Clendon David: Insurance (Prudential Supervision) Bill — First Reading 
Clendon David: Insurance (Prudential Supervision) Bill — First Reading 
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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.