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