Nash Stuart: Insurance (Prudential Supervision) Bill — In Committee Third Reading 
Nash Stuart: Insurance (Prudential Supervision) Bill — In Committee Third Reading 
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STUART NASH (Labour) 
: 
 I also rise to support the Insurance (Prudential Supervision) Bill. This bill is important to the people of New Zealand for three reasons which I will outline and elaborate on. The first reason is that this bill is another step in achieving clear robust laws and regulations across the financial sector. The second is that it will provide a much higher level of security to New Zealanders with exposure to the insurance industry. The third reason which is important is that it tidies up legislation governing the sector where there was an unacceptable level of uncertainty. Tightening up the legislation regulating an important segment of the financial sector and providing certainty are the three reasons why Labour is supporting this bill. These measures will help to provide confidence to all New Zealanders that their Parliament is working together to further protect their rights and their money. 
New Zealanders have lost a significant amount of money in this economic recession—New Zealanders who worked incredibly hard saved hard dreamt and aspired and who should be allowed to live and retire with dignity. Parliament has already passed legislation in several areas to tighten or make laws where there really was a deficit in the financial sector and this is just another step in ensuring that hard-working Kiwis can have confidence in the New Zealand financial sector. That is what I mean when I say this bill is another step in achieving clear robust laws and regulations across this very important sector of the economy. It is not only sensible but also absolutely necessary in this day and age. That is why we all work together across all parties on this type of legislation which benefits all New Zealanders. 
Although the New Zealand insurance sector is not generally in distress and was not in distress during the heights of the economic recession the global financial crisis has demonstrated the vulnerability of the financial sector as a whole. Currently New Zealand does not have a framework for the prudential regulation and supervision of insurers. The current insurance legislation is outdated and inconsistent in its application across the diversity of the New Zealand insurance market. 
There has been extensive consultation on the provisions of this bill. A draft version of the bill was released for consultation in April 2009. The draft bill reflected policy approvals made by Cabinet in December 2007 and August 2008. Prior to that the proposals originated from the Review of the Financial Products and Providers work stream. A discussion document was released by the Ministry of Economic Development in September 2006. A further consultation paper was released by the Reserve Bank in May 2008. 
The second reason why I support this bill is that it provides a much higher level of security to New Zealanders with exposure to the insurance industry. The bill requires all insurers operating in the New Zealand market to be licensed and supervised by the Reserve Bank and to comply with minimum prudential requirements. The Reserve Bank will have powers to act in respect of insurers that are in distress or in other difficulties and I will elaborate on these points in a minute. That said in the end the new regime has been designed around a self-managing approach. For example insurers are expected to devise and adhere to their own fit and proper risk management policies subject of course to Reserve Bank oversight. 
The cost to the Reserve Bank associated with the insurance proposals is estimated to be in the range of $2.5 million to $4 million per annum on an ongoing basis once the prudential regulation proposals for insurance have been fully implemented. The new insurance prudential supervision regime will generate transitional and ongoing compliance costs. However the new costs will be incurred largely at the stage of the transition to the new regime. Also the overall marginal cost to the industry is mitigated by its relatively light-handed and comparatively non-prescriptive approach. In addition to this foreign-owned insurers that operate in New Zealand are already subject to a degree of regulation by their home country supervisors. The regulatory impact statement concluded that the benefits contained in the regulatory regime outweighed the costs. 
I will outline some of these costs now. Insurers will incur a cost in applying to be licensed under the regime. This includes the cost of familiarisation with the new regulatory requirements self-assessment against the regime preparing an application dealing with the Reserve Bank as a supervisor and making any organisational and business changes needed to qualify for a licence. The proposed regulatory and supervisory requirements will impose additional compliance costs on insurers including the need to maintain structures to verify compliance with requirements to maintain capital in line with the minimum standards and to report regularly to the Reserve Bank. These are not onerous requirements or costs at all. They are not expected to be significant relative to insurers’ revenue and profits and they are not likely to affect the ability of insurers to continue to provide an insurance service at current levels—this was one point that we made very clear at the Finance and Expenditure Committee—although the impact on small insurers may be proportionally greater than on large insurers; we recognise that. Once insurers are licensed those costs are likely to become routine costs of doing business and we do not believe that they represent a material increase in costs over the status quo. 
Compliance with capital adequacy and solvency requirements may place constraints on insurers’ business operations to a small degree. These requirements and the associated costs are generally aligned to internationally accepted prudent practice for the insurance industry. The regulatory reporting of public disclosure requirements will impose some additional costs on insurers beyond existing levels but these are not expected to be significant relative to insurer revenue and existing public reporting requirements. The costs will be higher for those insurers that do not currently have to comply with the Financial Reporting Act 1993. 
The proposed mandatory requirement for insurers to have a financial strength rating will impose additional costs on those insurers that are not currently rated. Ratings are already mandatory for most general insurers and a number of other insurers have voluntary financial strength ratings. That is just common sense if one wants to attract consumers into one’s financial institution. The annual cost to insurers of having a rating is expected to be in the range of around $30000 to $40000. There will be indirect costs associated with ratings such as management time and the provision of information. In some cases the cost of ratings will be absorbed by insurance providers although in other cases some or all of the cost might be passed on to policyholders. In order to minimise costs for those that can least afford them the bill provides an exemption for certain very small insurers with annual gross premiums below a prescribed threshold. 
The Reserve Bank has the power to require information from insurers which the bank can require to be audited at the insurers’ expense. Costs will be incurred on a case by case basis by insurers who breach the regulatory requirements. In both cases the bank will adopt a risk-based approach to supervision which means that only non-compliant or at-risk insurers will face a specific cost. 
There are a couple of risks with the legislation. Licensing requirements may represent a barrier to entry for potential new market participants and increased supervision may reduce market discipline on insurers and increase moral hazard. 
In conclusion the reasons why Labour is supporting this bill are that firstly it is another step in achieving clear robust laws and regulations across the financial sector. The second reason is that it will provide a much higher level of security to New Zealanders with exposure to the insurance industry. The third reason why Labour is supporting this important bill is that it tidies up legislation relating to the sector where there has been an unacceptable level of uncertainty. I commend this bill to the House.