable at 60c or volatile between 35c and 45c? I am somewhat flabbergasted at those members. Do we have School Certificate any more? I do not know whether they passed it; it is quite obvious that they did not. 
Let us just think through what Labour members are saying. Here is the point: New Zealand is a debtor nation. New Zealand in 2000 owed the world $100 billion; New Zealand now owes the world $175 billion - odd. On the other side of the House they are talking about savings problems but actually $75 billion more was borrowed from overseas by New Zealanders—both private and State—over the 9 years of the previous Government. I now understand why they want monetary policy - type inquiries and why they want to go around the country and campaign on them rather than on the growth story of this Government. They are in denial. They are actually blaming the monetary policy settings for the Reserve Bank and they are blaming the Reserve Bank of New Zealand Act. Members should recall that under their watch inflation used to be 0 percent to 2 percent and then it went to 0 percent to 3 percent. Under their watch inflation was floored at 3 percent so we knew no upside. The cost of debt for New Zealand—the discount of future cash flows of any investment in New Zealand—went up and the present value went down. CPI was floored at 3 percent—not capped at 3 percent—under their watch. So maybe we can understand why they are in denial and want to change those actual targets and those settings. 
Labour members talk about not wanting volatility. The currency against the US dollar went to 80c under their watch—80c. It has been 73.5c or 74c under this Government but it went to 80c under their watch. If they want to moan about volatility fair enough but do they want it fixed and less volatile at 80c volatile at 40c or somewhere in between? How will they get there? Only one message has been heard—beyond perhaps the Bowen triangle if you like—in the financial markets who lend to New Zealand. The financial markets who fund New Zealand’s mortgages who lend to fund working capital in New Zealand are hearing that the second-largest party in New Zealand—the party that aspires to be the next Government; the party that was in Government for 9 years—wants to throw out New Zealand’s inflation targets in the Reserve Bank of New Zealand Act it wants to bring in some kind of premium on petrol I suppose and it wants to bring in some prudential management on mortgages or something. It is all State control. We need a lot more clarity. There used to be a party in the House that went down this path all the time. There was some popular stuff all around it. Actually there was. Yes exporters are having a bit of a squeeze at the moment when referenced to the US dollar. But those referenced to the Aussie dollar are not doing too badly. They are not doing too badly actually. At NZ40c to US$1 which customers would be coming to their door? Perhaps we would have some importers coming in and exporters would start to be a bit more comfortable trying to manage their way through. 
Members on the other side of the House need to think through just exactly what they are trying to say. They are in denial. The problem is not monetary policy; the problem was the balance between monetary and fiscal policy under the previous Government which is what we are trying to address. Fiscal policy resulted in real wages in New Zealand increasing only 3 percent over 9 years. They increased only 3 percent over 9 years because of the fiscal settings of that Government. What were those fiscal settings? An incredible hike in tax rates and tax take—$25 billion more tax was taken in 2007 than in 2001. Members on the other side have gone quiet. It was one of the key reasons why real wage growth was only 3 percent. The problem was the balance between fiscal and monetary policy. The learned speaker on the other side was constantly saying that we have to fix and tinker with monetary policy. Actually Government grew 20 or 25 percent over a couple of years the tax take was $25 billion more and New Zealand’s indebtedness went from $100 billion to $175 billion under their watch. Monetary policy ain’t got nothing to do with it. 
Then they talk about the housing boom. Do members know what fed the housing boom? Thank you Mr Deputy Speaker; this is a third reading speech. Do members know what kicked off the housing boom? It was the increase in the top marginal tax rate from 33c to 39c. If members do not want to take my word for it that is OK. There is plenty of research out there. I tell them to look at some of the archives and look what is happening now with the market when it is moving from 39c to 33c and aligning the rates because they created this credible arbitrage. If members want further evidence they should look at the briefings to the incoming Minister be they tax or fiscal. They should look at those taxpayers whose income interestingly enough sits around $59000—$1000 under that for the top marginal tax rate. 
Anyway this is a good bill. I felt the need to reply to some of the somewhat confused speeches from the other side of the House; no doubt we have a couple more coming. As I acknowledged earlier I appreciate and acknowledge the work of the committee and the House on this bill. I acknowledge political points from members on the other side as naive as they might be. I am grateful for their support of the general thrust of this bill and I am sure the whole House is grateful for their backing of the general thrust of the Insurance (Prudential Supervision) Bill. Thank you. 
Mr DEPUTY SPEAKER 
: Before I call the next speaker I say that I have given some latitude to both sides of the House in this debate. This debate is not about monetary policy—that is very clear. If we look at the provisions and the parts of the bill we see it is not about monetary policy. I ask future speakers to bear that in mind. Although one can certainly refer to monetary policy it cannot form the substantive part of the debate. This is a third reading debate so the speeches are not open-ended like in a first reading debate. I also draw members’ attention to Speaker’s ruling 117/4 in particular which says that “On the third reading of a bill a member cannot discuss—(1) Any matter not included in the clauses of the bill;”. That is very important as we proceed. I trust that future speakers will bear that in mind. 
Hon MARYAN STREET (Labour) 
: 
 Yes I will bear that ruling in mind. However I think it is also appropriate in third reading speeches to be permitted a little bit of rebuttal. There was a good deal of misrepresentation in the previous speech by Craig Foss that should not go unanswered.  
There was misrepresentation of the Labour Party’s position on the inflation target under the Reserve Bank and that needs to be dismissed. Labour has never said that the inflation target should go wider. We know that inflation can have a devastating effect on people’s standard of living especially on Kiwi householders with fixed incomes and people who struggle to have anything left over at the end of the week.  
To return directly to the Insurance (Prudential Supervision) Bill it is fine as far as it goes. That is what we have said and that is what the previous Labour speaker said very eloquently. This measure is designed to improve prudential controls over the insurance sector and provide fairness transparency and security over the supervision scheme for the benefit of policyholders. But it cannot go unsaid that this bill represents a lost opportunity. 
We are in extraordinary economic times. We have seen the collapse of economic orthodoxy. We have seen the collapse of financial institutions. We have seen the punishment of innocent people who entrusted their savings to banks financial houses and economic structures on which they should have been able to rely. The financial crisis that we find ourselves in as part of the global community is not the construction of the Labour Party or the former Labour Government. It is not our construction. It is an international phenomenon. However the unfortunate thing is that the New Zealand currency bobs about on the ocean of international trading in a way that disadvantages our exporters. In order to assist the economy to recover we need to assist exporters. 
One way to assist would be to alter monetary policy and the kinds of prudential structures that exist in the economic system. Taking one measure this bill when others could have been employed is a lost opportunity. It represents timidity—in fact I said earlier that it was cringing timidity—on the part of this Government. It has not been bold enough to deal with some of the big issues in order to restore faith in economic and financial structures. 
All that this bill addresses is the insurance sector. It is a reasonably good bill that is improved by the addition of the 10-page Supplementary Order Paper which clearly indicates that the Minister of Finance realised that not everything was right in the first draft of the bill. We support the Supplementary Order Paper—we support that. But why take baby steps towards addressing and correcting financial supervision when giant steps are required? Quantum leaps are required not just step changes—in this case a baby step change—if we are going to provide our exporters who are far and away the money earners in this economy with some stability in order for them to trade profitably. It is good that we have security transparency and fairness in a supervision scheme for the insurance sector and for the policyholders within that sector. Of course anything that protects and buffers policyholders—ordinary New Zealanders and New Zealand businesses—from the vicissitudes of the fluctuating financial situation in the world at the moment is good and worth supporting. But it is essential to note that this baby step will not fix the things that need fixing. 
This bill will not—and it could have—address the core issues at the heart of the financial and economic malaise that encompasses the world at the moment. The heavy trade in the New Zealand dollar comes at the price of our exporters. It makes our dollar volatile. It makes it very difficult for exporters with very low margins—like most of our commodity producers—to anticipate and roll with the punches in their trading functions. That makes exporting a risky business. It will take more than this bill to fix that. 
This is one measure of many that is appropriately being put into the hands of the Reserve Bank as an independent arbiter to monitor and supervise. On this side of the House we believe that the Reserve Bank needs clearer legislative authority to allow it to use prudential powers to support wider-ranging monetary policy—a different mix within our monetary policy settings. We would address the Reserve Bank’s powers and we would welcome the inclusion of these supervisory functions in its powers but we would look at other powers that the Reserve Bank ought to have because it is hamstrung by the limitations of the tools it has at its disposal. Of course we want inflation controlled. Of course we want stability of prices. But we also need additional measures to fix the kinds of problems that New Zealand experiences to take pressure off interest rates to make our dollar a less attractive trading currency than it currently is and to allow our exporters to flourish. Labour would make those changes. We believe that we should make them. We believe that this bill is heading in the right direction but it is not the step change that the Prime Minister talks about. 
Not only is the step change in this bill insufficient but it represents a lost opportunity. We have lost an opportunity to do something bold something that would truly make a difference to the economic direction of this country something that would support our exporters enable our interest rates to arrive at levels that are manageable and increase capital flows to exporters. The provision of prudential supervision over the insurance sector is good and we will support it but— 
Mr DEPUTY SPEAKER 
: I am sorry to interrupt the honourable member but her time has expired. 
DAVID CLENDON (Green) 
: 
 I am pleased to take a short call on this the Insurance (Prudential Supervision) Bill. Although it is somewhat against the trend of the debate so far this morning I will try to focus on the insurance industry sector and some of the very major challenges that are coming before it. In fact they are already before the sector. 
We have supported this bill so far and will continue to do so. We believe that the insurance industry has been largely unregulated. That is against international norms and expectations and indeed against local expectations as well. There has been a degree of self-regulation in the New Zealand insurance industry and to be fair for the most part that has worked. The industry has been proactive in developing its own framework for self-management. It has set out to achieve a fairly high standard of ethical behaviour a degree of transparency and the requirement of some proof of financial solvency within the sector. 
However we cannot be at all complacent. Clearly there is a history of reliability within the New Zealand insurance sector. The same could be said for the financial sector up until quite recently as was referenced by the previous speaker. We know that goodwill and past performance are far from being reliable indicators of future performance and the potential for future risk and indeed collapse. The insurance industry has never been one for the faint-hearted. There are some significant and some very new and demanding challenges ahead of it so this bill is timely to the extent that it does endeavour to give some surety or at least a degree of acknowledgment that the sector needs to be regulated. 
The bill is complex it is wide ranging and there were elements within the original drafting that caused us some concern. Those concerns were also reflected by other stakeholders industry people and political interests as well. One of the primary concerns we saw was that the bill as originally drafted on the matter of solvency standards created the potential for New Zealand - based operators and companies to have a significant disadvantage particularly against providers from Australia. That could have imposed a competitive disadvantage on our companies and potentially could have driven our New Zealand insurers offshore. Fortunately the select committee did some useful work and responded to some of the submitters. The provisions of clause 53 essentially remove the likelihood of sending our insurance industry overseas. 
It is clear that one of the more serious challenges facing the industry which makes the need for regulation to better protect consumers against the likelihood of industry failure is the reality of climate change and the impact that will have on the assets that the industry protects and in which the industry invests. It is a considerable amount of cash every year. Insurers internationally are recognising that global warming and climate change are a serious business issue as well as an environmental issue—that the two are intertwined. To that end international companies are endeavouring to lead by example to reduce their own environmental footprint and to encourage suppliers and customers to do likewise. IAG is far and away the largest player in the New Zealand market. It has gross written premiums in excess of $1.2 billion and holds something like 2½ million policies. The company is also one of the most active in advocating for and acknowledging environmental and social as well as financial considerations being incorporated into risk assessments. 
Climate change is already having and will continue to have serious consequences for our natural and our built environments our national and local infrastructure and our ability to conduct business and to maintain the integrity of our communities. We are already seeing both locally and internationally instances of much higher intensity and much more regular adverse weather events than we have seen historically. The insurance companies the industry that are carrying the risk for any damage to our natural and physical resources are of course highly exposed and will become more so as climate change and the effects of it continue to develop over the coming few years and decades. If we do not respond quickly if we do not respond intelligently and if we do not respond by changing our policies and our practices towards future-proofing our private and public assets against the effects of climate change we can confidently expect to see the insurance sector as all others come under increased pressure and increased likelihood of failures and collapses. Failure to future-proof our economy by attending to the effects of climate change will see the insurance industry either taking some huge financial hits or potentially withdrawing cover from the areas most exposed to the risks and challenges of climate change. 
I will quote from IAG’s website which reminds us that that company is the largest player in the New Zealand industry. This company has become very active in the area of sustainability and in acknowledging the threats to the industry. The company states that “The weather has become a vital concern to the insurance industry. … We accept the strong scientific consensus that human-induced climate change is real. The consequences of climate change are being seen and heard with higher frequency and greater intensity. Those who live in risky areas could well find insurance less affordable and less readily available unless new solutions are found.” 
The bill we are debating today is one useful and positive step towards finding new solutions. It provides a mechanism for the continued evaluation of the financial and operational health of the insurance sector. It should to some extent provide an early warning system if you like that will let us know whether any players in the sector are starting to get into any real difficulties. That is a necessary element albeit in itself not a sufficient one of what must be a much more comprehensive and much more sustained response to protecting our individual and our collective future in what will be a much more dynamic much more unpredictable and much more volatile physical and economic environment. Kia ora. 
AMY ADAMS (National—Selwyn) 
: 
 It is a pleasure to take a call on the third reading of the Insurance (Prudential Supervision) Bill. Before I get into the detail of my contribution I acknowledge the previous speaker for making an interesting and thought-provoking contribution. It was one of the few speeches this morning that actually focused on the insurance sector and I found that quite refreshing so I thank Mr Clendon for that. 
As we have heard across the debate on this bill’s passage through the House this bill focuses on ensuring that our insurance sector is robust and that the public can have confidence in it. It is one of a number of measures that have been taken around the supervision of various entities within the financial sector. There has been quite some discussion around the need for care in that area and certainly that view is shared across the House. But we do have to be careful I think when we are talking about prudential supervision not to get caught up in the hysteria of concern around one aspect of the financial sector and use that heavy-handed and emotion-fuelled response to deal with all aspects of the sector. 
The aspect of the bill I want to focus on in my contribution is that yes the insurance sector must be regulated; yes we need to bring it into line with international benchmarks and that is certainly what this bill is doing; and we need to ensure that there can be public confidence in what is a very important sector for all New Zealanders. What we have to be careful of though as we must with any regulation that we bring into existence is the need to have a balanced and appropriate response to the scale of the issue in this sector. We are not talking about finance company failures we are not talking about banks and we are not talking about some other more worrying aspects of the financial sector. We are talking about the insurance market in this bill. 
As my friend Mr Foss said in an earlier contribution this is not where the problem has been in terms of New Zealanders losing vast quantities of money. We recognise that the insurance sector needs to be appropriately regulated and I think that giving the Reserve Bank the power to ensure that all insurance companies that carry on business in New Zealand need to be licensed and subject to various prudential supervision requirements which we can talk about later is an appropriate step. But we have to be mindful of the need to be balanced in our response. 
The Minister of Internal Affairs in his contribution at the beginning of the debate described the bill as sensible and well targeted and I think that is exactly right. But I would add to that comment the word “balanced”. The challenge we always have is to ensure that our response is balanced and appropriate. Maryan Street in her contribution referred to it as baby steps. If Labour had a view of what else needed to be done to regulate insurance companies we certainly did not hear it from Labour members during the select committee process. If this is a baby step I challenge those members to tell us what in the insurance sector— 
Stuart Nash 
: No she wasn’t talking about this bill Amy—she was talking about the whole area of monetary policy. 
AMY ADAMS 
: Well she was making a speech on this bill I say to Mr Nash so it is not unreasonable to assume that she was speaking about it although it might be an unreasonable assumption to make that Labour would actually talk about the bill in front of us. But she referred to it as baby steps and I disagree with that. In terms of the insurance sector this is exactly the appropriate response needed for the level of actual risk and concern. 
It is worth pointing out that the powers that can be exercised under this bill have to be exercised for the purposes of promoting public confidence in the sector. That is the test. We do not need to regulate for the sake of it. There is no point in measuring the success of our supervision programme by the sheer quantity of red tape we create. We have to ensure that what we have done is no more than necessary because let us not forget that any time we put compliance costs on business—and insurance companies are no different—that cost is passed through to consumers. If we care about keeping down the costs to consumers we have to be mindful of not over-regulating. 
This bill is an appropriate response to the challenges faced by the insurance sector. I think the amendments made by the Finance and Expenditure Committee which I described in my second reading contribution will assist in getting that balance right. We now have a response that is appropriate that is well considered and that will serve the needs of this sector and the New Zealand public. I thank the House for working for the large part collaboratively and constructively on this bill during its passage through the House. It is certainly good to see such important legislation having widespread support in the House. I take the opportunity once more to commend the bill to the House. Thank you. 
STUART NASH (Labour) 
: 
 I also rise to support the Insurance (Prudential Supervision) Bill. This bill is important to the people of New Zealand for three reasons which I will outline and elaborate on. The first reason is that this bill is another step in achieving clear robust laws and regulations across the financial sector. The second is that it will provide a much higher level of security to New Zealanders with exposure to the insurance industry. The third reason which is important is that it tidies up legislation governing the sector where there was an unacceptable level of uncertainty. Tightening up the legislation regulating an important segment of the financial sector and providing certainty are the three reasons why Labour is supporting this bill. These measures will help to provide confidence to all New Zealanders that their Parliament is working together to further protect their rights and their money. 
New Zealanders have lost a significant amount of money in this economic recession—New Zealanders who worked incredibly hard saved hard dreamt and aspired and who should be allowed to live and retire with dignity. Parliament has already passed legislation in several areas to tighten or make laws where there really was a deficit in the financial sector and this is just another step in ensuring that hard-working Kiwis can have confidence in the New Zealand financial sector. That is what I mean when I say this bill is another step in achieving clear robust laws and regulations across this very important sector of the economy. It is not only sensible but also absolutely necessary in this day and age. That is why we all work together across all parties on this type of legislation which benefits all New Zealanders. 
Although the New Zealand insurance sector is not generally in distress and was not in distress during the heights of the economic recession the global financial crisis has demonstrated the vulnerability of the financial sector as a whole. Currently New Zealand does not have a framework for the prudential regulation and supervision of insurers. The current insurance legislation is outdated and inconsistent in its application across the diversity of the New Zealand insurance market. 
There has been extensive consultation on the provisions of this bill. A draft version of the bill was released for consultation in April 2009. The draft bill reflected policy approvals made by Cabinet in December 2007 and August 2008. Prior to that the proposals originated from the Review of the Financial Products and Providers work stream. A discussion document was released by the Ministry of Economic Development in September 2006. A further consultation paper was released by the Reserve Bank in May 2008. 
The second reason why I support this bill is that it provides a much higher level of security to New Zealanders with exposure to the insurance industry. The bill requires all insurers operating in the New Zealand market to be licensed and supervised by the Reserve Bank and to comply with minimum prudential requirements. The Reserve Bank will have powers to act in respect of insurers that are in distress or in other difficulties and I will elaborate on these points in a minute. That said in the end the new regime has been designed around a self-managing approach. For example insurers are expected to devise and adhere to their own fit and proper risk management policies subject of course to Reserve Bank oversight. 
The cost to the Reserve Bank associated with the insurance proposals is estimated to be in the range of $2.5 million to $4 million per annum on an ongoing basis once the prudential regulation proposals for insurance have been fully implemented. The new insurance prudential supervision regime will generate transitional and ongoing compliance costs. However the new costs will be incurred largely at the stage of the transition to the new regime. Also the overall marginal cost to the industry is mitigated by its relatively light-handed and comparatively non-prescriptive approach. In addition to this foreign-owned insurers that operate in New Zealand are already subject to a degree of regulation by their home country supervisors. The regulatory impact statement concluded that the benefits contained in the regulatory regime outweighed the costs. 
I will outline some of these costs now. Insurers will incur a cost in applying to be licensed under the regime. This includes the cost of familiarisation with the new regulatory requirements self-assessment against the regime preparing an application dealing with the Reserve Bank as a supervisor and making any organisational and business changes needed to qualify for a licence. The proposed regulatory and supervisory requirements will impose additional compliance costs on insurers including the need to maintain structures to verify compliance with requirements to maintain capital in line with the minimum standards and to report regularly to the Reserve Bank. These are not onerous requirements or costs at all. They are not expected to be significant relative to insurers’ revenue and profits and they are not likely to affect the ability of insurers to continue to provide an insurance service at current levels—this was one point that we made very clear at the Finance and Expenditure Committee—although the impact on small insurers may be proportionally greater than on large insurers; we recognise that. Once insurers are licensed those costs are likely to become routine costs of doing business and we do not believe that they represent a material increase in costs over the status quo. 
Compliance with capital adequacy and solvency requirements may place constraints on insurers’ business operations to a small degree. These requirements and the associated costs are generally aligned to internationally accepted prudent practice for the insurance industry. The regulatory reporting of public disclosure requirements will impose some additional costs on insurers beyond existing levels but these are not expected to be significant relative to insurer revenue and existing public reporting requirements. The costs will be higher for those insurers that do not currently have to comply with the Financial Reporting Act 1993. 
The proposed mandatory requirement for insurers to have a financial strength rating will impose additional costs on those insurers that are not currently rated. Ratings are already mandatory for most general insurers and a number of other insurers have voluntary financial strength ratings. That is just common sense if one wants to attract consumers into one’s financial institution. The annual cost to insurers of having a rating is expected to be in the range of around $30000 to $40000. There will be indirect costs associated with ratings such as management time and the provision of information. In some cases the cost of ratings will be absorbed by insurance providers although in other cases some or all of the cost might be passed on to policyholders. In order to minimise costs for those that can least afford them the bill provides an exemption for certain very small insurers with annual gross premiums below a prescribed threshold. 
The Reserve Bank has the power to require information from insurers which the bank can require to be audited at the insurers’ expense. Costs will be incurred on a case by case basis by insurers who breach the regulatory requirements. In both cases the bank will adopt a risk-based approach to supervision which means that only non-compliant or at-risk insurers will face a specific cost. 
There are a couple of risks with the legislation. Licensing requirements may represent a barrier to entry for potential new market participants and increased supervision may reduce market discipline on insurers and increase moral hazard. 
In conclusion the reasons why Labour is supporting this bill are that firstly it is another step in achieving clear robust laws and regulations across the financial sector. The second reason is that it will provide a much higher level of security to New Zealanders with exposure to the insurance industry. The third reason why Labour is supporting this important bill is that it tidies up legislation relating to the sector where there has been an unacceptable level of uncertainty. I commend this bill to the House. 
AARON GILMORE (National) 
: 
 It is a pleasure to quickly take a short call on the Insurance (Prudential Supervision) Bill; particularly given that is my birthday I do not want to take a lot of time talking. I will touch on a couple of things. This bill fits in very nicely with the prudential security rules being put in place by our Government and it is another step in another sector. A lot of work has been done on trustees and other things but I will touch on one point briefly. Opposition members discussed at length in their earlier speeches the issues around the need for other forms of prudential security outside the insurance sector. Well actually the Reserve Bank is doing that and doing a very good job of putting in place those prudential rules particularly around liquidity rules and self-funding of deposits. I think that is a good thing and we all support that. 
This bill puts in place for the first time in a very long time a set of rules around regulation of insurance companies bringing them all together and that has to be a nice thing. It allows more surety and safety for those people out there all those mums and dads and everybody else for their insurances and their investments in insurance companies to be safer. We are highly supportive of that because it allows a greater step in the right direction to protect those savings and investments and it helps economic growth. Thank you. 
Bill read a third time.