Insurance (Prudential Supervision) Bill — First Reading 
Insurance (Prudential Supervision) Bill — First Reading 
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Insurance (Prudential Supervision) Bill 
First Reading 
Hon BILL ENGLISH (Minister of Finance) 
: 
 I move  
That the Insurance (Prudential Supervision) Bill be now read a first time. 
 At the appropriate time I intend to move that this bill be referred to the Finance and Expenditure Committee for its consideration. I will outline the main features of the bill but first I will point out one small fact of history to Clayton Cosgrove who was speaking earlier. It is that the problem with what Mr Muldoon did in 1972 was actually that he made superannuation too generous—completely the opposite of the way that the situation was presented by the Labour member. 
The Insurance (Prudential Supervision) Bill will be administered by the Reserve Bank as part of its Government-appointed role of prudential regulator of our financial services sector. The bill will deliver comprehensive prudential regulation of insurers who are carrying on insurance in New Zealand. All insurers operating in the New Zealand market will be required to be licensed and supervised by the Reserve Bank and to comply with minimum prudential requirements. The introduction of this legislation is another significant step towards achieving clear robust regulatory arrangements across the financial sector. It will replace outdated and disjointed legislation fill gaps where no prudential regulation currently exists and remove inconsistent legislative application between different insurance sectors. 
Unlike certain other parts of the financial sector the New Zealand insurance industry is not generally perceived as being an industry in distress. However the flow-on effects of the global financial crisis will inevitably have an impact on the value of the investment funds so it is timely to introduce regulation that sets clear prudential standards. In addition the bill brings the regulation of insurers into line with established international benchmarks and expectations. We believe that this will increase the confidence of offshore observers and participants in the New Zealand market and improve the confidence of the public in the insurance industry. 
The proposed legislation exists as a stand-alone bill in its own right rather than as an amendment to the Reserve Bank of New Zealand Act. The powers conferred on the Governor-General the Minister and the Reserve Bank under this bill must be exercised for the purposes of promoting the maintenance of a sound and efficient insurance sector and of promoting public confidence in that sector. These purposes will be achieved by establishing a system for licensing insurers imposing prudential requirements providing for supervision by the Reserve Bank in respect of compliance with the requirements set out in the bill and conferring certain powers on the bank to act in respect of insurers who are in distress or in other difficulties. The bill will have reach over all insurers operating in the New Zealand market. It will include life insurers non - life insurers health insurers and discretionary mutual providers of insurance services. 
Although the bill is obviously designed to deliver effective regulation it is comparatively light-handed in its application and it is intended to deliver regulation that does not mire the industry in a compliance mentality. It contains a strong emphasis on director and senior officer obligations and accountability which are intended to be reasonably self-administering for compliance insurers once implementation is completed. The bill recognises a number of the realities of our market including its small size and significant diversity and it deals with these by having marginally varied requirements between the different categories of insurers. However there is also a strong focus on competitive neutrality in the application of regulation to insurers. 
In addition to the licensing requirement placed on all insurers the bill proposes that all insurers except for a limited class of small friendly society insurers will be required to have a financial strength rating from a rating agency approved by the Reserve Bank. All insurers will be required to have satisfactory fit and proper assessment programmes for directors and relevant senior officers and satisfactory risk management programmes governing their day-to-day operations. The bill will contain capital and solvency requirements to apply to all insurers which are derived from a risk-based approach that takes into account the specific situation of each insurer. A minimal capital requirement will also apply under the solvency standards. Life insurers will be required to maintain statutory funds for the protection of funds allocated to long-term policyholder liabilities. There will be enhanced financial reporting requirements on all insurers and a requirement for all insurers to have an appointed actuary to assist in this reporting. All insurers will be required to produce an annual financial condition report to both the management and the Reserve Bank as a regulator. The Reserve Bank will be required to approve all transfers of policyholder liabilities and amalgamations between insurers and amended legal requirements are included within the legislation to increase the efficiency of this process. 
The bill provides the Reserve Bank with broad-ranging information-gathering powers appropriate to the role of the industry supervisor and it empowers the bank to have an active role in respect of insurers in financial distress. This will include the ability of the Reserve Bank to participate in insolvency procedures and in extreme circumstances in statutory management. 
The development of this bill has been assisted by an extensive consultation programme involving stakeholders across the insurance industry and providers of related support functions. The consultation included the release of a draft bill in April 2009 which attracted more than 90 submissions. The Reserve Bank has also been in close dialogue with relevant overseas insurance bodies including the International Association of Insurance Supervisors and the Australian Prudential Regulation Authority as well as with other New Zealand Government agencies. There is general industry acceptance of the need for the prudential regulation of insurers and general support for the direction taken by the bill. 
In conclusion I say this bill broadens the ability of the Reserve Bank to promote a sound and efficient financial system. It is a significant step forward in terms of updating the regulation of insurers and improving the transparency and clarity of regulation in the sector. It is my hope that this legislation will lift public confidence in an industry that is characterised by complex financial arrangements that are often difficult to understand. As a result of comprehensive consultation I suspect that we will have a strong degree of support for this bill’s referral to a select committee. 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 Labour welcomes the introduction of the Insurance (Prudential Supervision) Bill. We will be supporting the bill’s referral to a select committee and we look forward to hearing a wide range of submissions from the industry and affected parties. Sadly this bill does not go far enough. Although we support the broad aim of broadening and improving the prudential supervision capabilities of the Reserve Bank and welcome in principle the extension of that role to the insurance industry we note that the Government has had little to say about other broader enlargements of the prudential supervision role. In this brief introductory set of comments I plan to reiterate the key contents of the bill to briefly cover some of the risks and benefits that this legislation potentially has—noting in particular some of the concerns of the domestic captive insurance industry—and to then talk about the broader mandate for prudential supervision that I have outlined. 
The key provisions of the bill include provision for an insurance company to obtain a licence when it has met the criteria for eligibility. It requires an insurance company to maintain solvency to obtain and publish financial strength ratings to meet fit and proper standards for its directors and relevant officers to have and comply with a risk management programme to appoint an actuary to prepare an annual financial condition report and 6-monthly financial statements and to maintain at least one statutory fund that relates to the life insurance business and is solely for the purpose of meeting life insurance liabilities. 
The bill recognises and accommodates the supervision of overseas insurers based in New Zealand by the home regulator subject to such regulation meeting the satisfaction of the Reserve Bank. On that point I note that the Labour Opposition underlines the importance of the independent full-service role of the Reserve Bank that we currently enjoy. We note that there has been some discussion in the media particularly from some our Australian banking colleagues about seeing the extension of the Australian Prudential Regulation Authority’s oversight to cover the New Zealand market. The Labour Opposition would vigorously oppose such a move believing that it is in New Zealand’s national sovereign interests that we maintain a full-service independent Reserve Bank in this country. So we welcome at least in principle the extension of the Reserve Bank’s role to include the prudential supervision of the insurance industry in concert with such specialist advisers as are deemed to be appropriate. 
Considerable detail is contained in the bill around the licensing provisions the risk management requirements what defines a fit and proper person the statutory fund separation for life insurance and similar long-term insurance funds capital adequacy and solvency standards and appropriate financial and regulatory reporting. The bill also covers insurance credit ratings and the supervision framework including effective distress management provisions. 
The bill has a number of both costs and risks as well as potential benefits and we look forward to those being debated through a proper select committee process as we had for the last tax bill to pass through this Parliament as we did not have for the preceding tax bill and as we certainly did not have in relation to the emissions trading system bill. I am sure that the chair of the Finance and Expenditure Committee—who will I expect want to take a call—would be the first to echo the point that all parties share an interest in having a proper and effective parliamentary process. 
Craig Foss 
: Let’s hope. 
Hon DAVID CUNLIFFE 
: Let us hope indeed. 
Some of the costs and risks that the Finance and Expenditure Committee will want to consider with regard to this bill include the point that the compliance costs on insurers that are applying to be licensed under the regime are not excessive are relevant and are on the other hand sufficient to underpin a proper regulatory role that is credible and enduring. The select committee will also want to consider the point that the proposed regulatory and supervisory requirements will impose some additional costs including the need to maintain structures that verify compliance. Those costs are not expected to be significant relative to insurers’ revenue and profits but we will want to verify that. We will also consider the point that the compliance with capital adequacy and solvency requirements may place constraints to some degree on an insurer’s operation and we will want to examine whether those are not enough just right or too much. We look forward to submissions on that point. The regulatory reporting and public disclosure requirements will impose some additional costs and we look forward to seeing the cost-benefit analysis there. 
The proposed mandatory requirement for insurers to have a financial strength rating will also impose some additional cost which is potentially outweighed by the transparency value to consumers of being able to obtain a better assessment of the risk base of their insurer. That will be high in the minds of ordinary New Zealanders who have weathered their way through the recent recession that the country is now emerging from but that the Government would rather have New Zealanders think we are still in. 
The explanatory note of the bill states “the mandatory ratings requirement and its associated disclosure requirement could place commercial pressure on some insurers and lead to some insurers merging with others or leaving the sector.” We will want to know how many insurers are expected to merge with others or leave the sector what degree of concentration we might expect to see in the market and whether that raises any competition concerns. We would potentially be interested in the view of the Commerce Commission around those matters and of the Securities Commission with regard to transparency improvements. The Reserve Bank is to have the power to require information from insurers and we support that. But we will be interested to know what information is required and we will want to know that the bank’s powers are sufficient for it to do the job that its powers are graduated that it does not have the problem of a hole in the middle between the basic routine information-gathering powers and the ability to escalate short of system stability requirements should there be a perceived problem that needs to be addressed. We will want to look at the licensing requirements and the fiscal cost to the Reserve Bank. We note that the Reserve Bank will not be charging a licensing fee for the first 3 years so we will want to look at the fiscal risk to the Crown. 
I note that concern has been expressed by the captive insurance industry. It notes that there will be a regulated domestic captive industry under this bill but an unregulated foreign captive industry. I believe the select committee will want to take close note of any competitive dynamics that that sets up because I believe all parties will share a common interest in ensuring that the New Zealand domestic industry is not disadvantaged relative to its foreign counterparts by these prudential rules which are potentially in the interests of all parties. We will want to make sure that there is not a disguised incentive for the outsourcing of captive insurance programmes. 
That brings me now to the wasted opportunity in the bill which is the opportunity that the Finance and Expenditure Committee broadly drew attention to in respect of the Reserve Bank’s announcements that it was moving into counter-cyclical prudential policy pursuant to Basel II and the G-20 processes. It rather begs the question of why the Government has not advanced some intention to fine-tune the Reserve Bank of New Zealand Act when we have the Reserve Bank itself saying it wants to innovate in the area of prudential supervision. The Government is bringing forward this legislation to broaden the prudential supervision of an allied industry the insurance industry yet we have the paradox that the Minister of Finance himself says nothing can or should be done to enhance counter-cyclical prudential supervision and its relationship to monetary policy. 
I am very pleased to note that the Leader of the Opposition the Hon Phil Goff with the full support of his caucus has been the first to say that more work is needed in this area and that Labour withdraws from the orthodox consensus about a period that has now passed. The days prior to the global financial crisis prior to the Basel II process and prior to the G-20 process were the days when inflation stalked the Earth as the only problem of note. Now in this post-recessionary environment growth and jobs and the potential for recovery are as important as inflation control and price stability but the Government appears not to have got it. The Government has not got it going by the statements of the Minister of Finance and it has not got it in respect of this bill. Here it is—probably quite rightly—broadening prudential supervision into insurance but missing the opportunity to have Parliament scrutinise the broadening of the prudential role of the Reserve Bank in the banking sector which is of course the key issue. 
CRAIG FOSS (National—Tukituki) 
: 
 I was enjoying the speech of the previous speaker the Hon David Cunliffe until he got on to monetary policy. I note that I was part of the National minority on the Finance and Expenditure Committee last year which reviewed the monetary policy and the various instruments initiated by the previous Minister of Finance the Hon Michael Cullen. We examined all sorts of options in respect of tools in the tool box for the Reserve Bank etc. I think that committee review went on for 5 or 6 months and I think it was virtually unanimous. There was total consensus other than a small minority report from New Zealand First which is no longer here and the committee reported that it had gone through the various fiscal and economic cycles and that the status quo was working. You know an election comes around and the Government becomes the Opposition and its members look for something to talk about but the uncertainty that the member’s statements create destine Labour to remain in Opposition for somewhat longer because they create uncertainty and premiums. 
Briefly the speaker made a point regarding captive insurance and I think that will take up a fair bit of our time on the Finance and Expenditure Committee. There has been a fair bit of discussion about that already and I fully expect a fair few submissions on the issue. I acknowledge that a lot of the work on the Financial Advisers Bill and the non-bank deposit takers bill and regulations and the upgrades and changes were started under the previous administration. This bill is yet another plank to that. So its history is quite robust and I think there will be consensus across the House as this Insurance (Prudential Supervision) Bill goes through subject to changes and debate at the select committee. 
It is an upgrade and a modernisation. If any good things came out of the systemic financial markets failure around the world—we were not quite as badly affected here as many other parts of the globe were—they were the examination of current prudential regulation monitoring a sudden awareness of many holes in the system and an acknowledgment that in respect of the huge asset base the obligations in the cross holdings from the various insurance funds across the financial sector can have a major impact on the financial sector and the New Zealand economy. 
Having looked through the Insurance (Prudential Supervision) Bill I note that a lot of the wording looks similar to wording in the Financial Advisers Bill which the Finance and Expenditure Committee considered last year so there is some commonality there. As the chair of that committee I am sure that its members will welcome considering this legislation. We will have a busy few months. I look forward to submissions on the bill. I think the previous speaker outlined most of the issues that will be raised in respect of it although I set aside the points he raised with regard to monetary policy. I commend the bill to the House. 
RAYMOND HUO (Labour) 
: 
 The Insurance (Prudential Supervision) Bill is important. How important is it? The bill is expected to receive the Royal assent in the fourth quarter of 2010 and will come into effect 18 months after that which means that after that date it will be an offence to carry on or permit someone to carry on an insurance business without a licence. The overall purpose of the bill is to encourage the maintenance of a sound and efficient insurance sector that promotes confidence among policy holders and the general public. 
The bill establishes a licensing regime for insurers and prudential regulations with compliance largely self-administrated while supervision is provided by the Reserve Bank. The Reserve Bank had earlier released a draft bill for stakeholder consultation. The paper provides an overview of the bill. The Reserve Bank was not seeking policy input but was asking for comment on legal drafting and operational issues. 
The key features of the bill are firstly licensing. Every person who carries on insurance business in New Zealand except the defined Crown and public entities must hold a licence issued by the Reserve Bank. Licences may be subject to conditions including requiring a specified amount or proportion of insurance business to relate to New Zealand policy holders. Businesses must meet certain criteria including having an appropriate incorporation and ownership structure governance structure and financial strength and the ability to carry on their business in a prudent manner. Businesses must have a fit and proper policy and overseas applicants must have home regulation that is at least as satisfactory as the relevant New Zealand law. 
The second of the key features is the solvency standards. The Reserve Bank may approve solvency standards for insurers after consulting with those it considers will be substantially affected. The third feature is credit ratings. Licensed insurers will be required to have a current credit rating from an appropriate rating agency subject to limited exceptions for small and new or captive insurers. 
The fourth feature is overseas policyholder preferences. Overseas insurers will be required to disclose the nature and extent of any requirement in their home jurisdiction that relates to the recognition and priorities of creditors’ claims in the event of insolvency and has the effect of giving a material preference to policyholders in the insurer’s home jurisdiction or is otherwise materially disadvantageous to New Zealand policyholders. The fifth key feature is actuary audits and the sixth is financial reporting. The seventh feature is statutory funds which means life insurers will be subject to a detailed statutory fund regime. A life insurer must establish at least one statutory fund in respect of its life insurance business relating solely to its life insurance business or a particular part of that business. 
The eighth feature is Reserve Bank prudential supervision. The Reserve Bank will be able to require that an insurer and its associated persons provide to the Reserve Bank any information data or forecasts about any matters relating to the business operation or management including corporate financial and prudential matters for business carried on in New Zealand or elsewhere. The ninth feature is audit or actuary reporting. The tenth one is distress management. The Reserve Bank will be able to direct an insurer to prepare a recovery plan where the insurer is failing to maintain a solvency margin the business of the insurer has not been conducted in a prudent manner or the insurer is failing to comply with requirements. 
The eleventh one is liquidation voluntary administration and statutory management. The twelfth feature is the transfers and amalgamations and the thirteenth is criminal liability. There will be criminal liability for certain breaches with the potential for substantial fines on summary conviction and in some cases imprisonment. It is worth noting that according to the New Zealand Captive Insurance Association this legislation could create an unregulated captive insurance industry in New Zealand. The legislation would allow foreign companies setting up insurance subsidiaries in New Zealand to regulate it. A captive insurance company is designed to underwrite risks of its parent corporation only. The association president said this morning that this bill drafted by the Reserve Bank of New Zealand would regulate domestically owned captives but would not provide for the licensing and therefore regulation of foreign-owned captives. 
The Hon David Cunliffe said earlier in his speech that that would raise a certain kind of concern. At the moment there are six Australian-owned captives set up in New Zealand. The association’s view is that foreign-owned captives are forming in New Zealand and want to be regulated. The association president said: “The Reserve Bank is by default encouraging an unregulated foreign insurance industry in this country. This will be extremely harmful for New Zealand international financial services reputation”. 
This is a sensible bill and we will be supporting it through to the Finance and Expenditure Committee. It establishes a prudential regulation framework for the insurance industry. In doing so it gives a number of powers to the Reserve Bank to carry out its new role. Sadly this bill does not go far enough. It goes nowhere near dealing with one of the key economic issues facing the country currently in the state of monetary policy. Labour believes that we need to improve our export performance so we are all better off. Exporters need certainty and at the moment they do not have that with the exchange rate so volatile. Labour wants to lift New Zealand’s economic performance so we all benefit in terms of high standards of living and high incomes. To do that we need to re-examine monetary policy which apparently is not working at the moment. Unfortunately Mr Key’s Government has so far only attacked Labour’s call to look at our monetary policy and defended the status quo. Overall this is a sensible bill and we will be supporting it through to the Finance and Expenditure Committee. Thank you. 
DAVID CLENDON (Green) 
: 
 The Greens will be supporting the Insurance (Prudential Supervision) Bill to be referred to the Finance and Expenditure Committee given that it establishes a level of regulation in an industry where it is clearly desirable that there should be some regulation. The timing is interesting to the extent that the almost complete absence of regulation of the finance sector was clearly a major contributor to its near collapse internationally. A great many New Zealanders have suffered real and substantial losses initially financial loss but also a flow-on effect of loss to their health their security their well-being and their capacity to make choices about how and where they live their lives. So it seems appropriate for the Government to have some role in regulating a very closely related industry. We are informed that the bill is intended to bring New Zealand into line with international expectations for insurance regulation and grew from a review begun by the Ministry of Economic Development in 2005. 
At first glance the reference to a reliance on self-discipline within the industry raised some red flags given that the history of industry self-regulation voluntary codes of practice and mechanisms of that nature have at best a chequered history generally in New Zealand as elsewhere and not least in the financial sector. Ordinary New Zealanders put responsibility for a great deal of their financial security—indeed their personal and emotional sense of well-being—into the hands of insurance companies. It seems appropriate that the Government should put in place mechanisms to ensure that that responsibility is well placed. 
The four main parts of the bill are the prudential regulation the credit ratings the requirement that people be fit and proper persons and the establishment of a risk management programme and some minimal solvency requirements. They would all seem to be very sensible elements or a sensible framework for this bill. We have heard comments already that it appears that the requirement to have capital in excess of a minimum requirement seems quite complicated and perhaps that might be ironed out or made to be less complicated. 
The Insurance Council of New Zealand acknowledges that New Zealand is one of the least regulated insurance markets in the world. It points out that in many countries—including the UK the USA and Australia—insurance commissions regulate the industry. In some cases this extends down almost to the level of micro-managing the requirements—for example that issuing approvals for new product releases be managed at that the level. 
Clearly any form of regulation will impose compliance costs on an industry and inevitably those costs will be passed on to consumers so it is important to establish compliance costs that are appropriate but not so onerous that they will have a negative impact on people’s ability to access these services. The compliance costs associated with the provisions of this bill are not insignificant—for example it seems that it may cost in the order $40000 a year to obtain and hold a credit rating—but in the context of the industry and its financial capacity they would not appear to be onerous. We note that exemptions for small players seem adequate to remove groups such as those offering funeral insurance at a low level from the requirements and cost implications of the bill. 
It has been argued that such a bill is unnecessary and that the self-regulation environment in New Zealand is satisfactory and successful because the industry has been proactive in developing its own framework. It must be said that that framework is multifaceted is set out to achieve a high standard of ethical behaviour and a degree of transparency and indeed requires proof of financial solvency. Although this may be based on a history of reliability the same could be said for much of the financial sector up until recent times. We know goodwill and past performance are not necessarily a wholly reliable indicator of future performance and future risk. 
We note that one element lacking from the bill is a formal mandate for reporting to the public which limits or even prevents public oversight of how well the Reserve Bank which will have primary responsibility for overseeing these matters is doing in relation to the purpose of the bill. It may be assumed that the Reserve Bank will adopt a practice similar to its oversight of the banking sector: following section 165A of the Reserve Bank of New Zealand Act and providing twice-yearly financial stability reports. But again this is absent from the bill as it stands and we expect a formal mandate for the bank to report in this way. Under the bill currently solvency information will not be made publicly available and although there will always be a level of commercial sensitivity about some of this information we expect to see at least industry-wide information to make this acceptable. 
In summary we think that in some ways it is extraordinary that we have got to this time without having some formal mandate for regulation of this sector. We look forward to seeing this bill go to select committee. Thank you. 
RAHUI KATENE (Maori Party—Te Tai Tonga) 
: 
 TheInsurance (Prudential Supervision) Bill starts off with honourable intentions. It promotes the maintenance of a sound and efficient insurance sector and public confidence in the insurance sector. It is a laudable goal to promote confidence among policyholders and the general public. 
As members of the Finance and Expenditure Committee we have heard more than our fair share of uncertainties and financial anxieties amongst stakeholders and the general public alike. I was interested therefore to learn that at the end of last year although all other variables of the market were heading downwards life insurers were sitting pretty with a 9.5 percent increase in total premiums. Statistics from the Investment Savings and Insurance Association showed that total premiums for life insurance policies for the year to 30 September increased to $1.512 billion. Apparently this was all to be expected as people looked “for the safety security and peace of mind that life insurance provides”. 
With this grand setting the bill introduces a major change to the insurance sector by clarifying and refining the legal accounting and actuarial responsibilities of the proposed regulatory environment. It is to be noted that this is indeed a major change as historically our insurance industry has been lightly regulated. Over the last few years there has been a desire to bring the insurance sector more into line with the regulatory focus of its international peers a desire that was given shape some 6 months ago when the Reserve Bank released the draft Insurance (Prudential Supervision) Bill for stakeholder consultation. 
The bill will establish a system for licensing insurers impose prudential requirements on insurers provide for the supervision by the Reserve Bank of compliance with those requirements and confer certain powers on the bank to act in respect of insurers in financial distress or other difficulties. In that respect it has been described as a relatively light-handed approach to regulation with the emphasis being placed on self-discipline. In effect compliance is largely self-administered although supervised by the Reserve Bank. We welcome the move towards establishing certainty while at the same time encouraging an improvement in general practice. 
The Maori Party has supported other bills to improve regulation of the financial sector including the Financial Advisers Bill the Financial Service Providers (Registration and Dispute Resolution) Bill and the Reserve Bank of New Zealand Amendment Bill. We are of course aware that the fact that this bill is even on the books indicates the failure of the market to regulate itself. The House can be assured of our general support for this bill to remove inconsistencies in application between different insurance sectors and to provide legislative regulation where no prudential regulation currently exists. We see this as a safety mechanism that is in the best interests of all those implicated in the insurance industry but I want to raise a few questions around this whole issue of insurance. We know that insurance can be a huge cost for Maori iwi and hapu who have responsibility for a marae or local gathering place. Legal risk and/or indemnity insurance costs may be a disincentive for Maori and better information about insurance may help to address this problem. I also recall a report from the Ministry of Women’s Affairs that suggested that most Maori women do not have private provision for health or sickness insurance. Although we support the intention of moving to a sound insurance sector we need to make sure these issues are aired as we consider the take-up of insurance and eligibility and access for Maori along with other New Zealanders. 
The Maori Party agrees that the financial stability of insurers is essential to provide the level of protection necessary for a sound insurance sector. We also all know the stories of constituents who have been ill-served and ill-informed by those in the insurance sector. Consumers must be well placed to monitor the financial strength of insurers both on their own and collectively. In the best interests of the people we will vote to support the bill at this first reading and we look forward to subsequent debate. 
AMY ADAMS (National—Selwyn) 
: 
 It is my pleasure to also contribute to this first reading debate on the Insurance (Prudential Supervision) Bill. A number of themes have come through quite strongly in the debate this afternoon. One of those has been the fact that over the last 18 months or so the world has changed and one thing that has become clear to us all is the importance of trust and confidence in our banking and financial sectors. Certainly although New Zealand has not escaped the recession unscathed it has done considerably better than many other countries in the world. In large part that has been because our banking sector has been much stronger than that of many other countries we have seen. If anything was needed to bring home to us the importance of that it has been not only the relative success of the banking sector but also the complete failure of trust we have seen through the non-bank lending sector and the finance company failures that have hurt and terribly scarred so many New Zealanders. 
Those wider issues really do set a context for what we are dealing with here with prudential supervision of the insurance sector because that sector also plays its role in the financial security of all New Zealanders. Through this bill the House looks to bring a lot of outdated and disjointed legislation together into a cohesive prudential set of regulations that will ensure New Zealanders can have the same high level of trust and confidence in the insurance sector that we would want them to have in all aspects of the financial markets. 
This bill will set up a system whereby the Reserve Bank is both the regulator and the supervisor of all insurers in New Zealand. It will cover all types of insurance such as life non-life and medical. One of the important aspects of it is to ensure that New Zealand does not become seen by international jurisdictions as a soft option with a loose regulatory framework around insurance and this bill has been very careful to benchmark our rules with comparable international equivalents to make sure that that is not the case. The bill talks about a number of requirements on the insurers such as financial strength ratings satisfactory fit and proper risk management programmes and risk-based capital and solvency requirements all of which are quite familiar themes to those of us who have been looking at prudential supervision in other areas. 
Interestingly I note in the bill that although the Reserve Bank has a supervisory role it is a reasonably light-handed approach. The regulations require the insurers to take ownership for themselves and exercise self-administration and self-discipline. Certainly it will be interesting when we go through the select committee process to explore that further to look at the risks involved and to examine with the Reserve Bank the pitfalls and benefits of that approach. It is a more light-handed regulatory system. We do not want to put onerous costs on the industry but we do want to ensure that New Zealand has an insurance sector that New Zealanders can have confidence in. I commend the bill to the House. 
BRENDON BURNS (Labour—Christchurch Central) 
: 
 I am very pleased to take a call in the first reading of the Insurance (Prudential Supervision) Bill. I acknowledge the comments of the member preceding me in saying that the world has indeed changed in the last 18 months. Those who at the beginning of last year might have still believed that the market was God and that anybody who talked about the need for rules and regulations was talking the devil’s talk might now accept that the market does need rules and regulations. The financial markets of the world have been brought to their knees in the last 18 months and that underlines the need for appropriate regulation such as implemented by this bill. 
Labour will be supporting this bill’s referral to a select committee. I presume it will be referred to the Finance and Expenditure Committee. That is for the House to decide but if so as a member of that committee I look forward to looking at the bill in more detail. It is a sensible bill establishing the need for monetary policy and Reserve Bank powers and we will look at its needs in terms of a prudential regulatory framework for the insurance industry. In doing so the bill gives a number of powers to the Reserve Bank to carry out its new role. 
Sadly this bill does not go as far as it might. It goes nowhere towards dealing with one of the key economic issues facing our nation at present which is the issue of monetary policy. We are looking again on Thursday at the Reserve Bank and whether it might move on interest rates. We have no certainty about these issues and the bill should give the Reserve Bank some more power so that it is able to be more flexible in implementing current monetary policy. Indeed Labour does believe that we need as a nation to improve our export performance. It is our lifeblood as the cliché so often goes but it is important to give exporters certainty. Exporters such as the Manufacturers and Exporters Association which is headquartered in my electorate of Christchurch Central are 100 percent behind the comments of Phil Goff in a recent speech when he said we need to review the Reserve Bank’s approach to monetary policy because it is doing nothing to assist our export sector and to grow the economy of this nation and to give it some of the sustainability that will be so important into our future. 
As a party Labour wants to see New Zealand lift its economic performance and lift our incomes so that we can all do better but to do that we must look at monetary policy. It is not set in stone and it is not working in the interests of this nation. Everybody but the National Government seems to believe that that is now the case. I think that when the Prime Minister asserts that he will defend the status quo on monetary policy he is really defending something that is truly indefensible. The status quo is not delivering for New Zealand. When our dollar is stretching through to US73c and US74c when it was US50c at the start of the year how on earth can our exporters compete in a market where they are 50 percent more expensive than at the start of the year? 
It is the volatility of the dollar underpinned by our current monetary policy that causes the problem for exporters. They could survive if they knew where the dollar might be over a time period but the fact that it ranges from one end of the spectrum to the other across a short time frame causes them immense damage. There are estimates that every 1c movement in the value of the dollar costs this country $100 million in lost export opportunities. 
We are supportive of this bill as it addresses the need for some regulation across the insurance industry and that is highly appropriate. The bill will require insurers to obtain a licence having met the criteria for eligibility; to maintain appropriate solvency; to obtain and publish financial strength ratings so that we get some sort of sense of where the insurance companies are on the spectrum of financial strength; and to meet fit and proper standards for directors and relevant officers. We have seen in the wider financial industry the capacity for directors to not be appropriate and for strange practices to take place. 
We want to see under the bill the requirement for insurance companies to have a risk management programme. Obviously they are managing funds and they need to be giving assurance to those people who take out insurance policies with them that they will appropriately manage the potential for upside and downside risk. Appointing an actuary is another key requirement under the provisions of the bill and obviously to prepare annual financial condition reports and 6-monthly financial statements so those watching the insurance industry will be able to get some assessment of the relative strength of the insurance companies. 
The main areas that are being brought through in the bill include the licensing of insurers to see that there is a consistent set of minimum standards met by all insurers. Obviously they must obtain a licence. Once that is granted they can be monitored against those standards. This then reduces the need for consumers to be having to make complex inquiries to be assured about the strength of a particular insurance company. That was something that was observed during the collapse of many finance companies over the last couple of years. Consumers have had a devil’s time trying to work out whether their particular financial company is kosher strong and able to survive the market downturn. Often they do not find out until it is too late and their money goes down the gurgler when if there had been appropriate financial regulation they may have been able to have at least some signals of the strength of that particular company. It is good to see these provisions introduced for the insurance industry. 
Another main provision the bill is introducing is that insurance companies will have to be licensed before the bill is enacted. We are not doing this in any rapid time provision. It is estimated that there will be an 18-month lead time for the insurance companies to meet those requirements and to get licensed and covered by the ambit of this bill. 
One of the other key provisions of the bill will be about capital adequacy and solvency standards. That truly will be an essential element of the legislation. Obviously an insurance company needs to give assurance to the market that it has the reserves and can meet the tests that apply in market situations from time to time. Overseeing all of this will be the Reserve Bank. It will require financial information from the insurance companies and potentially the public will have access to that should they have the need to assess in greater detail. 
The background to the bill really comes down to the need to ensure we have a sound insurance sector. In the same way that we are now beginning to contemplate changes to financial companies we need to know that when one is taking out policies or making investments with an insurance company that company has the capacity to endure through the blips that happen across financial markets on a fairly regular basis. New Zealand’s insurance industry is known to be generally sound. There are no signals of distress and that is very important. It is one of the good things across the New Zealand financial market that although we have had 20 or so smaller financial companies implode we have some stability across the banking sector more generally and the insurance companies have certainly reacted to that. 
They recognise and certainly Parliament is now recognising that we need to have assurance on these issues. We cannot just put our faith and trust and hope in the systems. We need to know as a nation of investors that the insurance industry will endure the regular storms that happen on the financial markets. 
In the lead-up to the bill’s introduction there has been extensive consultation. That has been appropriate and no doubt it will continue through the select committee process. That is also important and I am pleased to be able to commend the bill to the House today. 
PESETA SAM LOTU-IIGA (National—Maungakiekie) 
: 
 I also stand to support the Insurance (Prudential Supervision) Bill. As many previous speakers have suggested this bill encourages the maintenance of a sound and efficient insurance sector. It is about promoting confidence and trust but also about promoting efficacy in how that sector operates within the New Zealand market. The bill replaces some of the rather outdated and disjointed insurance legislation that we have in place today and it aligns our insurance regulatory framework with the benchmarks that are set overseas. New Zealand’s financial markets do not operate within a vacuum but within a complex financial market that spans the globe. 
The economic conditions this year have been quite turbulent. They have resulted in the deepest recession that the world has experienced for a number of decades. But what this bill attempts to do is not to over-regulate this particular market; it is a light-handed way of approaching the markets. In terms of some of the scandals that have affected the financial sector we have to be careful as legislators that we do not try to legislate for honesty probity and those who are operating in markets in a very dishonest way. The bill is about setting the right frameworks. It is about allowing our regulators and those who oversee these markets to have the right tools with the right frameworks and also the resources are put in place so that they are able to oversee the efficient running of the insurance market. 
So what do we do? This bill establishes a system of licensing insurers which I think most in this House would agree with. It imposes prudential requirements on insurers and allows for the Reserve Bank of New Zealand which has overseen monetary policy in this country in an independent way to provide for compliance with certain requirements. It is also about allowing policyholders to trust that those participating at the corporate level in the insurance market are operating in the way that they are supposed to which is providing insurance products and services. It is a comprehensive bill because it covers life non-life as well as medical insurance. It is also designed to provide for and ensure that New Zealand’s financial markets are fluid. It is part of a series of reforms this Government is putting in place as a continuation of some of the reforms of the last Government that will allow for securities. As well as the corporate trustee model which has been reformed there are a number of reforms in the area of financial advisers that we are currently going through. 
So this bill is one small part of an overall reform of our financial and securities markets. It will be good for the select committee to look into the detail of the bill that is proposed and I look forward to discussing it within the Finance and Expenditure Committee. I commend this bill to the House. Thank you. 
Hon LIANNE DALZIEL (Labour—Christchurch East) 
: 
 It feels like déjà vu here; almost 3 years ago to the month I released as part of a suite of nine documents under the Review of Financial Products and Providers a document focused on insurance and that is the genesis of the Insurance (Prudential Supervision) Bill which we are considering today. So obviously I am very pleased to welcome it to the House and I give my absolute assurance of support for its passage. Obviously there will be detailed consideration of the bill at the Finance and Expenditure Committee and I am sure there will be elements of it that different members of that committee want to look at in detail. 
I thought it would be interesting to remind the House about the outcomes the Labour Government was seeking from the insurance sector at the time; I think they are worthy of reflection in light of what has happened since this report was tabled: “The overall outcomes Government is seeking from the insurance sector are: A sound and efficient insurance sector; Facilitation of effective risk management; Confidence in the insurance sector”—and that is what my colleague who has just resumed his seat Peseta Sam Lotu-Iiga was talking about—“that encourages participation by consumers firms and providers; and Not to compromise or constrain contestability competitiveness and innovation in the insurance sector.” 
The one word that I have circled on the page here is “innovation” because now that we have looked at what has happened internationally the word “innovation” may not be the right word when we are talking about the principles that underpin the quality of confidence that is required in our insurance industry. When we look at the failure of various banks and other institutions over in the United States we see that we were exempt from those failures here because the out clauses that those banks in the US had were not out clauses that our Reserve Bank allowed here in New Zealand. Those out clauses gave the ability to insure against the risk of the almost impossible thought of the whole thing turning into a house of cards and crumbling and that is exactly what happened in the United States. And of course when AIG failed as well the whole house of cards came tumbling down. We must never ever allow that to happen. I agree with my colleague who has just resumed his seat that we cannot legislate for good behaviour and we cannot legislate for integrity but we sure as hell can legislate in this Parliament for the kinds of checks and balances that will ensure that those who have a dishonest approach or who are negligent with other people’s money as we have seen are able to be held to account and are not able to get away with what other people have been able to get away with in other jurisdictions. 
I am glad we are talking positively about regulatory intervention. I think that sometimes in this House we have become a bit risk-averse with the word “regulation”. Why do we not just say rules for protecting consumers? Let us not use the word “regulation” if people are so cut up about it. Rules for the protection of consumers are what we are talking about here. 
We listed all the reasons for regulatory intervention back in 2006. Under “Asymmetries of information and complexities”—who has the information and who knows what protection is there—the report states: “Consumers need to be well informed about insurance products and providers through accessible timely and easily understood information in order to assess which product and provider will best meet their financial needs.” How many people in this House have read the small print on their insurance policy? I do not think a single member in this House would put up his or her hand to admit to that. OK I see that the Associate Minister of Immigration the Minister of Labour the Hon Kate Wilkinson is nodding her head; she reads every last bit. She was a lawyer so I expect her to do that. I have a legal background myself but I cannot say that I have ever read every single last bit of an insurance policy. But they are complex documents; in them people are entering into complex agreements and they do not even begin to understand them which is why the consumer focus of the protection that regulation offers needs to be well understood. 
There are issues of transferability. Once people are locked into an insurance policy and things go wrong with it or things go wrong with those people I am afraid that it is not so easy to find another insurer. Anyone in this House who understands the nature of the expression “pre-existing condition”—and all of us who are dealing with accident compensation cases at the moment understand it very well—knows that a pre-existing condition can lock people out of the cover of an alternative insurance provider if they are unable to continue with the first provider for any particular reason. So the question of transferability is a huge reason why insurers have this imbalance of power over consumers in many many respects. Of course if a policyholder is locked into a policy of a company that then falls over then obviously that is a great issue as well. 
Unfair or fraudulent conduct happens on both sides by all participants—both insurers and policyholders themselves. There can be misleading practices on both sides of the equation and therefore there needs to be some regulatory protection there. 
There are questions of expectation and confidence. Obviously we have huge issues in terms of our exposure to earthquakes. Here in Parliament we are 400 metres from a fault line—not that I like to remind anyone of that while we are actually in the building. There is the question of insurance liabilities following on from a large earthquake—those sorts of things. There are major issues with insurance. Of course we are protected from some of the huge costs that other countries have imposed on them because of our wonderful accident compensation scheme which assists in respect of personal injury. 
Then we have externalities around distress or failure in the insurance industry that is likely to pose a risk to the soundness of the financial system. That potentially has international reputation impacts. The other point we made was that large-scale events like a natural disaster may have some implications for the economy in terms of business interruption. I recall very clearly the cost that was imposed on many many countries around the world post - September 11 which was not a natural disaster but was a disaster none the less. What happened was the cost of reinsurance rates went through the roof. New Zealand was completely protected because of our accident compensation scheme. So it is worthwhile mentioning that point. 
So that was the basis of the consultation that went out to the general public. I think it was a very very good process and I want to place on record how responsive the insurance industry itself was to that process. It wanted to have its regulatory frameworks modernised. Some of its legislation is nearly a century old and does not in any way reflect the insurance market of today. The insurance industry deserves huge ups in terms of its willingness to be engaged in this process. 
The Review of Financial Products and Providers announcements on all of the nine discussion documents were made in June 2007. That was about 2 weeks before Bridgecorp collapsed which was a tragic coincidence of events. Among those announcements was Cabinet’s decision in June 2007 that the prudential regulatory authority for the insurance sector would be the Reserve Bank of New Zealand and that is what this bill does today. Responsibility shifted from the Ministry of Economic Development to the Reserve Bank of New Zealand and the office of the Minister of Finance. Essentially Cabinet approved the overall architecture of the insurance prudential supervision regime in December 2007 then we went out to get some further stakeholder engagement and that essentially was signed off in May 2008. 
There were four principles that the Government was guided by in terms of the decisions that were made throughout this process. Overall there was to be a relatively light-handed approach to the supervision and regulation of insurers. It was to be cost-effective subject to meeting regulatory objectives and prudential requirements. Competitive neutrality was the principle that we adopted. And of course it was to provide the benchmarking and consistency that we have heard others speak of today. The primary intention was to have the appropriate regime for New Zealand’s circumstances having regard to appropriate international best practice. 
I know that I am running out of time which I had not expected to happen so I will simply make reference to clauses 198 to 208 which make special provisions for Lloyd’s. I do know whether other speakers have contributed on this issue but I met with Lloyd’s when I was in London a couple of years ago and they were very keen to see this particular provision written into our law. So I congratulate the Government on taking up the proposal that was put forward. It is an important protection this bill is an important advance for New Zealand and I welcome its introduction to the House. 
DAVID BENNETT (National—Hamilton East) 
: 
 I will just take a short call on the first reading of the Insurance (Prudential Supervision) Bill. First of all some Opposition members have been talking about the need for monetary policy reform and of their vision of the world and economics. I think the New Zealand Parliament and the New Zealand people need to be aware that the New Zealand economy has come through this recession as well as could be expected for a Western economy. The prudential supervision of our banks has given us a lot to be thankful for and our monetary policy has been shown to be effective and successful once again. Labour Opposition members are hopping on the bandwagon that I think New Zealand First started a number of years ago but nobody has any solutions that are any better than what we have at the moment and they are raising false hope by going around saying that they have a better system. 
The reality is that this recession was a combination of factors: not only were there some unusual financial whiz-kids in the US and other Western economies but also it was a wake-up call for the West in that the Eastern economies have focused more on their production of goods and services and exports. They have basically shown us that we need to reinvent the wheel and get back to basics. That is what the New Zealand economy needs to do. We need to get back to being an export-led economy that actually pays its way in the world. That is the wake-up call that this recession has given to the Western World and it is up to the West to accept that to move on and to play the game. The competing economies of the world are playing that game and if we do not wake up and do so we will fall further down the list of international economies. 
This bill is an attempt to give a balanced approach to dealing with supervision of the insurance industry. It is not too stringent but at the same time it presents a definite level of support and regulation so that people can have confidence in insurers. The supervision to be provided by the Reserve Bank of New Zealand will be important in providing a mechanism to give that discipline to the industry. This bill is important as we look forward in providing a certain degree of regulation but not over-regulation of the industry. The Opposition talks about the need for monetary policy reform but that is not the answer. The answer is for New Zealand to be an export-led economy. That is what this National Government is about and what it has been working towards for the last year or so since it has been in office. 
Bill read a first time.  
Bill referred to the Finance and Expenditure Committee.