The affairs of the general insurance industry should not be under the regulation of the Reserve Bank of New Zealand (RBNZ), says former bank governor Don Brash.
An article by NZ Herald details why Brash thinks RBNZ should not have been appointed as prudential supervisory in the first place. Brash’s comment was reportedly backed by Tower Insurance chief executive Richard Harding, who claims the current regulatory and supervisory framework administered by RBNZ has proven to be “materially flawed” and “urgent overhaul is required.”
Brash and Harding mentioned the failure of CBL Insurance in early 2018, with the former noting that the collapse was “a red flag for the effectiveness of the existing regime.” When an insurance company starts getting into trouble and only RBNZ is aware of that, “the bank is in an almost impossible position,” Brash told the publication.
“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 explained.
Brash reportedly suggested that the correct remedy would be to revert to the credit rating model of the early 1990s. The idea is that all insurance companies would be obliged to disclose a rating from a specialist insurance rating company, either AM Best or Standard & Poor’s, whenever an insurance contract was written or renewed. Brash said that system provided a strong incentive for insurers to strengthen their claims paying rate - but he also acknowledged that no system will prevent the failure of all insurance companies, noting the collapse of AMI following the 2011 Christchurch earthquake.
“CBL itself had a relatively strong rating prior to the Reserve Bank effectively closing its doors,” he said. “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.”
However, Harding reportedly rejected Brash’s suggestion. He claims New Zealand general insurers need a new regulator, separate from RBNZ and along the lines of Australian Prudential Regulation Authority (APRA). Unlike empowered offshore regulators, Harding claims RBNZ’s supervisory activities are “under-resourced, lacking in sufficient capability and capacity to meet the necessary objectives.”
Meanwhile, the Insurance Council of New Zealand (ICNZ) believes the current regime has worked well. In its submission on the second part of the review of the Reserve Bank Act, the council noted it is “supportive of the Reserve Bank retaining its responsibility for prudential regulation and supervision of insurers.”
NZ Herald added Harding and ICNZ agree on the need to recommence a review of the Insurance (Prudential Supervision) Act that has been on hold since late 2017.