Dalziel Lianne: Insurance (Prudential Supervision) Bill — First Reading 
Dalziel Lianne: Insurance (Prudential Supervision) Bill — First Reading 
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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.