English Bill: Insurance (Prudential Supervision) Bill — First Reading 
English Bill: Insurance (Prudential Supervision) Bill — First Reading 
[Volume:659;Page:8313] 
Hon BILL ENGLISH (Minister of Finance) 
: 
 I move  
That the Insurance (Prudential Supervision) Bill be now read a first time. 
 At the appropriate time I intend to move that this bill be referred to the Finance and Expenditure Committee for its consideration. I will outline the main features of the bill but first I will point out one small fact of history to Clayton Cosgrove who was speaking earlier. It is that the problem with what Mr Muldoon did in 1972 was actually that he made superannuation too generous—completely the opposite of the way that the situation was presented by the Labour member. 
The Insurance (Prudential Supervision) Bill will be administered by the Reserve Bank as part of its Government-appointed role of prudential regulator of our financial services sector. The bill will deliver comprehensive prudential regulation of insurers who are carrying on insurance in New Zealand. All insurers operating in the New Zealand market will be required to be licensed and supervised by the Reserve Bank and to comply with minimum prudential requirements. The introduction of this legislation is another significant step towards achieving clear robust regulatory arrangements across the financial sector. It will replace outdated and disjointed legislation fill gaps where no prudential regulation currently exists and remove inconsistent legislative application between different insurance sectors. 
Unlike certain other parts of the financial sector the New Zealand insurance industry is not generally perceived as being an industry in distress. However the flow-on effects of the global financial crisis will inevitably have an impact on the value of the investment funds so it is timely to introduce regulation that sets clear prudential standards. In addition the bill brings the regulation of insurers into line with established international benchmarks and expectations. We believe that this will increase the confidence of offshore observers and participants in the New Zealand market and improve the confidence of the public in the insurance industry. 
The proposed legislation exists as a stand-alone bill in its own right rather than as an amendment to the Reserve Bank of New Zealand Act. The powers conferred on the Governor-General the Minister and the Reserve Bank under this bill must be exercised for the purposes of promoting the maintenance of a sound and efficient insurance sector and of promoting public confidence in that sector. These purposes will be achieved by establishing a system for licensing insurers imposing prudential requirements providing for supervision by the Reserve Bank in respect of compliance with the requirements set out in the bill and conferring certain powers on the bank to act in respect of insurers who are in distress or in other difficulties. The bill will have reach over all insurers operating in the New Zealand market. It will include life insurers non - life insurers health insurers and discretionary mutual providers of insurance services. 
Although the bill is obviously designed to deliver effective regulation it is comparatively light-handed in its application and it is intended to deliver regulation that does not mire the industry in a compliance mentality. It contains a strong emphasis on director and senior officer obligations and accountability which are intended to be reasonably self-administering for compliance insurers once implementation is completed. The bill recognises a number of the realities of our market including its small size and significant diversity and it deals with these by having marginally varied requirements between the different categories of insurers. However there is also a strong focus on competitive neutrality in the application of regulation to insurers. 
In addition to the licensing requirement placed on all insurers the bill proposes that all insurers except for a limited class of small friendly society insurers will be required to have a financial strength rating from a rating agency approved by the Reserve Bank. All insurers will be required to have satisfactory fit and proper assessment programmes for directors and relevant senior officers and satisfactory risk management programmes governing their day-to-day operations. The bill will contain capital and solvency requirements to apply to all insurers which are derived from a risk-based approach that takes into account the specific situation of each insurer. A minimal capital requirement will also apply under the solvency standards. Life insurers will be required to maintain statutory funds for the protection of funds allocated to long-term policyholder liabilities. There will be enhanced financial reporting requirements on all insurers and a requirement for all insurers to have an appointed actuary to assist in this reporting. All insurers will be required to produce an annual financial condition report to both the management and the Reserve Bank as a regulator. The Reserve Bank will be required to approve all transfers of policyholder liabilities and amalgamations between insurers and amended legal requirements are included within the legislation to increase the efficiency of this process. 
The bill provides the Reserve Bank with broad-ranging information-gathering powers appropriate to the role of the industry supervisor and it empowers the bank to have an active role in respect of insurers in financial distress. This will include the ability of the Reserve Bank to participate in insolvency procedures and in extreme circumstances in statutory management. 
The development of this bill has been assisted by an extensive consultation programme involving stakeholders across the insurance industry and providers of related support functions. The consultation included the release of a draft bill in April 2009 which attracted more than 90 submissions. The Reserve Bank has also been in close dialogue with relevant overseas insurance bodies including the International Association of Insurance Supervisors and the Australian Prudential Regulation Authority as well as with other New Zealand Government agencies. There is general industry acceptance of the need for the prudential regulation of insurers and general support for the direction taken by the bill. 
In conclusion I say this bill broadens the ability of the Reserve Bank to promote a sound and efficient financial system. It is a significant step forward in terms of updating the regulation of insurers and improving the transparency and clarity of regulation in the sector. It is my hope that this legislation will lift public confidence in an industry that is characterised by complex financial arrangements that are often difficult to understand. As a result of comprehensive consultation I suspect that we will have a strong degree of support for this bill’s referral to a select committee.