Huo Raymond: Insurance (Prudential Supervision) Bill — First Reading 
Huo Raymond: Insurance (Prudential Supervision) Bill — First Reading 
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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.