Wednesday 3rd July 2019
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The failure of CBL Insurance was a "dramatic" example of the inadequacies of prudential regulation and supervision for insurers and backs the case for greater resourcing, according to a report on how the Reserve Bank handled the case.
The central bank commissioned 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.
In a wide-ranging report, the review's authors made a range of recommendations, and found the central bank could and should have acted more forcefully at an earlier stage.
During the pre-licensing and licensing phase in 2012 and 2013, the report found the Reserve Bank's processes were sound. However, from 2014 to 2016 - a period that included CBL's initial public offering - they found the RBNZ gave the insurer the benefit of the doubt too often and should have acted more decisively about its solvency concerns.
In 2017 and 2018, the report's authors said the regulator acted firmly, decisively, and within its powers.
The authors said the CBL case backed up International Monetary Fund recommendations to expand resourcing for the Reserve Bank' supervision activities, which they said were hindered by limited scale and lack of specific insurance experience. The issue was compounded by the bulk of CBL's business being overseas, meaning its impact on New Zealand's insurance sector and economy were deemed to be low.
"The CBL case clarifies, perhaps in a dramatic way, the potential consequences of inadequacies in prudential regulation and supervision," the report said.
"We recommend an expansion of the supervisory resources of the bank for the supervision of licensed insurers and associated policy development."
The level of extra support required needs more investigation, as well as a review of the supervision philosophy, and central bank and government policy as to how far supervision should go, the authors said.
The CBL review comes at a time when the government has a multi-stage consultation on the Reserve Bank Act underway, including how it should supervise and enforce prudential regulation.
The Reserve Bank has already warned it will be more intrusive in its oversight of the sector, given the lack of self-discipline it has found among banks and insurers. Deputy governor Geoff Bascand today said the regulator is reviewing what it needs to do to boost the resilience of those sectors and is recalibrating its rules and how it enforces them.
"We are encouraged that our licensing decision and process were found to be sound, and that our actions leading to CBL being placed into liquidation were assessed to be appropriate," he said in a statement.
"We acknowledge the review’s finding that our supervision was overly-lenient towards CBL and should have addressed concerns about its reserving and management more urgently."
The Reserve Bank has accepted all of the findings and recommendations for itself and the regulatory regime.
Former CBL managing director Peter Harris said the review showed the Reserve Bank lacked the experience and resources to carry out its role, but said the review was flawed by not seeking input from him, the CBL board, ratings agency AM Best, or the appointed actuary, PwC.
"As a consequence of these and other flaws, in our view, the review falls dramatically short of being a document that would provide confidence to the public and international financial community that the regulation of NZ’s insurance market is in capable hands," Harris said in a statement.
The review found the Reserve Bank was right to maintain confidentiality - a cause for concern among CBL shareholders - despite the tension with continuous disclosure obligations under NZX rules.
"In the CBL case, the position is also confounded to some extent by the fact that CBL Insurance is a subsidiary of the listed entity, CBL Corporation, which itself is not licensed," the report said.
"The lack of disclosure at the time of interim liquidation can be said to have been awkward for shareholders because, with no prior disclosure by the bank or CBL, they were deprived of information that they may well have judged to be relevant to their position as investors. Arguably it was also awkward for policyholders, but that is a secondary matter in the eyes of investors."
However, the report found it was "appropriate to maintain confidentiality over these steps" at a fact-finding stage.
The report said the central bank needs to be able to act early on any potential risk it identifies without affecting public confidence in the insurer.
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