Parker David: Insurance (Prudential Supervision) Amendment Bill — Second ReadingText is incorporated into the Bound VolumeParker David: Insurance (Prudential Supervision) Amendment Bill — Second Reading[Sitting date: 20 August 2013. Volume:692;Page:12649. Text is incorporated into the Bound Volume.]Hon DAVID PARKER (Labour):We have got a bit of competition for this call. I was very happy to stand aside. The Labour Party is supporting the Insurance (Prudential Supervision) Amendment Bill. It is as the previous speaker Minister Collins described and is the sort of housekeeping legislation that normally finds support across the House. There are a couple of things that I will traverse.The first is that there are a couple of minor changes that were made by the Finance and Expenditure Committee. The first as the Minister has outlined is just to extend from 3 to 4 months the period in which interim financial information must be prepared and given to the Reserve Bank. This is now aligning with the Financial Reporting Bill which has been to the Commerce Committee. The second relates to provisional licences. It became apparent that if an institution could not get a final licence because for example it had become insolvent the Reserve Bank would have lost its oversight function because the provisional licence could not stay in force. That obviously is not very sensible and so the committee recommends that provisional licences can stay on foot to give the Reserve Bank some continuing powers in respect of those entities until such time as either they cancel their licences or if their problems can be fixed they can move to a full licence.There is one other issue that is not directly affected by this bill but I think it is good to put it on record. There is a debate going on in New Zealand at the moment as to whether the strength of insurance companies and their financial worth should be sufficient to meet a one-in-500-year event or a one-in-1000-year event. It is my understanding that the reasoning that lies behind the move towards requiring them to be strong enough to withstand the consequences of a one-in-1000-year event rather than a one-in-500-year event is that the Alpine Fault which goes once every 800 years roughly and the big quake that could hit New Zealand or Wellington in that rare event ought to be able to be catered for by the insurance community without the insurance community going broke and effectively leaving it to others perhaps either putting the onus on to private individuals who would be left uninsured or leaving it to the Government to pick up the bill.This is a very difficult decision because there are trade-offs to be made as to whether the additional level of security that would be obtained is firstly necessary and secondly affordable because if there are greater capital requirements required of insurance companies then that cost will be passed on to consumers through the insurance bills that they pay. So the first problem could be that if insurance costs go up as a consequence of this higher degree of confidence that we would have that they could meet these very expensive but rarer events it might be that it leads to lower levels of insurance because people cannot afford their insurance bills. That is one issue. The second issue—and this was raised with me recently by a senior member of the insurance industry—is that if the capital requirements become too high it may be that some of the multinationals that are present in New Zealand cannot get the support from their parent companies to provide the additional level of capital that is required by the New Zealand regulator because they will not be able to get a decent rate of return on it from the insurance market in New Zealand. As a consequence some of those insurers may withdraw from the New Zealand market reduce their presence or become more selective about the sort of cover that they are willing to offer because their parent owning bodies overseas are not willing to extend the additional capital to the New Zealand subsidiary to meet those requirements. The third potential problem with it is that if the capital barriers to entry for new entrants go even higher we are likely to become even more dependent in New Zealand in an important aspect of our financial services sector namely our insurance companies on overseas-owned companies and they will face less competition from New Zealand - owned entities.I think these are three very important concerns. Although I understand the concerns of the Reserve Bank about improving from a prudential point of view the likelihood that insurance companies can meet large events we have to be very careful that we properly take into account the three factors that I have mentioned. The first issue is the cost of insurance. The second issue is the possibility that some of the multinational insurers will not get the capital backing required from their parent companies to meet those commitments and therefore might withdraw from the market which would reduce competition and again could drive up costs and also increase risks because we would become more reliant as a country on a smaller number of insurance companies. The third issue is whether we are going to see ever-greater capital flows or returns of profits from the New Zealand insurance market to overseas companies because it is less likely that we will have New Zealand participants in the insurance market. That issue has been raised with me by more than one representative of the insurance industry and I believed their comments to me to be unedited and not self-interested. They were actually not talking in pursuit of their own interests. They were talking about what they thought was in New Zealand’s interest and I believed them to be straight in that regard. That is an issue that we have got to grapple with. It is a complex one and I hope that we get that one right in New Zealand.Although this area of Reserve Bank policy in this bill finds the support of the Labour Party it is fair to say that we have considerable concern about the effectiveness of overall Reserve Bank arrangements in New Zealand. We are not convinced that monetary policy is right yet. It was interesting that when 3 years ago we pulled out of the cross-party accord on monetary policy we were accused of heresy and a couple of the things that we called for to be changed have quietly been changed since—namely the adoption of albeit in a somewhat clumsy way the macro-prudential tools. There is also a discussion paper that is now out from Treasury or some work that has been done by Treasury looking at the decision-making process in the Reserve Bank and whether it should be the governor or the board that takes decisions relating to monetary policy which is another change that we called for. It is strange how these things were heresy a couple of years ago but when there has been true leadership shown by the Labour Party even occasionally the National Party follows suit.What it has not addressed in respect of monetary policy is of course the fundamental problem under the Act which is that primacy has to be given by the Reserve Bank to inflation-targeting ahead of other important aspects of economic management that are impacted by monetary policy including the exchange rate. As a consequence we have fewer jobs in New Zealand and we have a larger current account deficit which is probably New Zealand’s largest economic vulnerability. It is a much larger cause of problems than the insurance matters to which we are referring here. That is not to diminish the importance of the Insurance (Prudential Supervision) Amendment Bill which the Labour Party supports.