RBNZ launched consultations on the scope of the Insurance Prudential Supervision Act (IPSA) 2010 and on the associated Insurance Solvency Standards. The consultation on IPSA is concerned with the broad scope of the entities and activities that should be covered by the regulatory net of IPSA. This consultation is the first in a series of five consultations that will cover different aspects of insurance regulation in New Zealand, as part of the overall review process. These consultations will take place during 2020-2022, with policy decisions and new legislation expected during 2023-2024. The second consultation, which is on Insurance Solvency Standards, looks at how the standards are structured and applied to insurers as well as seeks views on how these standards can accommodate the new IFRS 17 accounting standard for insurance contracts. The required level of capital will be consulted on at a later stage. Both the consultations are open until February 18, 2021.
Consultation on Insurance Prudential Supervision Act
In 2017, RBNZ had commenced a review of IPSA. The first stage of the review, which comprised identification of issues at a high level and an initial public consultation process, was completed in 2017. This consultation paper marks the beginning of a second stage of the review of IPSA. In this stage, RBNZ will work through each of the 11 modules set out in the 2017 consultation paper, seeking feedback on specific options for reforming the existing legislation. This paper, however, deals with two modules; one module is on the scope of legislation and it discusses whether the legislation applies to the appropriate range of entities; the other module concerns overseas insurers and it details treatment of branches and overseas insurers. The remaining modules will be grouped together pragmatically in ways that ensure, where possible, related and interacting issues are dealt with in the same consultation. RBNZ expects these subsequent papers to be issued during 2021 and 2022.
This consultation paper on IPSA discusses whether the definition of insurance contracts remains sufficiently broad to cover new forms of business and whether it is clear enough to give industry the guidance it needs. It also invites stakeholders to identify any places in which they think the boundary of "insurance business" is incorrectly drawn by the current framework. The paper also discusses whether IPSA should regulate New Zealand-based insurers and reinsurers that issue all their policies overseas. Additionally, the paper explores how the balance of risks is struck in the current legislation and invites stakeholders to consider whether that balance remains appropriate. The paper goes on to ask whether IPSA needs tighter coverage of reinsurance or whether insurers should be under increased obligations to monitor and report on their risk assessment of reinsurance arrangements. Finally, the paper moves on from the entities captured by IPSA to discuss issues about how entities’ corporate and legal form affects regulations.
Consultation on Insurance Solvency Standards
The consultation on Insurance Solvency Standards looks at a series of technical issues concerning how insurance companies calculate their solvency capital requirements. In this document RBNZ explores the possibility of having a single framework apply to both life and non-life business. In October 2020, RBNZ announced the start of the Solvency Standards Review alongside the IPSA Review. It is timely to review the standards to ensure that they are robust and fit for purpose. The review will be divided into two stages. The first stage (now underway) will address structural changes and other issues that require immediate attention (including IFRS 17). The second stage will address the determination of individual components of the solvency requirements (asset risks, liability risks, other components). RBNZ will introduce interim standards at the end of the first stage and final standards at the end of the second stage. In conducting the review, RBNZ will take into account efficiency considerations from the industry.
This consultation paper on Insurance Solvency Standards relates to the first stage of the review. It is concerned with the issues that shape the standard’s fundamental structure and nature. While IPSA provides general purposes and principles to govern regulation and supervisory activity and empowers the solvency standards, it provides no specific purpose for holding regulatory capital. RBNZ proposes that the purpose of holding regulatory capital is to ensure that, in adversity, an insurer’s obligations to policyholders will continue to be met in full as they fall due. This consultation also seeks views on whether:
- A total balance sheet approach should be adopted to capture second-order effects and balance sheet interactions
- Certain “sectorally important” insurers are critical to the functioning of financial system of New Zealand and should be treated differently for capital purposes compared to the “non-sectorally important” insurers
The consultation paper highlights that RBNX is exploring the possibility of using a “standardized balance sheet” structure as part of its response to IFRS 17. This new accounting standard is expected to have a material impact on an insurer’s balance sheet. In particular, from a New Zealand perspective there is likely to be a number of areas requiring judgment to be exercised, leading to inconsistent results across the industry. As the solvency requirements are based on the accounting balance sheet, it follows that they may be similarly affected. To minimize any unintended consequences, it is necessary to fully consider and understand the extent to which IFRS 17 will impact the solvency position and the potential avenues available to respond to IFRS 17.
Comment Due Date: February 18, 2021
Keywords: Asia Pacific, New Zealand, Insurance, IPSA, IFRS 17, Insurance Contracts, Solvency Capital Requirement, Insurance Prudential Supervision, RBNZ
Previous ArticleHKMA Intends to Implement Technical Amendment to NPL Securitizations
In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.
The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.
The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.
The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.
The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.
The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.