Monday 23rd September 2019
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The Reserve Bank needs more resources rather than new powers to better fulfill its role as prudential regulator of insurance companies, deputy governor Geoff Bascand says.
Currently, the central bank has just seven or eight staff overseeing more than 90 insurance companies, he says.
Before the CBL situation blew up, it had tended to focus its energies on the larger companies that have the greatest impact on New Zealanders – CBL provided builders' insurance, mostly in France.
"We're satisfied that our powers for our prudential purposes are adequate. We have the authority to look at the governance and risk management and to engage with them very purposefully about these elements," Bascand told BusinessDesk.
"In terms of resources, we can only do that lightly with the number of insurers that exist." While RBNZ does focus on the most significant institutions for policyholders, "we're limited in the depth of that," he says.
"I would never be able to promise that we could find everything and look at every institution. We would like to go more systematically through the insurance sector and have frequent discussions and more scrutiny over their practices than we do at this time."
Last week, after RBNZ and the Financial Markets Authority publicly expressed disappointment with the life insurance industry's response to their joint conduct and culture review, FMA chief executive Rob Everett called for greater investigatory powers for his organisation.
Currently, the FMA can only respond to complaints or to specific examples of mis-selling or other types of misconduct before it can act. It would like to be allowed to "go in and poke around" inside banks and insurance companies so it can stop potential problems for consumers before they happen, Everett said.
The government appears receptive to the FMA's plea: Commerce and Consumer Affairs Minister Kris Faafoi has said he shares the FMA and RBNZ's concerns about the unwillingness of the life insurance industry to change and that the government has been working to fast-track measures to improve conduct in the financial sector which will be announced shortly.
Bascand says he believes the government is similarly sympathetic to RBNZ's plea for greater resources.
"We've had indications from the government that they understand resourcing and funding is part of the need for a stronger regulator" and that's being considered in the phase-two stage of the review of the Reserve Bank Act, although that hasn't got to the point of 'a specific number,'" Bascand says.
"The direction of travel is for us to be significantly more resourced and stakeholders are receptive to that."
The conduct and culture review has turned up at least 75,000 customer issues valued at least $1.4 million from the 16 life insurance companies subject to the review, but that amounts to just 0.05 percent of the life industry's $2.57 billion in annual premiums.
Bascand says those estimates of remediation costs came from only "a small number" of the companies.
"I would be surprised if that was all there was. I don't have specific remediation figures that suggest big operational issues," he says.
"But when you see a company not knowing whether it's got a conduct problem, or finding a little one, having not looked very widely, you wonder how good their risk management is."
The two regulators have ordered the laggards to "get it done and get it done by Christmas."
The Reserve Bank is also tasked with ensuring financial stability, although that side of its prudential regulatory efforts is more keenly focused on banks and day-to-day critical activities such as payments and other transactions.
Nevertheless, an insurance company failure "would damage confidence in our investment market" and it would indirectly impact the banks because they rely on general insurers to insure the property banks lend on.
Life insurance policies also often have a savings aspect to them.
Everett has said the problems he's aware of don't rise to the level of the FMA wanting to warn consumers away from particular companies, so he doesn't want to name names at this stage, although he indicated that may change.
RBNZ appears more willing to name names in the wake of the CBL collapse. It has done so with ANZ Bank, New Zealand's largest bank, on a number of high-profile occasions, calling out the bank's governance failures and requiring ANZ to hold more capital for a number of reasons
Bascand says RBNZ won't hesitate – "if there's a particularly egregious breach of regulation, then it's likely that entity will be named," particularly if there's an enforcement action.
That would also be the case "if we had an entity that was in serious breach of our requirements or not paying nearly enough heed to our requirements."
And it does appear the life insurance companies are falling into that category. "At this stage we have a widespread lack of focus and attention … a great number of these insurers need to do better."
Some have suggested the industry has a fundamental design problem that only legislation can change.
As the Reserve Bank has pointed out, commissions to salespeople in New Zealand amount to about 25 percent of total premiums paid each year, far higher than in other countries.
Mexico and Hungary are the next highest at about 15 percent with Australia at about 12 percent and the United States about 9 percent.
And the FMA has found that only 2 percent of sales of life insurance policies are genuinely new, rather than just churn, or switching customers between policies to generate income for life insurance agents.
Those within the industry have said that the first company to reduce commission payments would simply lose business to its competitors.
Bascand isn't buying that. "It's a problem the industry has to confront. Some are looking at that. Some are trying. We need them to move further and faster, especially some of the bigger companies," he says.
"I think it's a sad day that businesses think that the only way to create a more competitive dynamic is to rely on a regulation. I think there is opportunity for businesses to change distribution models" by, for example, changing to using a digital channel.
Legislation governing commissions "is a last resort, not a first resort."
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