Parker David: Insurance (Prudential Supervision) Amendment Bill Reserve Bank of New Zealand Amendment Bill — Third ReadingsText is incorporated into the Bound VolumeParker David: Insurance (Prudential Supervision) Amendment Bill Reserve Bank of New Zealand Amendment Bill — Third Readings[Sitting date: 27 August 2013. Volume:693;Page:12812. Text is incorporated into the Bound Volume.]Hon DAVID PARKER (Labour): The Labour Party supports the Insurance (Prudential Supervision) Amendment Bill and the Reserve Bank of New Zealand Amendment Bill. The Minister who has just resumed his seat Mr Brownlee is quite right in saying that the Finance and Expenditure Committee thought it was important that provisional licences can be kept for a longer period of time than was originally envisaged the reason being that if a company gains a provisional licence but cannot convert it into a long-term non-provisional licence because for example of insolvency then it is desirable that there still be a level of oversight by the Reserve Bank that can occur under a provisional licence that could not occur if the insurer was unlicensed. So this helps the Reserve Bank and the Government through the Reserve Bank to maintain oversight of insurers in that situation.There is an important outstanding issue in respect of the prudential supervision of insurance companies that is not touched upon by this legislation and it is a difficult issue for New Zealand to grapple with. Before I sit down I want to just mention the complexities around that issue and that is whether the prudential standard upon whichinsurance companies are judged is their ability to meet either a one-in-500-year event or a one-in-1000-year event. Of course if the requirement is for them to have a strong enough capital position to meet a one-in-1000-year event it effectively means that they have to have a stronger balance sheet. At first blush you can understand why the Reserve Bank might want companies to have a stronger balance sheet in order to meet a one-in-1000-year event. My understanding is that the Alpine Fault ruptures approximately every 800 years and that would probably be the biggest insurance event that it is possible to contemplate in New Zealand. That is one of the reasons why the Reserve Bank is looking at the—Hon Trevor Mallard: What about the Wellington one?Hon DAVID PARKER: Well the Wellington one would probably go out in sympathy. You know what Wellington is like! The consequences of that would be dire for New Zealand but that is a different question. Whether we should move the prudential requirement to a one-in-1000-year event rather than a one-in-500-year event is not the only part of this question because there are some consequences of that. This has been passed on to me by a number of participants in the insurance industry and I do not believe that they are talking from a position of self-interest. Indeed I think that they have New Zealand’s interests at heart in respect of this issue because they can live with either eventuality.The first consequence is that if there is higher capital requirement for an insurer it may be that that capital is not available to them. The multinationals that are present in New Zealand compete for capital amongst different parts of the world so it may well be that they just cannot get the additional capital to put into their New Zealand operation and their parent company chooses on balance given our risks in respect of earthquakes and the like to withdraw from the New Zealand market rather than bring forward that additional capital to their New Zealand subsidiary. That would mean that we have less competition in insurance in New Zealand and we become more reliant on the remaining insurers which in itself increases risk in the event of a very big earthquake.The second issue is that even if they could get that additional capital in New Zealand to meet a higher prudential ratio to cover a one-in-1000-year event rather than a one-in-500-year event the cost of that increased capital would be passed on to the people who buy insurance or buy premiums from those companies. In other words people’s insurance bills would go up. If people’s insurance bills go up then some of those people who would otherwise have taken insurance will not take insurance or will take lower levels of cover. So in terms of the effect on New Zealand’s insurance cover it could be—I am not saying it would be but this requires careful analysis—that increasing the capital requirements could actually result in lower levels of insurance in New Zealand. So it could be counter-productive if what we are trying to do is minimise the risk of consequences in New Zealand if there is a really bad earthquake. If we have fewer people insured against different sorts of risk—and it is not just their household cover or their contents cover but things like business interruption insurance; all those other sorts of cover would be affected by these same capital ratios—and we have insurance costs going up then we could actually have the opposite outcome from that which we intend even though the Reserve Bank might be thinking that it is improving from its perspective the financial stability of the insurance companies. Overall New Zealand might be worse off because we have lower levels of insurance.The third area where this is relevant concerns the effect on competition with the multinationals. Over the last two or three decades we have seen a concentration of ownership by overseas multinationals of New Zealand’s insurance market. This is also something that has happened in other parts of the financial services sector like the banking industry. As a consequence of amongst other things monetary policy settingsand tax settings New Zealand has been hollowed out when it comes to ownership of our financial services sector. The ability of small New Zealand companies to start up and grow into companies that compete with these overseas companies—who of course repatriate profits as any insurance company would do in that situation—could be inhibited by increasing stringency of capital requirements that make it harder for new entrants to enter into the market and compete.None of those issues are dealt with in this legislation arising from the Insurance (Prudential Supervision) Amendment Bill but they are coming at us in respect of an issue as a consequence of the Reserve Bank saying that it is considering whether to increase the prudential requirements from 500 to 1000 years. I for one will take some convincing that the issues I have raised are not more important. The Labour Party supports this legislation.