Wednesday 10th April 2019
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It was a mistake to make the Reserve Bank the prudential supervisor of the general insurance industry, according to former bank governor Don Brash.
His criticism is backed by Tower Insurance chief executive Richard Harding who says the current regulatory and supervisory framework administered by the Reserve Bank has proven to be "materially flawed and urgent overhaul is required.”
However, the pair part company on what the correct remedy should be.
And the Insurance Council of New Zealand, which says it represents general insurers that insure about 95 percent of New Zealand’s market with policies covering about $1 trillion worth of property and liabilities, would clearly like to let sleeping dogs lie.
“We support the enhancement of the status quo rather than more radical change,” and the current regime has worked well, the council says in its submission on the second part of the review of the Reserve Bank Act.
But both Brash and Harding cite CBL Insurance’s failure in early 2018. The collapse was “a red flag for the effectiveness of the existing regime,” as Harding puts it.
Brash says that when an insurance company starts getting into trouble and only the Reserve Bank is aware of that, “the bank is in an almost impossible position.
“If it discloses its concern to the market, the insurance company is almost certainly in potential jeopardy. If it fails to indicate concern, and worse still, if it forbids the insurance company concerned from making others aware of the bank’s concern, the bank is blamed for not disclosing that concern,” he says.
The Reserve Bank initially forbade CBL from telling NZX about the central bank’s concerns.
Instead of the current prudential supervision, Brash suggests reverting to the model in the early 1990's when all insurance companies were obliged to disclose a rating from a specialist insurance rating company, either A M Best or Standard & Poor’s, whenever an insurance contract was written or renewed.
“That provided a strong incentive for insurance companies to strengthen their claims-paying rating, knowing that by doing so they were enabled to charge slightly higher premiums,” he says.
“That system also capitalised on the knowledge of the rating agencies about the strength of the international companies with which New Zealand insurers were writing reinsurance contracts.” Brash disclosed that he was a member of the committee that recommended the system of mandatory rating.
“Of course, no system will prevent the failure of all insurance companies. AMI collapsed following the 2011 Christchurch earthquake and, though it had been expanding its business at least in part by under-cutting other insurance companies and was rated below many of those other companies, the then government undermined the system by paying out in full under all the insurance policies which the company had written,” Brash says.
The government at the time was led by the National Party, a party Brash once led, and the AMI bailout cost the taxpayer about $1.5 billion.
Clearly, obtaining a credit rating is hardly foolproof.
“CBL itself had a relatively strong rating prior to the Reserve Bank effectively closing its doors. But the benefit of a system which creates a strong incentive on insurance companies to strengthen their own claims-paying ability is surely to be preferred to one where insurance companies have an incentive only to meet the minimum standards imposed by the Reserve Bank,” Brash says.
Tower’s Harding argues for a new regulator, separate from the Reserve Bank, along the lines of the Australian Prudential Regulation Authority. He rejects the approach Brash suggests.
“The ‘light touch,’ or laissez faire, attitude to regulation and supervision is out of step with the inherent exposure of the New Zealand population and economy to risk,” Harding says.
“The Reserve Bank lacks focus of clarity and purpose with regard to prudential regulation and supervision. The supervisory activities of the Reserve Bank are under-resourced, lacking in sufficient capability and capacity to meet the necessary objectives,” unlike offshore regulators, he says.
Harding highlights the Australian ownership of two-thirds of New Zealand’s general insurers and the “particular risk to New Zealand with these well-resourced and empowered regulators focused solely on protecting local consumers, economic stability and interests over other interests such as the interests of New Zealand’s consumers and economy.”
Australian-owned insurers account for 66 percent of general insurance premiums paid in New Zealand, according to the International Monetary Fund.
“Tower strongly advocates for the adoption of a regulatory and supervisory approach and framework that moves away from the existing ‘light touch’ model to a more robust approach.”
About the only thing Hardy and ICNZ agree on is the need to recommence a review of the Insurance (Prudential Supervision) Act that has been on hold since late 2017.
“We are supportive of the Reserve Bank retaining its responsibility for prudential regulation and supervision of insurers,” ICNZ says.
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