Thursday 4th July 2019
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Reserve Bank governor Adrian Orr says the prudential supervisor will have to be more sceptical in its oversight of the insurance and banking sectors given the lack of self-discipline shown in the CBL Insurance case.
The central bank yesterday published an independent review by John Trowbridge and Mary Scholtens QC to examine its supervision of CBL Insurance, spanning its pre-licensed state in 2011 through to its eventual collapse in early 2018.
The report found the insurer's failure was a "dramatic" example of the inadequacies of prudential regulation and supervision, and that the Reserve Bank was too lenient with the insurer from 2013 to 2016 and should have been more forceful in acting on its concerns about the firm's solvency.
Trowbridge told a briefing in Wellington yesterday that there needs to be more accountability, stemming from the regulator, where the self-discipline of a company's board may not be working.
"That's the lesson here. Where you come from an environment that's used to such a light-handed position, and we're saying, in this case, it doesn't appear to have worked, and we think a number of steps should be taken by the bank in the future," he said.
Orr said CBL's self-discipline was lacking and that the bank's own regulatory discipline should have been more proactive in pursuing some of its actions in a complicated backdrop with competing professional advice.
"I find it disappointing the outcome is you have to be more sceptical," Orr said.
The review said the CBL case was an example of the limitations of self-discipline. "If it were effective, it is reasonable to expect that many of the issues arising in the CBL case should not have arisen and some of the findings and recommendations expressed in this report would not be important."
The Reserve Bank has taken the 144-page report's findings and recommendations on board. It is reviewing what it needs to do to boost the resilience of the banking and insurance sectors and is recalibrating its rules and how it enforces them.
Orr said the Reserve Bank is building up its resources after being on a zero-bound budget for at least five years.
He said the central bank doesn't run a zero-failure regime, and that people need to understand the role of directors in governing companies.
"It comes down to market- and self-discipline, with regulatory discipline a third level," Orr said.
Trowbridge said the central bank has already learned lessons from the review process, and that it understands what needs to be done.
"I think that the likelihood of this happening again is very much reduced," he said.
Trowbridge said the lack of local long-tail insurers - where premiums are paid upfront but face a potential for claims many years later - also reduces the chance of a repeat.
However, the government's proposals to introduce soft compulsion for homeowners to get insurance or a guarantee to protect themselves from faulty work on building new houses would bring that risk back to the market.
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