Insurers under solvency spotlight

After being deferred by Covid-19 and other matters, the Reserve Bank will relaunch its review of the laws governing insurance companies and their solvency levels.

The central bank is reviewing the Insurance Prudential Supervision Act 2010 or IPSA, which came into force in 2010 and was due for review three years ago.

Also under review are the associated solvency standards, which govern the minimum amount of capital that insurers are required to hold.

In a speech to insurers last month, Deputy Governor Geoff Bascand said his goal was improving prudential regulation.

Over the next year, the RB will seek feedback on the scope of the Act, which insurance groups and products should be included and how insurance is defined.

The treatment of overseas insurers, statutory funds and the regime regarding solvency will also be up for discussion. A substantive consultation paper is expected in November.

In his speech, Bascand noted that New Zealand was heavily reliant on foreign-based life and general insurers and they needed to follow the same rules as locally based insurers. He also noted that the risk of under-insurance in the Canterbury earthquakes had been mitigated by the fact that most home owners had total replacement insurance.

The change to ‘‘sum insured’ insurance – insurance based on a nominated sum – created the ‘‘potential for increased economic risks’’ if another big event left home owners unable to cover their full rebuild costs, he said.

Insurance Council chief executive Tim Grafton said the reviews were ‘‘well signalled’’ and appropriate, given the number of developments in the last decade.

These included a change in international accounting standards, and the collapse of insurer CBL, a company once valued at $750 million, in 2018.

And there was always the issue of New Zealand’s ‘‘uniquely high’’ seismic and other risks.

Another reason for the review was New Zealand’s current solvency standards, introduced in 2014, were assessed two years later by the International Monetary Fund, and found to have some discrepancies with the core principles of insurance supervisors internationally, he said.

In the wake of CBL’S collapse, Grafton said the Reserve Bank had felt ‘‘it had limited levers to be able to manage solvency risk’’.

A substantive consultation paper is expected in November.