Insurance (Prudential Supervision) Amendment Bill

on behalf of the Minister of Finance: I move, That the Insurance (Prudential Supervision) Amendment 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 and that the committee present its final report on or before 13 September 2013.

The amendment bill contains amendments to the Insurance (Prudential Supervision) Act 2010 in nine areas, and one consequential amendment to the Reserve Bank of New Zealand Act 1989. It aims to reduce or eliminate unnecessary compliance costs and address technical issues identified during provisional licensing to ensure a smooth transition to full licensing of insurers.

By way of background, the Insurance (Prudential Supervision) Act, which received the Royal assent on 7 September 2010, establishes a licensing and prudential supervision regime for insurers carrying on insurance business in New Zealand. The Act represents a significant step forward in terms of delivering comprehensive prudential regulation of insurers carrying on insurance business in New Zealand. The Act provides for a transitional period towards full compliance that runs through to 7 September 2013. Most insurers carrying on business during the transitional period are operating under a provisional licence, whereby the full effect of the Act is delayed. At the end of the transitional period all provisional licences will have expired.

The Reserve Bank has reviewed the operations of the Act during the transitional period. Although the Act has proved to be generally effective and robust, it is not unexpected that some provisions have been identified as appropriate for reform. In particular, two provisions in the Act could expose insurers or the Reserve Bank to operational complications at the end of the transitional period, and for this reason these amendments would ideally come into force before 7 September 2013. The amendment bill proposes to extend the term of provisional licences of insurers who enter into an insolvency procedure before 7 September 2013. At this date insurers that are subject to an insolvency procedure will not qualify for a full licence. The inability to extend a provisional licence will result in the insurer not being subject to distress management provisions prescribed under the Act, and the Reserve Bank may wish to continue to have a role for regulatory purposes.

The second proposal relates to interim financial reporting requirements. Some overseas insurers are concerned about the cost of complying with half-yearly insurer and group financial statements prepared in accordance with New Zealand generally accepted accounting practice where branches and subsidiaries are operated in a number of countries. The proposed amendment is to allow the Reserve Bank to specify another basis for reporting by overseas insurers. For example, in appropriate cases, overseas insurers may submit half-yearly insurer and group regulatory financial reports in accordance with home jurisdiction requirements. It is anticipated that the Reserve Bank would receive the same information provided to the insurer’s home regulator.

Two other proposals are expected to reduce or eliminate unnecessary compliance costs. Certain provisions under the Act have been identified to be too onerous in circumstances where policy holders are not expected to gain material benefits or additional protection even if the insurer complies with the requirements. The first of these allows the Reserve Bank to exempt an insurer that is running off its liabilities from the requirement to have a current financial strength rating. Often there will be limited public benefit for an insurer to hold a financial strength rating where it is required to cease to enter into new contracts of insurance. The second clarifies that in respect of contracts of insurance that renew more frequently than annually, disclosure in writing of the insurer’s financial strength rating to the policy holder will be made on at least an annual basis rather than on every renewal. This proposal would stand in addition to provisions under the Act, requiring the insurer to give notice of a rating downgrade to the public or policy holder within a prescribed period and to disclose its current financial strength rating on its internet site.

The amendment bill also takes the opportunity to address technical issues—for example, providing a limitation period of 5 years within which the Reserve Bank may file a charging document against an insurer that has committed an offence. A limitation period of 5 years for all types of offences against the Act is considered appropriate to improve consistency in the enforcement of the Act, to reflect the nature of operation and risks in the insurance sector, and to improve consistency with provisions in other statutes administered by the Reserve Bank.

The amendment bill also empowers the Reserve Bank to publish and maintain on its website an official register of licensed insurers, with additional content to be determined by regulations. This will result in a consequential amendment to the Reserve Bank of New Zealand Act 1989, where the current provision is confined to the determination of form, and will set a common standard across the Insurance (Prudential Supervision) Act and the Reserve Bank of New Zealand Act 1989.

In conclusion, the proposals included in the amendment bill will enhance the effectiveness of the Insurance (Prudential Supervision) Act without the imposition of unnecessary compliance costs on insurers. To date there has been general industry acceptance of the Act. The amendment bill does not involve significant changes to existing policy and is expected to continue to benefit from the industry’s support.

I rise to confirm that the Labour Party will be, with some reluctance, supporting this bill, the Insurance (Prudential Supervision) Amendment Bill. This bill extends the transitional period established under the Insurance (Prudential Supervision) Act 2010 that would otherwise expire in September of this year, and the bill does need to be enacted before this date.

I could not hope to match the comprehensive and exciting presentation by Minister Nikki Kaye. There will be a quiz at the end of this debate for people watching Parliament tonight to test their memory of the points that the Minister made in her opening address. My remarks will be limited to two broad sections. Firstly, I am going to note some of the provisions of the bill that have, no doubt, been made with considerable input from the insurance industry. I think it is important that the House checks off that input. Secondly, Mr Assistant Speaker, if you will allow me, I will note some contextual matters to do with Reserve Bank prudential supervision, which provide some of the framework within which this bill has occurred.

On to the first matter, which is that this bill might have been named the “Insurance (Prudential Supervision—The Industry Made Me Do It) Amendment Bill”. The reason for that characterisation is that it contains a number of provisions that might be kindly described as business-friendly. In other words, judging by the Minister’s enthusiasm for her speech, she was probably handed a list by the insurance association and told: “Please enact these.” That seems to be what is happening, and I draw the House’s attention to but a couple of examples.

The first is, in the genteel language of officials: “The Bill … contains amendments that extend the term of provisional licences of insurers that enter into an insolvency procedure before 7 September … Extending the term of … [these licences] ensures that the distress management tools made available … will reduce unnecessary costs and improve administrative efficiency …”. In other words, it is a free extension. Here is another example: “Other amendments will reduce … costs and improve administrative efficiency”—the same language again—“(for example, a formalised register administered by the Bank and an ability to exempt insurers in run-off from the requirement to maintain a current financial strength rating).” Why have a current financial strength rating if you are simply going to exempt the insurers? This is rather interesting—“The Industry Made Me Do It Bill”. I will not go on because, of course, there are valid reasons to have the bill. We do not want the current transitional period expiring and the industry simply being left in the lurch, and for that reason Labour is supporting the bill.

It is very important to note, if I might, some of the context within which this has occurred. This has been a very, very big week for the Reserve Bank. It was only yesterday that we discovered, despite the continual protestations of the Minister of Finance that New Zealand had hitherto had the very best monetary policy in the entire world, which included no intervention in currency markets and no macro-prudential tools, that guess what? The Governor of the Reserve Bank confirmed to the Finance and Expenditure Committee yesterday that, virtually as the Minister was speaking, the bank was busy intervening in the New Zealand dollar. Goodness me! What the Minister refused to countenance, the governor was already doing. How very, very interesting. So there is the Reserve Bank selling New Zealand dollars like it is going out of fashion to drive the Kiwi dollar down—and, in fact, it did, because as soon as that was announced, the Kiwi dollar dropped like a stone, by about a cent.

But the interesting thing here is that Labour has been calling for exactly that kind of intervention—and so have our Green colleagues—for about the last 3 years, and the Government of the day has said it was unnecessary. Here is the embarrassing thing for the National-ACT Government: the Governor of the Reserve Bank, hardly a noted Marxist revolutionary, has gone on and done it behind the Government’s back—leapfrogged the Government, and agreed with the Opposition.

What an interesting week for the Reserve Bank to be debating the now rather exciting Insurance (Prudential Supervision) Amendment Bill. Who knew that this bill would be a show-stopper? Who knew why the Government buried it at the very end of the long list of matters to be covered in urgency? Because it is embarrassed—deeply, deeply embarrassed. It is so worried that Tim Groser has been brought back from Geneva or Ouagadougou where he was busy marshalling votes to be the Secretary-General of the South Pacific Forum, just so he could save the Government for this bill. I commend his action, I hope someone gave him a decent visa, and I look forward to running against him in the good seat of New Lynn in a mere 18 months’ time.

The second signal achievement of this week in regard to the Reserve Bank is the governor’s admission that in a few days he will be signing with the Minister of Finance a memorandum of understanding on the subject of macro-prudential supervision—a matter not unrelated to the content of this bill, but rather more exciting. That is things like loan-to-value ratios and other tools that will compress the rapid rise of the housing market. Again, the Labour and Green parties have been calling for the increased use of these tools and the consequential amendment of the Reserve Bank of New Zealand Act for the last 2 years. We are on record. What did Mr English say? “Oh no!”, he said, “There is no need. We already have the best monetary policy in the whole wide world, and that would be unorthodox!” Well, how very interesting that in a short few days’ time he will be signing off on the very same amendments that the Opposition has long mooted and that he has long denied. What a very interesting week for the Reserve Bank.

The third leg of the treble for the Reserve Bank is the contribution of noted New Zealand Herald economist Brian Fallow, who today has declared that “Austerity’s for booms, not slumps.” This is important because the Government is embarking on a veritable austerity programme, soon to be confirmed by another miserly and unfair Budget in just a few days’ time. Does the Government believe that we are in a boom? If it does, it must be living on a different planet. Should we call it “Planet Gilmore”? On “Planet Gilmore”, everything is rosy! The waiters deliver on time and they do not answer back. On “Planet Gilmore”, New Zealand is blooming. It is just that on the real planet Earth, in the real Aotearoa, it ain’t booming. There are 270,000—here is the serious bit—children growing up in poverty, and many, many tens of thousands more unemployed than when this Government took office. This is something closer to a slump for real New Zealanders than a boom, and this is no time for austerity. [Interruption] Todd, there is time for the noted chairman of the Finance and Expenditure Committee to refresh the coiffure of his pate before he leaps to his feet and demands the attention of the viewer.

May I sum up. There are three elements to this debate. The first is—as the Minister, with such sparkling repartee, has outlined to the House—that this is a boring bill. However, it is boring particularly because she is merely reading the shopping list from the insurance industry association. She is so afraid; she is now slumping down behind her chair. She is so ashamed to have been the tool of the industry. The second main point is that there are some significant holes, which Labour will do its best to reconsider in 18 months’ time when we take the Treasury benches. The third is that it has been a huge week for the Reserve Bank. It has finally come out. It is appropriate to use such terms in the House, of course, noting recent achievements. It has come out and said that it likes to intervene in currency markets—that it is good for it, it puts hairs on its chest, it makes money out of it, and it drives down the Kiwi dollar so we can export more. That is all good stuff. The only person who disagrees is Bill English, but Graeme Wheeler has seen to him. Finally, he is seeing to him next week when he forces the Minister to sign off on the macro-prudential tool box, which Labour and the Greens have long been calling for. I would say this is a week, in regard to the Reserve Bank’s supervision role, where you could say Opposition one, Government nil. The people of New Zealand live in hope.

There are people in New Zealand living in hope now that that last speech has finished. We will get on very soon, I am sure, to the quiz that was announced, but I think the number of people taking part in the quiz at this stage will be many fewer than at the beginning of the intervention.

Can I just address one point from that last speech very briefly before I get into talking about what is a significant piece of legislation, the Insurance (Prudential Supervision) Amendment Bill. The last speaker in the debate, the Hon David Cunliffe, spoke of 200,000 children in poverty in New Zealand. I do not want to debate around what that word “poverty” means, but what I do want to say, and what I want to recollect, is that over 9 years of a Labour Government there were more than $20 billion worth of surpluses, and at the end of that 9-year period there were the same number of children in poverty as there were at the very beginning. I just wanted to address that. I will put it aside, because the House is harmoniously moving towards a short adjournment.

Can I say again that this amendment bill is another significant step towards achieving clear and robust regulatory arrangements across our financial sector. Although the original Act of 2010 has proven to be effective, it is not unexpected that some provisions have been identified as appropriate for reform, and, therefore, this amendment bill does that.

I did say this is a significant piece of legislation; therefore, I want to reserve my substantive contribution until the second reading. But can I say to Minister Nikki Kaye that that was one of the more enlightening speeches I have heard on legislation that is likely to come to the Finance and Expenditure Committee. I want to thank her for her great knowledge in this area.

I rise to take a call to support this bill, the Insurance (Prudential Supervision) Amendment Bill, especially as delivered by the Minister for Food Safety, Nikki Kaye. This is a sensible bill and we will be supporting it through to the select committee stage. The bill makes a number of technical amendments to the prudential regulatory framework for the insurance industry. The Insurance (Prudential Supervision) Act 2010 received the Royal assent on 7 September 2010. It established a licensing and prudential supervision regime for insurers carrying on insurance business in New Zealand. In other words, the insurers carrying on insurance business in New Zealand are required by the Act to participate in a licensing and prudential supervision regime.

There is a transition period in the Act and that runs through to 7 September 2013. Most insurers carry on business during the provisional period, operating under a provisional licence, whereby the full effect of the Act is delayed while insurers follow the path to full compliance. At the end of the transition period, all provisional licences will have expired. Needless to say, this bill needs to be enacted before that date, and this bill should have had its first reading months ago.

Through the licensing phase of the 2010 Act a number of technical issues have been identified as appropriate for reform. This bill brings amendments relating to these technical issues. The key amendments proposed in this bill include, firstly, requiring the Reserve Bank to keep a register of licensed insurers. Secondly, it allows overseas insurers to report, with the Reserve Bank’s consent, by entering financial information that complies with their home jurisdiction requirements rather than New Zealand’s International Financial Reporting Standards generally accepted accounting practice. Thirdly, it extends the term of provisional licences of insurers that enter into an insolvency procedure before 7 September 2013. Extending the term of the provisional licences of those insurers would make sure that the distress management tools made available under Part 4 of the Insurance (Prudential Supervision) Act remain available to the Reserve Bank and liquidators. It is intended that the amendments proposed under this bill will come into force before 7 September 2013. However, this has yet to be confirmed or cannot get confirmed, because it is having only its first reading tonight.

I rise to take a call on the first reading of the Insurance (Prudential Supervision) Amendment Bill. I will begin by saying that the Green Party has decided that we cannot offer support to this bill at the first reading, and there are several reasons for this.

Firstly, the principal legislation, the Insurance (Prudential Supervision) Act, was supported by the Green Party. We think it is extremely important to have good regulatory oversight and good prudential requirements for the insurance industry, so we were very supportive of that bill throughout the whole process. What this amendment bill seeks to do is make nine very technical, dry changes to the prudential requirements for the insurance industry, which are set to come into law in September 2013. The changes were recommended by the Reserve Bank. They include things like allowing the Reserve Bank to exempt a licensed insurer from the requirements to have a current financial strength rating if the insurer has stopped writing new contracts. It allows overseas insurers to use accounting rules that apply in their home country for interim financial reporting rather than adhering to New Zealand’s accounting practices. It requires the Reserve Bank to keep a public register of all licensed insurers, while dropping the requirement for it to be made available on the bank’s website—interestingly. It makes any offences under the principal Act category 3 offences as defined by the Crimes Act, creating a statute of limitations of 5 years.

The main changes recommended in the bill move in the direction of lighter regulation in some highly specific circumstances, such as the case of an insurance company that has stopped issuing new insurance. This controlled relaxing could make sense; however, our concern is that it is happening in an industry that is characterised in New Zealand by a few dominant, foreign-owned players that are too big to fail. We believe that particularly in a post - global financial crisis world, in a world where the insurance industry globally is facing increasing threats—and in New Zealand we saw after the natural disaster of the Christchurch earthquake that it had quite serious repercussions for AMI, which was our largest New Zealand - owned insurer. In the post - global financial crisis world and in a world where we can anticipate more frequent serious, severe weather incidents that will undoubtedly result in insurance companies having to pay out more, it is not the time to be moving towards lighter regulation. We could be convinced through the select committee process, but it will take that process for us to fully understand the total ramifications and implications of the changes in this bill.

I note that another reason for not supporting it tonight is that there was no regulatory impact statement accompanying this bill, so we have got no reason for these particular changes that is fleshed out in detail and fleshed out in a way where we feel we have been able to understand that the officials have looked at the changes, have thought about all the implications, and have assessed the risks and the advantages of these changes. Given the dearth of information about the bill, we simply cannot support it this evening. That is all I have to say. Thank you.

I take a call on behalf of New Zealand First on the Insurance (Prudential Supervision) Amendment Bill. New Zealand First will be supporting it through to the select committee. We believe that it is a fundamental situation in New Zealand that we must have a good, well-functioning insurance sector. It has been proven over recent years that unless we do, New Zealand is at great risk. It is most important—I think all parties in this House would agree—that we must have a very sound, well-functioning insurance sector, and that includes our own Earthquake Commission measures as well. The insurance sector underpins the basics of our modern economy. If we do not have a sound insurance sector, our whole economy could suffer as a result. The public must have confidence that this sector is sound, and appropriate prudential supervision of the sector is an important regulatory function that this Parliament must ensure is done to the highest level.

The Christchurch earthquake demonstrated the critical role of insurance, and it highlighted some concerns, as were illustrated in the situation with AMI. It would be so easy for situations like that to occur if there was not oversight by this Parliament and by the Government to ensure that the right safeguards were put in place in terms of the insurance sector. But it also revealed some aspects of the insurance sector that may not be working optimally for New Zealand. With so much of the insurance sector dominated by overseas companies, it is essential that the regulatory framework is comprehensive and up to date and that it works well. New Zealand First appreciates the significance of the insurance sector, that it operates well in New Zealand, and that at the present time we do seem to have it well and truly in hand. That is not to say that things cannot fall through the cracks. This bill goes a long way towards tidying up areas of that.

We have a few questions, which when the bill goes to the Finance and Expenditure Committee I am sure will be answered, such as about financial standards not being required of the insurance provider if it is in a run-off period. If the licensed insurer is described as being in a state of run-off and is not entering into new contracts for insurance, the Reserve Bank will be satisfied that it does not therefore have to have a current financial strength rating. We sort of have some doubts about that, and we would welcome the Minister of Finance and the Government explaining that a little bit further, because we believe that the highest financial ratings should be required, even at a time when an insurance company is running down in New Zealand. We would not want it to slip out the back door, so to speak, because its financial ratings were not held to the highest level throughout its activities in New Zealand.

This is a little bit like the bill that we addressed prior to this one, the Trustee (Public Trust) Amendment Bill. The Insurance (Prudential Supervision) Amendment Bill is very much an administrative bill. It is a technical bill. It tidies up areas through the Reserve Bank to make sure that our insurance industry in New Zealand has better governance and better oversight. New Zealand First will be supporting the bill through to the select committee.

on behalf of the Minister of Finance: I move, That the Insurance (Prudential Supervision) Amendment Bill be reported back to the House on or before 13 September 2013.

Motion agreed to.

The House adjourned at 8.30 p.m. (Thursday)