## cr17121

## Source details

**Canonical URL:** [cr17121](https://www.imf.org/-/media/files/publications/cr/2017/cr17121.pdf)

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### Executive summary and assessment scope
- Assessment performed as part of the 2016 New Zealand Financial Sector Assessment Program (FSAP); assessment team: Ian Tower and Mimi Ho (external experts) from August 16 to September 7, 2016.
- Benchmarked against the ICPs issued by the IAIS in October 2011, as revised in November 2015.
- Observance rating scale used: Observed (O), Largely Observed (LO), Partly Observed (PO), Not Observed (NO).
- The assessment identified a significant number of shortfalls in observance of the Insurance Core Principles (ICP), stemming from:
  - Incomplete implementation of initiatives (supervisory risk assessment, regulatory reporting), compromising off-site supervision and macroprudential analysis.
  - RBNZ’s principles-based, low-intensity supervisory philosophy and limited on-site supervisory work.
  - Resource constraints at the RBNZ and FMA.

### Sector structure, market composition, and key statistics
- Industry size and shares:
  - Banking sector total assets: 200.9 percent of GDP as at March 2016.
  - Managed funds and trusts: 49.7 percent of GDP.
  - Private insurance sector: 11.9 percent of GDP.
- Insurance penetration and density (2015):
  - New Zealand Life: Penetration 1.0 (in percent); Density 502 (NZD).
  - World average (life): Penetration 3.5 (in percent); Density 474* (NZD).
  - New Zealand Non-life (private): Penetration 2.9* (in percent); Density 1,500** (NZD).
  - New Zealand Non-life (public)***: Penetration 1.9 (in percent); Density 999 (NZD).
  - New Zealand Non-life (total): Penetration 4.8 (in percent); Density 2,499 (NZD).
  - World average (non-life): Penetration 2.8 (in percent); Density 378* (NZD).
  - Notes: * Converted from USD at USD 1= NZD 1.3707. ** Including health insurance. *** Mainly ACC and EQC.
- Number of licensed insurers (Dec 31):
  - Total licensed: 96 at the end of 2015.
  - 2015: Life 25; Non-life 51; Health 6; Captive non-life 5; Subtotal licensed direct insurers 87; Reinsurers life 6; Reinsurers non-life 3; Total licensed 96.
- Ownership and branch operations (12/31/15):
  - Of 96 insurers operating in New Zealand, 35 are branches; 18 of these are of Australian insurers.
  - Total premiums collected by branch operations in 2015: NZD 2,030 million (23 percent of total industry premium income).
  - Assets of branch operations in 2015: NZD 9,583 million (33 percent of total industry assets).
  - Direct insurers by ownership (12/31/15):
    - Australia-owned: Number 19; Count % Total 21; Premium Amount NZD 5,940; % Total 66; Assets Amount NZD 22,024; % Total 75.
    - NZ-owned: Number 43; Count % Total 48; Premium Amount NZD 2,205; % Total 24; Assets Amount NZD 4,646; % Total 16.
    - Others: Number 28; Count % Total 31; Premium Amount NZD 874; % Total 10; Assets Amount NZD 2,576; % Total 9.
    - Total: Number 90; Count % Total 100; Premium Amount NZD 9,019; % Total 100; Assets Amount NZD 29,245; % Total 100.
  - Australian-owned operations (branches and subsidiaries combined): 66 percent of market by premium; 75 percent of market by assets.
- Premiums and market totals (NZD millions):
  - Total Private Sector (life and non-life): 2015 9,811; 2014 9,394; 2013 8,935; 2012 8,369; 2011 7,558.
  - Total Public Sector (non-life only): 2015 4,594; 2014 5,005; 2013 4,957; 2012 4,972; 2011 4,918.
  - Total Market: 2015 14,405; 2014 14,399; 2013 13,892; 2012 13,341; 2011 12,476.
  - Private Sector share: 2015 54.9%; 2014 52.2%; 2013 50.8%; 2012 48.7%; 2011 45.8%.
  - Public Sector share: 2015 45.1%; 2014 47.8%; 2013 49.2%; 2012 51.3%; 2011 54.2%.
- Assets (NZD millions):
  - Total Private Sector (life and non-life): 2015 30,788; 2014 30,020; 2013 31,740; 2012 33,092; 2011 27,407.
  - Total Public Sector (non-life only): 2015 38,424; 2014 35,107; 2013 34,168; 2012 32,860; 2011 31,304.
  - Total Market: 2015 69,212; 2014 65,127; 2013 65,908; 2012 65,952; 2011 58,711.
  - Private Sector share of assets: 2015 28.4%; 2014 30.6%; 2013 33.1%; 2012 36.7%; 2011 31.8%.
  - Public Sector share of assets: 2015 71.6%; 2014 69.4%; 2013 66.9%; 2012 63.3%; 2011 68.2%.

### Product mix, distribution, and competition
- Life insurance trends:
  - New sales largely protection-only (term life); traditional life with savings elements discontinued.
  - Breakdown of life business (as of June 30, 2016 and new business premium in 2nd Quarter 2016) — NZD thousands:
    - Traditional: Inforce Premium 103,872; New Business Premium 58.
      - Whole life and endowment: 75,158; 52.
      - Unbundled: 28,714; 6.
    - Risk: Inforce Premium 2,095,449; New Business Premium 59,892.
      - Term: 1,149,937; 25,855.
      - Guaranteed acceptance: 68,333; 3,421.
      - Trauma: 375,884; 11,540.
      - Replacement income: 362,264; 13,825.
      - Lump-sum disability: 71,106; 2,021.
      - Accidental death: 14,375; 411.
      - Credit insurance: 53,550; 2,819.
    - Group: Inforce Premium 141,819; New Business Premium 2,195.
      - Life and disability: 92,330; 1,594.
      - Replacement income: 44,121; 520.
      - Trauma: 5,368; 81.
    - Annuities: Inforce Premium 14,478; New Business Premium 25.
  - KiwiSaver has attracted savings away from insurance products.
- Non-life landscape and ACC/EQC:
  - No compulsory class of non-life insurance because of ACC.
  - ACC provides universal no-fault protection; individuals may purchase private top-up insurance.
  - According to ICNZ (members account for 95 percent of the total non-life market), largest non-life classes by premium: motor (largest), domestic (private property), commercial (material damage and business interruption).
  - Gross written premium for non-life business (NZD millions, 12-month period to September of each year): 3,980; 4,449; 4,770; 5,258; 5,261.
- Distribution and intermediaries:
  - Channels: direct sales (including internet), agency arrangements (tied agents and banks), and brokers (particularly for corporate business).
  - Certain intermediaries report to FMA, but no comprehensive data on intermediation channels.
  - High rates of commission to intermediaries noted as potentially hampering life insurance growth and creating conduct risk (churning).

### Market concentration, ownership links, and group structure
- Concentration:
  - Top 8 life insurers account for 87 percent of life premium income and 93 percent of life industry assets.
  - Top 8 non-life insurers account for 91 percent of non-life premium income.
  - Top 2 non-life insurers have a 67 percent market share.
  - Top 2 life insurers account for 47 percent of the life market.
- Groups and conglomerates:
  - There are 14 foreign-owned insurance groups, 6 domestic insurance groups and 15 financial conglomerates operating in New Zealand.
  - 18 of the 19 Australian insurers operate as branches.
  - RBNZ does not apply IPSA to holding companies and exercises limited group-wide supervision.

### Key risks, Canterbury legacy, and mitigation
- Dominant risks:
  - Natural catastrophe risks predominate (earthquakes, volcanic eruptions, landslides, tsunamis, fires, floods).
  - Total private sector claims from the Canterbury earthquakes estimated at NZD 21.5 billion, of which NZD 18.3 billion has been paid.
  - EQC has paid NZD 9.4 billion to date related to Canterbury events.
- Performance and profitability:
  - Excluding earthquake line, most non-life lines are comfortably profitable with combined ratios in the 50 to 60 percent range.
  - Industry combined ratios (12-month period to September):
    - All lines of business: 2011 146.36; 2012 98.93; 2013 96.27; 2014 93.69; 2015 100.45.
    - Earthquake: 2011 31,163.02; 2012 201.81; 2013 115.09; 2014 108.75; 2015 174.79.
    - Commercial: 2011 55.65; 2012 65.50; 2013 59.60; 2014 63.32; 2015 56.47.
    - Domestic: 2011 62.30; 2012 59.33; 2013 58.11; 2014 52.15; 2015 53.43.
    - Motor: 2011 65.16; 2012 63.52; 2013 64.88; 2014 65.99; 2015 69.51.
- Mitigants:
  - Residential property earthquake losses shared with government-backed Earthquake Commission (EQC) within limits; EQC and ACC included in market statistics and collectively represent 45 percent of the non-life insurance market.
  - Reinsurance programs widely used; RBNZ strengthened solvency requirements for natural catastrophe exposure.
  - ACC reduces demand for private personal accident cover.

### Regulatory institutions, mandates, and practices
- Prudential supervision:
  - Reserve Bank of New Zealand (RBNZ) prudential supervision responsibilities extended to insurance in 2010 under IPSA.
  - RBNZ applies a “three pillar” approach emphasizing self-discipline (directors and senior management), market discipline (disclosure) and regulatory intervention.
  - RBNZ adopts a principles-based, low-intensity supervisory philosophy and has refrained from extensive in-depth on-site supervision to encourage self-discipline.
  - RBNZ has issued standards on solvency and fit-and-proper requirements and guidelines on governance and prudential conduct.
- Conduct regulation:
  - Financial Markets Authority (FMA) is responsible for market conduct; administers the Financial Markets Conduct Act 2013, the Financial Advisers Act 2008, and the Financial Markets Authority Act 2011.
  - FMA oversight embedded in general oversight of financial advisers and financial products. Responsible ministry: Ministry of Business, Innovation, and Employment (MBIE).
- Scope exclusions:
  - Assessment excludes personal accident and earthquake schemes provided by government entities (EQC and ACC) from supervision (they are Crown agents under the Crown Entities Act 2004 and not supervised by the RBNZ) but these entities are included in market statistics.

### RBNZ powers, enforcement, and recommended enhancements
- Existing powers under IPSA (sections cited in source):
  - Impose, vary, remove, add to, or substitute conditions of license (sections 21–22).
  - Approve changes in control and legal form (sections 26–29).
  - Cancel a license (section 30).
  - Remove a director or relevant officer (section 39).
  - Approve transfers and amalgamations (section 44).
  - Require information and reports (sections 121–126).
  - Conduct investigations (sections 130–134).
  - Require recovery plans (sections 138–142).
  - Issue directions (sections 143–150); recommend statutory management (section 170); apply to Court for liquidation, voluntary administration, or reduction in value of contracts (sections 151–153).
  - May issue binding standards for solvency (section 55) and fit-and-proper (section 36); may issue non-binding guidelines (section 73).
- Enforcement regime and limits:
  - No power to impose administrative sanctions; breaches of IPSA are criminal offences requiring court proceedings; maximum fine NZD 1,000,000 for specified offences.
  - RBNZ cannot approve directors in advance; may require removal where not fit-and-proper.
  - RBNZ has used powers to require additional solvency margins for some insurers.
- Recommended enhancements (selected):
  - Supplement existing powers to impose binding standards to cover full range of prudential regulation (including governance, risk management, internal controls).
  - Consider powers to impose administrative sanctions (infringement notices, administrative fines, enforceable undertakings).
  - Strengthen the licensing framework for overseas insurers and review Regulation 5 list of prescribed jurisdictions.
  - Increase transparency on use of powers (e.g., where additional solvency margin required) and develop published enforcement policy and approach to solvency control levels.
  - Consider clarifying and constraining circumstances for reporting individual supervisory issues to Treasury to avoid risks to independence.

### Solvency framework, capital adequacy, and recommended actions
- Solvency framework and features:
  - Solvency Margin = Actual Solvency Capital – Minimum Solvency Capital.
  - Fixed Capital Amount minimums: NZD 5 million for life insurers; NZD 3 million for non-life insurers.
  - Solvency standards issued for life, non-life, run-off, captives, local government insurance corporations, and variable annuity business.
  - Overseas branches exempted: all overseas non-life insurers and Australian life insurers have been granted exemptions from NZ solvency standards in practice.
  - Catastrophe risk charges:
    - Non-life catastrophe charge: greatest of Wellington 1-in-1000-year earthquake; other NZ 1-in-1000-year earthquake; or non-earthquake 1-in-250-year extreme event.
    - Life insurers: pandemic losses of extra deaths at 1 per thousand considered.
- Gaps and recommendations:
  - Solvency standard does not address dependencies between risk categories; single solvency control level makes early intervention difficult.
  - RBNZ should establish two solvency control levels as in ICP 17.3 and 17.4 to enable early, less intrusive intervention.
  - Develop internal guidance on supervisory actions for each solvency control level.
  - Apply the New Zealand solvency standard to all statutory funds to improve comparability across branches and subsidiaries.
  - Improve transparency of basis for additional solvency margins imposed via license conditions.

### Governance, risk management, actuarial function, and control functions
- Governance and fit-and-proper:
  - IPSA requires insurers to implement fit-and-proper policies for directors and “relevant officers” (CEO, CFO, Appointed Actuary); RBNZ issued Fit-and-Proper Standards in 2011.
  - RBNZ guidance expects boards to have adequate size, skills, independence (expectation: at least half independent), and committees (audit committee majority independent).
  - Thematic review (2014) of 17 insurers highlighted weaknesses in incentives, independent assessment, communication and challenge, and risk management functions.
- Risk management and control functions (Section 73 and related):
  - Insurers must have a written risk management program addressing insurance, credit, liquidity, market, operational and other risks.
  - Appointed Actuary required (section 76): must be a Fellow of NZSA or equivalent; has duties including review of financial statements and preparation of Financial Condition Report (FCR).
  - No explicit legal requirement that insurers must have dedicated internal audit or compliance functions; no defined independence, authority or resource requirements for control functions.
  - Outsourcing: no specific RBNZ policy; outsourcing considered within risk management and assessed at licensing, but no ongoing review of outsourcing arrangements.
- Recommendations:
  - Require establishment of dedicated risk management, compliance and internal audit functions, with options to outsource for smaller insurers.
  - Issue an outsourcing standard clarifying oversight and accountability for outsourced functions.
  - Incorporate assessment of effectiveness of insurer risk management into ongoing supervision.
  - Strengthen enforceability of risk management requirements by expanding RBNZ’s powers to issue binding standards.

### Conduct regulation, intermediaries, and consumer protection
- Intermediaries and adviser categories:
  - FA Act categories and counts (June 2015 estimates):
    - QFEs: 57 organizations; estimated 26,000 individual staff (“QFE advisers”); one third of QFEs are insurers.
    - AFAs: around 1,800.
    - RFAs: around 6,500.
  - RFAs subject to a registration-only regime with no minimum competence/qualification requirement; RFAs not subject to ongoing oversight.
- Gaps and recommendations on conduct:
  - Need for enhanced regulation of insurance intermediaries and conduct; current low-intensity regime for many advisers lacks basic competence and disclosure requirements.
  - Extend conduct-of-business requirements beyond advice focus: cover sales without advice, ancillary sales, claims handling, complaint handling, product design and disclosure across product life cycle.
  - Government-led FA Act review to address intermediaries; FMA to reassess resources and insurance-specific priorities.
  - FMA would benefit from enhanced enforcement powers and increased insurance-specific expertise.
- Policyholder protection:
  - No insurance policyholder compensation scheme in New Zealand.
  - All life insurance business (except small insurers) must be carried out in a statutory fund; no statutory fund requirement for non-life insurance.
  - No policyholder priority of claim in insolvency for non-life policyholders.
  - Recommended measures: consider extension of statutory fund protection to non-life policyholders and make policyholder preference explicit in insolvency.

### Macroprudential surveillance and sector-wide analysis (ICP 24)
- Findings:
  - Supervision focused largely on individual insurers; system-side (macroprudential) view hampered by limited detailed comparative reporting.
  - RBNZ took a more macroprudential approach in response to Canterbury earthquakes.
  - With increased data availability from late 2016, RBNZ expected to improve market-wide risk identification and publish aggregate sector information.
  - Table 9 summary of observance levels: Observed (O): 3; Largely observed (LO): 10; Partly observed (PO): 13; Not observed (NO): 0; Total: 26.
- Recommendations and operational actions:
  - Increase market-wide analysis from 2017; define regular outputs (standard reports on market trends, interconnectedness, systemic risk indicators) and templates for publication of aggregate information.
  - In the medium term, consider stress-testing exercises.
  - Near-term: cross-company analysis of Financial Condition Reports (FCRs) and require increased reporting of sensitivity analysis.
  - Recognize macroprudential development will require additional supervisory resources and will complement, not replace, insurer-level supervision.

### Cross-border cooperation, crisis management, and group supervision
- Cross-border exposures and Australia linkages:
  - High exposure to Australia through branches and subsidiaries; parental support was material after Canterbury events but exposure to shocks originating in Australia remains a risk.
  - Particular risk in life insurance from Australian branches disapplied from many RBNZ prudential requirements and reliance on Australian insolvency law/practice.
- Cooperation instruments and priorities:
  - RBNZ has MoUs with APRA and U.K. PRA; signatory to IAIS MMoU; active participation in some supervisory colleges (mainly APRA-related).
  - Trans-Tasman cooperation arrangements deepened (TTBC extended to insurance in June 2014) and cooperation on crisis management and resolution should be accorded high priority.
- Crisis management and contingency planning recommendations:
  - RBNZ should prioritize crisis management policy and procedures and study how to achieve IPSA’s policyholder protection principle in cross-border crises.
  - Require insurers to establish and maintain contingency plans and procedures tailored to going- and gone-concern situations, given high catastrophe risk.
  - Establish a process to proactively evaluate need for group-wide supervisors and supervisory colleges for cross-border insurance groups.
- Assessment for cross-border cooperation and crisis management: Partly Observed (ICP 26).

### Institutional independence, resources, transparency, and legal protections
- Independence and accountability:
  - RBNZ benefits from a high degree of formal and operational independence; governance defined by RBNZ Act with Governor as single decision-maker.
  - Ministerial direction powers exist (IPSA section 13) but are constrained; RBNZ required to publish Statement of Intent and respond to ministerial letters of expectation.
- Resources and funding (2015/16):
  - RBNZ funding: able to allocate agreed funding of NZD 49.6 million for 2015/2016 between its functions.
  - RBNZ’s overall budget for PSD in 2015/16 was NZD 9.6 million and headcount was 54.
  - Ten staff, including a manager, allocated to supervision of insurers, of whom two are actuaries.
  - FMA funding: funded 40 percent by government out of budget resources and remainder from fees and levies; FMA staff total 170.
- Transparency, confidentiality, and legal protection:
  - IPSA section 135 provides confidentiality with limited permitted disclosures; sanctions apply for unauthorized disclosures.
  - RBNZ may share information internationally subject to confidentiality protections and is signatory to IAIS MMoU; MoU with APRA extended to insurance in 2012.
  - Legal protection: IPSA section 230 provides immunity for RBNZ officers acting in good faith; section 231 provides government indemnity except where bad faith shown. FMA similarly protected under FMA Act section 22.
- Recommendations:
  - Clarify and constrain circumstances for reporting individual supervisory issues to Treasury; review 2012 MoU with Treasury.
  - Review resource needs at RBNZ and FMA in light of implementation experience and recommended enhancements.
  - Publish more detailed supervisory processes, enforcement approach and aggregated sector data.

### Public disclosure, reporting gaps, and supervisory reporting
- Public disclosure:
  - Insurers must produce audited financial statements and disclose solvency information (financial strength rating, actual solvency capital amount, minimum required, solvency margin, solvency ratio).
  - Solvency disclosure comparability impeded by branches using home jurisdiction methodologies and additional solvency margins applied by RBNZ to individual insurers.
- Reporting and supervisory returns:
  - Reporting requirements introduced since 2012; reporting lacks granularity on investment breakdowns, off-balance sheet exposures, outsourcing, and material governance changes.
  - Insurers required to submit audited annual financial statements, Appointed Actuary review, FCR, Insurer Return and Solvency Return within four months of year end; larger insurers report quarterly.
  - RBNZ is undertaking a project to improve quality and consistency of routine data collection.
- Recommendations:
  - Develop and publish standard aggregate reports on market trends and interconnectedness.
  - Strengthen disclosure on risk management (asset-liability management), investments, capital policy and governance.
  - Collect more granular asset breakdowns and off-balance sheet information for supervisory monitoring.

### Fraud, AML/CFT, and supervisory priorities
- Fraud:
  - Insurance fraud is criminally prosecuted under general law; ICNZ operates an Insurance Claims Register covering major personal lines (owners account for 85 percent of personal lines).
  - Assessment on countering fraud in insurance: Observed.
  - Recommendation: schedule thematic or firm-specific supervisory work on fraud controls.
- AML/CFT:
  - RBNZ and FMA are designated AML/CFT supervisors; RBNZ supervises life insurers that are reporting entities; non-life insurance currently not covered.
  - RBNZ maintains a specialist AML/CFT unit of four staff; conducts risk-based monitoring including annual reports and thematic surveys.
  - Assessment on AML/CFT: Observed.

Italic Source: IMF assessment document excerpts — EXECUTIVE SUMMARY and sections A–C of "ASSESSMENT OF INSURANCE CORE PRINCIPLES" (cr17121).

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Sector structure and risks
- The insurance sector is "small, increasingly focused on non-life business, and characterized by high concentration and extensive foreign, particularly Australian, participation."
- Non-life sector recovery: "The non-life sector has recovered strongly from heavy losses due to the Canterbury earthquakes in 2010–2011."
- Life sector weakness: "growth in life insurance is weak and product range limited, as savings have migrated from insurance to investment products."
- Distribution and commissions: "High rates of commission paid by insurers to intermediaries may also be hampering growth."
- Market concentration: "The market is dominated by the branches and subsidiaries of Australian groups, the largest accounting for almost half of total non-life premium income."
- Dominant risks and mitigants:
  - "Natural catastrophe risks predominate."
  - Residential property earthquake losses are "shared, within limits, with the government-backed Earthquake Commission (EQC) under a system that has generally performed well through the Canterbury crisis."
  - Risks are "also mitigated by reinsurance programs."
  - "The Accident Compensation Corporation (ACC) covers most personal accident losses, reducing the market for private cover."

### Regulatory institutions, mandates, and recent developments
- Prudential supervision:
  - "The Reserve Bank of New Zealand’s (RBNZ) prudential supervision responsibilities were extended to insurance in 2010."
  - The RBNZ applies a "three pillar approach to regulation, which emphasizes self-discipline (by directors and senior management), market discipline (through disclosure) as well as regulatory intervention, to bolster the other two pillars and as otherwise required."
  - The RBNZ "seeks to limit as far as possible the moral hazard associated with regulation."
- Conduct regulation:
  - Conduct regulation "was enhanced in relation to financial advice, though mainly on investment products, in 2008" and "the Financial Markets Authority (FMA) has since been given broader powers over financial products and markets, including insurance."
  - "Overall, regulation of insurance continues to develop, taking into account the lessons of licensing and the experience of conduct regulation of the wider market."
- Scope exclusions:
  - The assessment "excludes personal accident and earthquake schemes provided by government entities" (EQC and ACC) but these "are included in the market statistics in this report."
  - EQC and ACC are "Crown agents" under the Crown Entities Act 2004 and are "not supervised by the RBNZ."
  - "EQC, ACC and Southern Response Earthquake Services... collectively represent 45 percent of the non-life insurance market."

### Assessment scope, methodology, and timing
- Assessment timing and team:
  - Conducted as part of the "2016 New Zealand Financial Sector Assessment Program (FSAP)."
  - Assessment team: "Ian Tower and Mimi Ho (both external experts engaged by the IMF) from August 16 to September 7, 2016."
- Benchmarking and standards:
  - Benchmarked against the "ICPs issued by the International Association of Insurance Supervisors (IAIS) in October 2011, as revised in November 2015."
  - "The ICPs apply to all insurers, whether private or government-controlled. Specific principles apply to the supervision of intermediaries."
- Observance rating scale:
  - Observed, Largely observed, Partly observed, Not observed — with definitions for each category provided.

### Key findings and shortfalls
- Observance issues:
  - "The assessment has identified a significant number of shortfalls in observance of the Insurance Core Principles (ICP)."
  - Shortfalls arise from:
    - "Incomplete" implementation of initiatives (e.g., supervisory risk assessment, enhancement of regulatory reporting by insurers), compromising "off-site supervision, macroprudential analysis and publication of aggregate information on the market."
    - The RBNZ’s regulatory approach, including "the limited scope of its on-site supervisory work and mainly self-imposed limits on the resources it devotes to insurance regulation."
    - Areas where "enhanced regulation, as recommended in this assessment, would be supportive of the RBNZ’s general approach," such as extended disclosure obligations.
- Supervisory focus gaps:
  - The RBNZ "should focus more, in regulation and supervisory work, on setting standards on corporate governance, risk management and internal controls and undertaking risk assessment in these areas to promote the effectiveness of insurers’ governance in practice."
  - There is "scope to extend the RBNZ’s powers" (see next section).

### RBNZ powers, practices, and recommended enhancements
- Existing strengths:
  - The RBNZ "has extensive powers in relation to licensing, information-gathering, and sharing of information with other authorities, as well as supervision and enforcement."
  - RBNZ has "taken a thorough approach to licensing" and "has been ready to intervene in cases where it has identified shortcomings," including requiring "some insurers to hold solvency margin above the minimum."
  - The RBNZ "has built sound supervisory processes...supported by the role of the Appointed Actuary."
- Recommended enhancements to powers and transparency:
  - Supplement existing powers to impose binding standards in relation to "insurer solvency and fit-and-proper requirements" with powers "to cover all areas of prudential regulation."
  - Consider powers to "impose administrative sanctions."
  - Strengthen the framework for licensing of overseas insurers (branches) so the RBNZ "takes a robust case-by-case view of the equivalence of foreign regulatory regimes."
  - Increase transparency over how the RBNZ uses powers, including where it requires "additional solvency margin," and clarify its approach to enforcement.
  - "Develop an internal policy setting out its approach to supervisory action and use of powers in relation to two solvency control levels," especially actions when an insurer fails to maintain the lower solvency control level.
  - "Supervisory engagement with insurers is developing and needs to move even further, especially with larger insurers, towards communicating supervisory expectations, and requiring appropriate action."
- Mandate for policyholder protection:
  - The authorities "should consider a broadening of the RBNZ’s mandate for policyholder protection."
  - Currently RBNZ objectives in law focus on "stability and confidence in the sector," while it "is already mandated to take into account policyholders’ interests in key parts of its work, including crisis management."
  - An "explicit policyholder protection objective would provide underpinning for its peacetime supervision as well as crisis management."
  - Possible measures include "extension of statutory fund protection to non-life policyholders and making policyholder preference explicit in insolvency."
  - Note: "Policyholder compensation schemes are only one form of policyholder protection and are outside the scope of the assessment."

### Cross-border and Australia exposure
- Benefits and challenges of Australian presence:
  - Benefits: "parental support following the Canterbury earthquakes."
  - Risks: exposure "to shocks originating in Australia and particularly to a common shock or simultaneous separate shocks."
  - Particular exposure in life insurance: "significant Australian presence in branch form, the disapplication to branches of many RBNZ prudential requirements and the direct dependence on Australian insolvency law and practice in case of failure."
- Cooperation and priorities:
  - RBNZ "cooperates and has an open relationship with the Australian authorities," with trans-Tasman cooperation arrangements being "significantly deepened" to include insurer resolution issues.
  - This cooperation "should be accorded a high priority in the RBNZ’s work plan."

### Institutional independence, resources, and government interaction
- Independence and accountability:
  - RBNZ "benefits from a high degree of formal and operational independence" and "there are clear accountability mechanisms in relation to determining RBNZ priorities and to the spending of its resources."
- Recommended clarifications and resource needs:
  - "It would be appropriate now to clarify and constrain the circumstances in which information on individual supervisory issues is reported by the RBNZ, avoiding the risks to independence of increased government engagement in supervisory issues."
  - "It would also be timely to clarify the limits of government involvement in the development of insurance regulation."
  - "The RBNZ needs to increase its supervisory resources, taking into account the extent of existing challenges and the need to develop its regime in the future."

### Conduct regulation and intermediaries
- Current state and gaps:
  - "There is a need for more focus on the regulation of insurance intermediaries and insurance conduct, which is likely to require increased resources."
  - Government and FMA actions: "The government and the FMA have been moving in this direction under recent legislation and in the FMA’s supervisory initiatives, including on high life insurance commissions."
  - Current low-intensity regime shortcomings:
    - "Enhance the deliberately low intensity regime currently applying to most independent insurance advisers and brokers, which does not include even basic competence and disclosure requirements."
    - "Extend the range of conduct of business requirements specific to insurance beyond the current focus on advice."
    - "Ensure that the appropriate requirements apply to all insurance activity, including sales without advice and ancillary sales."
- FMA capacity:
  - "The FMA functions with clear objectives within a generally sound framework of powers and processes and its responsibilities relative to those of government are clearly differentiated."
  - The FMA "would benefit from enhanced enforcement powers and would need to add insurance-specific expertise and maybe greater overall resources."

### Assessment scope and exclusions (additional detail)
- Exclusions reiterated:
  - The assessment "excludes personal accident and earthquake schemes provided by government entities" (EQC and ACC).
  - Reasons: their functions are "similar to social insurance schemes," funded by "a range of compulsory levies," and backed by government (EQC has "an explicit guarantee that the government will make up any deficiency in its assets").
- Inclusion in statistics:
  - EQC and ACC are "included in the market statistics in this report because they form an integral part of financial protection in New Zealand and excluding them would understate overall available insurance and hamper international comparison."

*Source: IMF assessment document: EXECUTIVE SUMMARY and sections A–C of "ASSESSMENT OF INSURANCE CORE PRINCIPLES" (cr17121).*

### 8.      The RBNZ adopts a principles-based, low-intensity supervisory philosophy. The

### 8.      The RBNZ adopts a principles-based, low-intensity supervisory philosophy.

### Supervisory philosophy and regulatory instruments
- The RBNZ adopts a principles-based, low-intensity supervisory philosophy emphasizing the board’s accountability and the consumer’s responsibility in selecting financial products and providers.
- Consistent with this philosophy and with its powers under IPSA, the RBNZ has issued:
  - standards on solvency and fit-and-proper requirements;
  - guidelines on governance and carrying on insurance in a prudent manner.
- The RBNZ has consciously refrained from conducting in-depth on-site supervision to encourage self-discipline by insurers’ boards and management.

### Market conduct and the FMA’s role
- The responsibility for insurance market conduct supervision lies with the FMA.
- The FMA administers three laws:
  - The Financial Markets Conduct Act 2013;
  - The Financial Advisers Act 2008 (FA Act);
  - The Financial Markets Authority Act 2011.
- The FMA’s oversight of insurers and insurance intermediaries is embedded in its general oversight of financial advisers and financial products.
- The FMA was established in 2011, taking over functions of the former Securities Commission of New Zealand and the Government Actuary.
- The responsible ministry for the FMA is the Ministry of Business, Innovation, and Employment (MBIE).

### Data collection and limitations
- The RBNZ is refining its data collection from insurers.
- Data prior to 2012 is not available because insurers were not required to be licensed until March 7, 2012.
- Since 2012 the RBNZ has collected supervisory information based on published financial data, which lack the necessary granularity and consistency for in-depth supervisory analysis.
- Classification of insurers in the available data is by their predominant types of business, rather than by actual business lines; the breakdown between life and non-life business is not precise.
- The RBNZ is undertaking a project to improve the quality and consistency of routine data collection.

### Industry size, penetration, and density
- The New Zealand insurance industry is relatively small in the domestic financial system:
  - Banking sector total assets: 200.9 percent of GDP as at March 2016.
  - Managed funds and trusts: 49.7 percent of GDP.
  - Private insurance sector: 11.9 percent of GDP.
- Insurance penetration and density (2015) — Table 1 figures preserved:
  - New Zealand Life: Penetration 1.0 (in percent); Density 502 (NZD).
  - World average (life): Penetration 3.5 (in percent); Density 474* (NZD).
  - New Zealand Non-life (private): Penetration 2.9* (in percent); Density 1,500** (NZD).
  - New Zealand Non-life (public)***: Penetration 1.9 (in percent); Density 999 (NZD).
  - New Zealand Non-life (total): Penetration 4.8 (in percent); Density 2,499 (NZD).
  - World average (non-life): Penetration 2.8 (in percent); Density 378* (NZD).
  - Notes:
    - * Converted from USD at USD 1= NZD 1.3707.
    - ** Including health insurance.
    - *** Mainly ACC and EQC.

### Life insurance trends and product mix
- New sales of life insurance are for protection only, without savings elements.
- Traditional life insurance with savings elements has been discontinued.
- Most life insurers have established fund management subsidiaries and manage insurance and fund management business out of separate entities.
- There remains an inforce block of participating whole life and endowment policies and some investment-linked business, but new-life business is mostly confined to pure protection.
- Group business is relatively limited.
- KiwiSaver, a tax efficient (non-insurance) work-based retirement savings product, has attracted savings that might otherwise have gone into insurance.
- Breakdown of life insurance business (as of June 30, 2016 and new business premium in 2nd Quarter 2016) — Table 2 figures preserved (NZD thousands):
  - Traditional: Inforce Premium 103,872; New Business Premium 58.
    - Whole life and endowment: 75,158; 52.
    - Unbundled: 28,714; 6.
  - Risk: Inforce Premium 2,095,449; New Business Premium 59,892.
    - Term: 1,149,937; 25,855.
    - Guaranteed acceptance: 68,333; 3,421.
    - Trauma: 375,884; 11,540.
    - Replacement income: 362,264; 13,825.
    - Lump-sum disability: 71,106; 2,021.
    - Accidental death: 14,375; 411.
    - Credit insurance: 53,550; 2,819.
  - Group: Inforce Premium 141,819; New Business Premium 2,195.
    - Life and disability: 92,330; 1,594.
    - Replacement income: 44,121; 520.
    - Trauma: 5,368; 81.
  - Annuities: Inforce Premium 14,478; New Business Premium 25.

### Non-life insurance, ACC, and product landscape
- There is no compulsory class of non-life insurance because of ACC.
- ACC provides universal no-fault protection against work and non-work related injuries covering medical expenses, replacement of lost earnings, cost of changes to homes and vehicles required as a result of a person’s injury, and financial assistance for fatal accidents.
- Individuals may take up additional private insurance to supplement ACC coverage.
- According to ICNZ (members account for 95 percent of the total non-life market), largest non-life classes by premium are:
  - motor (largest),
  - domestic (private property),
  - commercial (material damage and business interruption).
- Gross written premium for non-life business (NZD millions) — Figure 1 shows series: 3,980; 4,449; 4,770; 5,258; 5,261 (data are based on 12-month period to September of each year).

### Distribution channels and intermediation data gaps
- Intermediation channels include direct sales (including internet), agency arrangements (tied agents and banks), and brokers (particularly for corporate business).
- Certain intermediaries are required to report information to the FMA, but there are no comprehensive data on intermediation channels.

### Industry structure, concentration, and number of insurers
- The number of insurers has declined since the RBNZ started licensing in 2012.
- Total number of licensed insurers: 96 at the end of 2015.
- Industry concentration (market share):
  - Top 8 life insurers account for 87 percent of life premium income and 93 percent of life industry assets.
  - Top 8 non-life insurers account for 91 percent of non-life premium income.
  - Top 2 non-life insurers have a 67 percent market share.
  - Top 2 life insurers account for 47 percent of the life market.
- Number of insurers by predominant type (Table 3, Dec 31):
  - 2015: Life 25; Non-life 51; Health 6; Captive life - ; Captive non-life 5; Subtotal licensed direct insurers 87; Reinsurers life 6; Reinsurers non-life 3; Total licensed 96.
  - 2014: Life 25; Non-life 51; Health 6; Captive life - ; Captive non-life 7; Subtotal licensed direct insurers 89; Reinsurers life 6; Reinsurers non-life 3; Total licensed 98.
  - 2013: Life 26; Non-life 49; Health 6; Captive life 1; Captive non-life 8; Subtotal licensed direct insurers 90; Reinsurers life 6; Reinsurers non-life 3; Total licensed 99.
  - 2012: Life 30; Non-life 49; Health 6; Captive life 1; Captive non-life 11; Subtotal licensed direct insurers 97; Reinsurers life 6; Reinsurers non-life 3; Total licensed 106.

### Premium growth and market totals
- Total private sector premiums increased from NZD 7.6 billion in 2011 to NZD 9.8 billion in 2015.
- Gross premium figures (NZD millions) — Table 4 preserved:
  - Direct insurers — Life: 2015 2,308; 2014 2,184; 2013 2,059; 2012 1,992; 2011 1,817.
  - Direct insurers — Non-life: 2015 5,603; 2014 5,468; 2013 5,127; 2012 4,723; 2011 4,152.
  - Direct insurers — Health: 2015 1,088; 2014 1,021; 2013 968; 2012 934; 2011 877.
  - Total direct insurers: 2015 8,999; 2014 8,673; 2013 8,154; 2012 7,649; 2011 6,846.
  - Captives — Life: 2015 - ; 2014 - ; 2013 22; 2012 18; 2011 18.
  - Captives — Non-life: 2015 20; 2014 28; 2013 52; 2012 64; 2011 59.
  - Total captives: 2015 20; 2014 28; 2013 74; 2012 82; 2011 77.
  - Reinsurers — Life: 2015 374; 2014 278; 2013 284; 2012 177; 2011 174.
  - Reinsurers — Non-life: 2015 418; 2014 415; 2013 423; 2012 461; 2011 461.
  - Total reinsurers: 2015 792; 2014 693; 2013 707; 2012 638; 2011 635.
  - Total Private Sector (life and non-life): 2015 9,811; 2014 9,394; 2013 8,935; 2012 8,369; 2011 7,558.
  - Total Public Sector (non-life only): 2015 4,594; 2014 5,005; 2013 4,957; 2012 4,972; 2011 4,918.
  - Total Market: 2015 14,405; 2014 14,399; 2013 13,892; 2012 13,341; 2011 12,476.
  - Total non-life sector: 2015 10,197; 2014 10,473; 2013 10,084; 2012 9,695; 2011 9,070.
  - Private Sector share: 2015 54.9%; 2014 52.2%; 2013 50.8%; 2012 48.7%; 2011 45.8%.
  - Public Sector share: 2015 45.1%; 2014 47.8%; 2013 49.2%; 2012 51.3%; 2011 54.2%.

### Assets and sector composition
- Assets in the life sector are about 45 percent of the total insurance sector, reflecting the lack of savings elements in life products.
- Total assets (NZD millions) — Table 5 preserved:
  - Direct insurers — Life: 2015 12,994; 2014 11,741; 2013 11,475; 2012 10,813; 2011 10,549.
  - Direct insurers — Non-life: 2015 15,270; 2014 15,471; 2013 16,906; 2012 19,031; 2011 14,604.
  - Direct insurers — Health: 2015 922; 2014 873; 2013 842; 2012 833; 2011 788.
  - Total direct insurers: 2015 29,186; 2014 28,085; 2013 29,223; 2012 30,677; 2011 25,941.
  - Captives — Life: 2015 - ; 2014 - ; 2013 65; 2012 61; 2011 59.
  - Captives — Non-life: 2015 59; 2014 85; 2013 192; 2012 215; 2011 190.
  - Total captives: 2015 59; 2014 85; 2013 257; 2012 276; 2011 249.
  - Reinsurers — Life: 2015 739; 2014 650; 2013 764; 2012 503; 2011 450.
  - Reinsurers — Non-life: 2015 804; 2014 1,200; 2013 1,496; 2012 1,636; 2011 767.
  - Total reinsurers: 2015 1,543; 2014 1,850; 2013 2,260; 2012 2,139; 2011 1,217.
  - Total Private Sector (life and non-life): 2015 30,788; 2014 30,020; 2013 31,740; 2012 33,092; 2011 27,407.
  - Total Public Sector (non-life only): 2015 38,424; 2014 35,107; 2013 34,168; 2012 32,860; 2011 31,304.
  - Total Market: 2015 69,212; 2014 65,127; 2013 65,908; 2012 65,952; 2011 58,711.
  - Total non-life sector: 2015 53,694; 2014 50,578; 2013 51,074; 2012 51,891; 2011 45,908.
  - Private Sector share of assets: 2015 28.4%; 2014 30.6%; 2013 33.1%; 2012 36.7%; 2011 31.8%.
  - Public Sector share of assets: 2015 71.6%; 2014 69.4%; 2013 66.9%; 2012 63.3%; 2011 68.2%.

### Branch operations and foreign ownership
- Of the 96 insurers operating in New Zealand, 35 are branches, 18 of which are of Australian insurers.
- Total premiums collected by branch operations in 2015: NZD 2,030 million (23 percent of total industry premium income).
- Assets of branch operations in 2015: NZD 9,583 million (33 percent of total industry assets).
- Australian-owned operations (branches and subsidiaries combined) represent:
  - 66 percent of market by premium;
  - 75 percent of market by assets.
- Direct insurers by ownership (Table 6, 12/31/15) — preserved:
  - Australia-owned: Number 19; Count % Total 21; Premium Amount NZD 5,940; % Total 66; Assets Amount NZD 22,024; % Total 75.
  - NZ-owned: Number 43; Count % Total 48; Premium Amount NZD 2,205; % Total 24; Assets Amount NZD 4,646; % Total 16.
  - Others: Number 28; Count % Total 31; Premium Amount NZD 874; % Total 10; Assets Amount NZD 2,576; % Total 9.
  - Total: Number 90; Count % Total 100; Premium Amount NZD 9,019; % Total 100; Assets Amount NZD 29,245; % Total 100.

### Profitability and Canterbury earthquake legacy
- ICNZ data shows non-life business performance remains adversely affected by the Canterbury earthquakes in 2010 and 2011.
- Excluding the earthquake line, most lines of non-life business are comfortably profitable with combined ratios in the 50 to 60 percent range.
- Total private sector claims from the Canterbury earthquakes are estimated at NZD 21.5 billion, of which NZD 18.3 billion has been paid.
- Industry combined ratios (ICNZ, 12-month period to September) — Table 7 preserved:
  - All lines of business: 2011 146.36; 2012 98.93; 2013 96.27; 2014 93.69; 2015 100.45.
  - Commercial: 2011 55.65; 2012 65.50; 2013 59.60; 2014 63.32; 2015 56.47.
  - Domestic: 2011 62.30; 2012 59.33; 2013 58.11; 2014 52.15; 2015 53.43.
  - Motor: 2011 65.16; 2012 63.52; 2013 64.88; 2014 65.99; 2015 69.51.
  - Marine: 2011 63.62; 2012 64.39; 2013 42.74; 2014 47.53; 2015 50.53.
  - Liability: 2011 48.82; 2012 43.93; 2013 42.03; 2014 30.96; 2015 23.02.
  - Earthquake: 2011 31,163.02; 2012 201.81; 2013 115.09; 2014 108.75; 2015 174.79.
  - Others: 2011 58.50; 2012 59.17; 2013 53.42; 2014 49.40; 2015 58.49.

*Source: IMF staff summary of chapter content.*

### 21.      There are 14 foreign-owned insurance groups, 6 domestic insurance groups and

### cr17121 - 21.      There are 14 foreign-owned insurance groups, 6 domestic insurance groups and

### Market structure and supervisory arrangements
- There are 14 foreign-owned insurance groups, 6 domestic insurance groups and 15 financial conglomerates operating in New Zealand.
- IPSA does not apply to holding companies, and the RBNZ exercises minimal group-wide supervision.

### Earthquake Commission (Box 1) — role, operations, and reform proposals
- The EQC is a Crown Entity established under the Earthquake Commission Act 1993; its predecessor was the Earthquake and War Damages Commission (established in 1945).
- EQC functions:
  - (a) manage the Natural Disaster Fund;
  - (b) educate New Zealanders about disaster preparedness;
  - (c) conduct research that improves the detection and understanding of geological hazards;
  - (d) settle claims for natural disaster damages;
  - (e) obtain reinsurance in respect of coverage provided under the Act.
- How It Works:
  - EQC provides EQCover against damages caused by earthquakes, landslides, volcanic eruptions, tsunamis, and geothermal activities.
  - Maximum coverage amounts: NZD 100,000 for home, NZD 20,000 for contents, and cover for land; the amount of coverage is for each event of natural disaster.
  - EQCover is integrated with private insurance: when a homeowner takes a home and household contents policy with a private insurer, they are automatically covered by EQCover; part of the premium paid to the insurer is transferred to the EQC and goes into the Natural Disaster Fund.
  - EQC is a first loss insurer: it pays the first NZD 100,000/20,000 for damages to a home/contents, and covers storm and flood damages to land (land cover primarily relates to land under and within eight meters of an insured home and appurtenant structures and certain retaining walls, bridges and culverts).
  - EQC is the first point of contact for claims, processes the claim and passes the remaining portion to the private insurer for settlement.
- Government Guarantee:
  - EQCover is government guaranteed; if the Natural Disaster Fund and its reinsurance are insufficient, the government will pay the shortfall.
  - As at June 30, 2016, the Natural Disaster Fund had a negative balance of NZD 457 million, compared to negative NZD 424 million at the end of 2015.
- The Canterbury Earthquake Claims:
  - The EQC has paid NZD 9.4 billion to date, while private insurers have paid NZD 18.3 billion. Claims are still emerging after 6 years.
- EQC Reform (key proposals invited for public comment in July 2015):
  - The EQC claims to be lodged with private insurers.
  - Monetary cap on building cover to be increased to $200,000 + GST.
  - The EQC land cover to apply only where rebuilding is not practicable.
  - Scheme terms and conditions to be better aligned with usual insurer practice.
  - The EQC no longer provide contents insurance.
  - EQC premiums to reflect the costs of running the EQC and the costs and risks of the EQC scheme; monetary caps, prices and excesses to be reviewed at least every 5 years.

### Key risks and vulnerabilities (insurance sector)
- Natural catastrophe exposure:
  - The non-life insurance sector is exposed to earthquake and other natural disasters (earthquakes, volcanic eruptions, landslides, tsunamis, fires, floods).
  - Canterbury earthquakes (2010–11) resulted in the government bail-out of one insurer and the failure of another; most Canterbury claims fell to the private insurance market because EQC only covers residential properties up to limits.
  - Uncertainties remain regarding the boundary between EQC and private insurer coverage, particularly on costs of restoring land.
- Mitigants and market adjustments:
  - Insurers and reinsurers continue to provide cover but have limited exposure (e.g., moving away from full replacement value).
  - The RBNZ has strengthened the solvency requirement relating to natural catastrophes.
  - Government is planning reforms to EQC legislation with significant implications for insurers’ risk management.
- Other non-life exposures:
  - Weather-related events such as windstorm, and cyber risk.
  - High reliance on reinsurance programs to manage and mitigate natural catastrophe risks.
  - Role of ACC limits personal accident risks to top-up policies.
- Life insurance sector risks:
  - Exposed to mortality and disability morbidity risk and risks associated with commission-paying practices.
  - New sales are largely for term life; the second largest class of life insurance is disability income policies (22 percent of total new premiums) with long-term liabilities.
  - High levels of upfront commission to distributors create lapse risk and business risk if commission practices change; the FMA is investigating commission practices.
  - Low growth rate of new sales of life insurance in recent years.
- Blocks of traditional life business:
  - Stock of inforce traditional life insurance policies exposes a small number of life insurers to market risks, including low interest rates.
  - Mitigants include participating business where future bonuses are not guaranteed and insurers have reduced bonus rates.
  - New regulatory regime addresses these risks through solvency standards and financial condition reporting.
- Policyholder protection and conduct risks:
  - No policyholder protection schemes and no policyholder priority of claim in case of insolvency for non-life policyholders.
  - Public policy emphasizes consumer responsibility and disclosure of financial strength ratings, but consumers may lack access to advice and financial literacy.
  - Market conduct risk is exacerbated by intense competition in a small market and a complex financial advisers regulatory regime.
  - Majority of financial advisers (6,500 out of 8,300) are subject to a low degree of regulation: no demonstration of competence and a limited degree of disclosure are required, although all must be members of a disputes resolution scheme.
  - Competition and high upfront commissions may have led to “churning” of policies to the detriment of policyholders.
  - Limited oversight of insurance conduct beyond the advice function; conduct risks may be lower than in many developed markets due to limited and less complex product ranges.
- Cross-border and Australia linkages:
  - High exposure to Australia through branches or subsidiaries of Australian insurers; parental support was a source of strength during Canterbury events.
  - Exposure to shocks originating in Australia and risk of common or simultaneous shocks in Australia and New Zealand.
  - Particular exposure in life insurance due to significant Australian presence in branch form, disapplication of many New Zealand prudential requirements, and dependence on Australian insolvency law and practices in case of failure.
  - Links to Australian banks exist (all large four banks have insurance companies in New Zealand; one is the largest life insurer by premium income).
  - Banks operating in New Zealand are required to limit their interest in insurers to one percent of assets.
  - New Zealand insurers also hold bank-issued bonds (data on extent limited).
- Cross-border insurance provision into New Zealand:
  - Openness to insurance provided on a cross-border basis; oversight is limited and there are no requirements to notify business placed abroad.
  - Risk that individuals or smaller businesses buy insurance cover abroad unaware of additional risks compared with domestic insurers; data not available on extent.

### Preconditions for effective supervision and supporting infrastructure
- Policy framework and authorities:
  - Primary policy framework centers on the New Zealand Treasury, the RBNZ, and FMA.
  - Primary purposes of the RBNZ (RBNZ Act 1989): ensure price stability and promote maintenance of a sound and efficient financial system; responsibilities include prudential regulation and supervision of banking and insurance sectors, resolution authority for banks, macroprudential policy (banking), regulation of nonbank deposit-takers, oversight/designation of payments systems, and monetary policy.
  - Treasury responsibilities: execution of government economic policy; three key outcomes—stable and sustainable macroeconomic environment, improved economic performance and a higher performing state sector.
  - FMA: oversight of organized financial markets and conduct of business across the financial sector.
  - Commerce Commission: administers general consumer protection law.
- Monetary and fiscal frameworks:
  - Monetary policy: Policy Targets Agreement (PTA) commits the RBNZ to an inflation target of between 1 and 3 percent on average over the medium term; RBNZ operationally independent with respect to PTA objectives and must have regard to the efficiency and soundness of the financial system and seek to avoid unnecessary instability in output, interest rates and the exchange rate.
  - Fiscal policy: Public Finance Act 1989 requires government to reduce total debt to prudent levels and manage fiscal risks prudently; government must present annual Budget Policy Statement and Fiscal Strategy Report; Treasury must publish, at least every four years, a Statement of the Long Term Fiscal Position covering impacts over 40 years.
- Legal, accounting, audit, and actuarial infrastructure:
  - Well-developed legislative framework for business organisation, insolvency, property registration/transfer, and consumer protection (e.g., Companies Act 1993).
  - Accounting and auditing follow international standards (IFRS and ISA); External Reporting Board issues standards; NZ-IFRS identical to IFRS with a small number of New Zealand-specific standards.
  - Chartered Accountants Australia and New Zealand (CAANZ) to become single professional body following merger; large international accounting firms present.
  - Auditor oversight: FMA responsibility under the Auditor Regulation Act 2011 for regulation of “auditor accredited bodies”; registration and licensing of auditors for audits of “FMC reporting entities”; FMA to carry out quality reviews of registered audit firms and licensed auditors at least once every four years and report annually; FMA is a member of IFIAR.
  - Actuarial profession: New Zealand Society of Actuaries (NZSA) has around 350 members, of whom around half are full members (fellows); NZSA issues competence and conduct standards and actuarial standards/guidance; insurers are required by the RBNZ to have regard to certain NZSA standards; NZSA has a complaints and disciplinary process but has not taken disciplinary action to date; the profession is not subject to independent oversight or regulation.
- Statistics and disclosure:
  - Statistics New Zealand publishes a wide range of social and economic indicators; mortality tables are available based on period and cohort life expectancy measures.
  - NZSA commissions periodic mortality investigations (most recently “Insured Lives 2008 to 2010” published in summary with detailed findings for sale).
  - Extensive corporate governance standards in laws, codes, and guidelines (Companies Act 1993; FMC Act; FMA and NZX principles).
  - Disclosure requirements: audited financial statements must be produced and made publicly available via Companies Office register; entities listed on NZX subject to disclosure requirements.
  - Ratings: extensive provision of ratings from agencies (not subject to regulation except where they provide ratings to entities subject to RBNZ disclosure requirements).

*International Monetary Fund — New Zealand sector assessment (excerpts).*

### 40.      The policy framework emphasizes the need for policyholders to take informed

### 40.      The policy framework emphasizes the need for policyholders to take informed

### Policy framework and moral hazard
- The regulatory approach emphasizes minimizing moral hazard associated with regulation itself and reducing the public perception of any implicit government guarantee.
- There is no depositor protection for the banking system; the RBNZ states it does not aim to prevent all failures of regulated entities in the sectors it regulates.
- Regulation places particular emphasis on appropriate disclosure to investors and customers.
- Financial literacy levels are low; there is a national strategy to develop financial capability.

### Policyholder protection and statutory arrangements
- 41. There is no insurance policyholder protection scheme that would provide a safety net in the event of insurer failure.
- Insurance legislation requires the RBNZ, when an insurer suffers distress, to recognize the importance of dealing with the insurer in a manner that aims adequately to protect policyholders.
- All life insurance business (except for a few smaller insurers) must be carried out in a statutory fund (see assessment of ICP 12). There is no corresponding statutory fund requirement for non-life insurance.
- New Zealand does not mandate insurance cover for particular risks (such as motor third-party liability); this reflects the role of the ACC (paragraph 3).
- 42. Dispute resolution schemes are available to retail customers; membership is compulsory for insurers and intermediaries except where they undertake only wholesale business (e.g., reinsurance only). There are three dispute resolution schemes covering insurance.

### Efficient financial markets and investment constraints
- 43. Markets are deep and liquid but relatively small by international standards and limited, for debt issues, to shorter maturities.
  - New Zealand insurers invest largely in NZD-denominated assets and mostly in debt securities.
  - Equity and bond markets are small by international comparison (relative to the size of the economy) and the range of instruments is limited.
  - Government and financial institutions dominate debt issuance.
  - Life insurers do not have access to domestic fixed interest securities or derivatives with terms long enough to match all their liabilities.
  - Government securities are issued only out to ten years, constraining longer term private issuance.
  - There are limited inflation-indexed products; the Treasury issues an inflation linked bond, but volumes are small (see assessment of ICP 14).
- 44. Insurers have access to investment markets outside New Zealand with no restrictions on foreign investment, subject to regulatory requirements in relation to risk management and solvency.
  - Many insurers use their head office or parent company to source and manage foreign investments.
  - Most insurers’ liabilities are NZD-denominated.
  - Foreign-owned insurers are significant in the New Zealand market.

### Summary of compliance with the ICPs — key findings by principle (Table 8)
- 1. Objectives, Powers, and Responsibilities of the Supervisor — LO  
  - Legislative changes established a “twin peaks” approach: RBNZ for prudential regulation and FMA for conduct.
  - Objectives of regulators clearly set out in law and support protection of policyholders; RBNZ statutory objectives focus on soundness and promoting public confidence.
  - Both RBNZ and FMA have extensive powers; these do not extend, with important exceptions in RBNZ’s case, to establishing rules themselves or imposing administrative sanctions.
- 2. Supervisor — LO  
  - Governance and decision-making processes clearly defined for RBNZ and FMA.
  - Transparent arrangements for appointment/removal of RBNZ Governor and board members; reasons for dismissal need not be published.
  - Adequacy of resources at both RBNZ and FMA needs reconsideration.
- 3. Information Exchange and Confidentiality Requirements — O  
  - RBNZ has legal power to obtain and share information domestically and internationally; signed MoUs with Australian and U.K. counterparts and is signatory to IAIS MMoU.
- 4. Licensing — LO  
  - Licensing requirements in IPSA are clear and comprehensive; RBNZ guidance draws on licensing experience since IPSA took effect.
  - RBNZ policy is accommodating to overseas insurers; wide range of jurisdictions treated as equivalent or satisfactory.
- 5. Suitability of Persons — LO  
  - Framework requires insurers to implement fit-and-proper policies and certify compliance to RBNZ.
  - RBNZ does not exercise prior approval for key individuals; scope of requirements limited to directors, CEO, CFO, and Appointed Actuary.
  - Extensive scrutiny of significant shareholders at licensing stage; no ongoing suitability requirements for controlling shareholders.
- 6. Changes in Control and Portfolio Transfers — PO  
  - Legislation requires notification to RBNZ; control threshold in IPSA is high by international practice, exposing RBNZ to risk that significant owner changes may occur without its knowledge.
  - RBNZ must base decisions on assessment of impact on policyholders.
- 7. Corporate Governance — PO  
  - Framework less comprehensive and binding than ICP requires.
  - RBNZ should provide clear articulation of governance expectations and design an ongoing monitoring strategy.
- 8. Risk Management and Internal Controls — PO  
  - Legal requirements are less prescriptive and binding than ICP requires.
  - Except for the Appointed Actuary, no explicit binding requirements for insurers to have risk management, compliance, and internal audit functions.
  - Lack of clear indication of insurer responsibility for outsourced functions.
- 9. Supervisory Review and Reporting — PO  
  - RBNZ has full supervisory powers and a developing toolset; supervisory framework still evolving.
  - Routine engagement is focused on reporting and regulatory transactions; limited qualitative in-depth interaction.
  - Supervisory resources are limited; full set of reporting requirements introduced only recently and lack granularity.
- 10. Preventive and Corrective Measures — LO  
  - Legislative framework and internal procedures allow corrective action and escalation to enforceable requirements.
  - No requirement to publish corrective actions; not all IPSA powers have been used.
  - RBNZ has imposed significant corrective measures on some insurers.
- 11. Enforcement — LO  
  - Legislation sets out enforcement tools and sanctions applicable to individuals and insurers; RBNZ has internal procedures to record and manage breaches.
  - RBNZ’s powers remain largely untested; financial and other penalties may be sought from the court, including against individuals.
- 12. Winding-up and Exit from the Market — LO  
  - RBNZ has options for voluntary and involuntary liquidation and selects based on circumstances.
  - Policyholder protection is a principle of IPSA; the only specific protective measure is priority of claim for life insurance policyholders in the statutory fund.
  - No policyholder protection scheme currently and no intention to establish one.
  - Largest life insurer by assets is an Australian branch subject to home jurisdiction solvency standard and statutory fund requirements; not required to hold assets in New Zealand; winding-up and New Zealand policyholders’ rights are not within RBNZ control.
- 13. Reinsurance and Other Forms of Risk Transfer — PO  
  - RBNZ recognizes importance of reinsurance given natural disaster exposure; appropriateness of reinsurance arrangements largely left to the Appointed Actuary.
- 14. Valuation — LO  
  - Valuation of assets and liabilities for solvency purposes broadly in line with ICP standard.
  - LO rating due to lack of guidance on choice of discount rates for long maturity businesses.
- 15. Investment — PO  
  - Insurers generally permitted free investment provided they maintain adequate capital.
  - Supervisory influence on investments is indirect through capital charges.
  - RBNZ is not collecting the information on investments needed to monitor investment breakdowns and shifts over time.
- 16. Enterprise Risk Management for Solvency Purposes — PO  
  - Key gaps include:
    - Need for rigorous process of risk identification and measurement (ICP 16.1).
    - Risk management policy should describe risk retention and strategies, including relationship between pricing, product development, and investment management (ICP 16.3).
    - Asset-liability management (ICP 16.5).
    - ERM framework should incorporate mechanisms to include new risks and information regularly and include feedback loops (ICP 16.9 and ICP 16.10).
  - The Financial Condition Report (FCR) is objectively prepared and serves a useful function.
- 17. Capital Adequacy — LO  
  - Solvency standard accounts for insurer risk profile; does not address dependencies between risk categories.
  - Single solvency control level makes early intervention difficult.
- 18. Intermediaries — PO  
  - Well-developed framework for intermediaries selling complex products and advisers (Authorised Financial Advisers and Qualifying Financial Entities); FMA carries out licensing and supervision.
  - Regime limited for those selling simpler products; government-led review of financial advice legislation is addressing these issues.
- 19. Conduct of Business — PO  
  - Regime focused on financial advice; other aspects of insurance conduct are less covered or only in FMA guidance.
  - Self-regulation and dispute resolution services exist but do not substitute for regulatory requirements and oversight.
  - Conduct risks may be lower due to product range, but handling of claims, complaints, and advice on simpler products are effectively unregulated.
- 20. Public Disclosure — PO  
  - Disclosure requirements based on accounting standards, supplemented by mandatory disclosure of financial strength: a credit rating by approved agencies, actual solvency capital amount, minimum required, solvency margin and solvency ratio.
  - Comparison across insurers is difficult due to management discretion under accounting standards, branches presenting solvency using home jurisdiction methodologies, and additional solvency margins for some insurers.
  - Financial statement disclosure lacking in investments, asset-liability management, description of risk concentration, and interaction between capital adequacy and risk.
- 21. Countering Fraud in Insurance — O  
  - Insurance fraud is addressed by general criminal law; criminal and regulatory authorities cooperate and have achieved successful prosecutions.
  - Fraud is covered in RBNZ guidelines and in supervisory risk-based work, but specific focus to date has been limited due to other priorities.
- 22. Anti-Money Laundering and Combating the Financing of Terrorism — O  
  - Both RBNZ and FMA are designated supervisors under AML/CFT legislation.
  - RBNZ monitors life insurers using reports and vulnerability analyses, conducts desk-based reviews and some on-site inspections with a risk-based approach.
  - FMA collects information, carries out reviews and publishes findings for reporting entities; no specific work program for insurance intermediaries.
- 23. Group-wide Supervision — PO  
  - Extent of group-wide supervision is limited; RBNZ obtained information on all legal entities in a group at licensing stage (2013) but lacks regular reporting to keep this knowledge current except at change of control.
  - RBNZ has not established relationships with overseas supervisors other than APRA, mainly due to resource constraints.

*International Monetary Fund — New Zealand: Selected excerpts from CR17121*

### 24. Macroprudential

### 24. Macroprudential — Macroprudential Surveillance and Insurance Supervision

### Overview / Key findings
- The RBNZ’s objectives focus on the sector, but supervision has been focused largely on individual insurers.  
- Scope to take a system-side (macroprudential) view has been hampered to date by limited availability of detailed comparative information from regulatory reporting.  
- A more macroprudential approach was taken in response to the Canterbury earthquakes.  
- With increased data availability from late 2016, the RBNZ will be better able to:  
  - identify emerging market-wide risks,  
  - assess for potential systemic significance, and  
  - publish more aggregate information on the sector.  
- Development of macroprudential supervision will contribute to the effectiveness of supervision of individual insurers but will not substitute for that activity and is therefore likely to require additional supervisory resources.  
- Table 9 — Summary of Observance Level:  
  - Observed (O): 3  
  - Largely observed (LO): 10  
  - Partly observed (PO): 13  
  - Not observed (NO): 0  
  - Total: 26

### Policy recommendations and operational actions (ICP 24 and related)
- Increase market-wide analysis of the sector from 2017, defining regular outputs for internal use such as:  
  - standard reports on market trends, interconnectedness and other potential sources of systemic risk, and  
  - templates for the publication of aggregate information (the RBNZ already has plans for consultation in this area).  
- In the medium term, consider stress-testing exercises.  
- In the near term, undertake cross-company analysis of information in Financial Condition Reports (FCRs); supplement this by requiring increased reporting of sensitivity analysis.  
- Recognize that macroprudential development will require additional supervisory resources and will complement—but not replace—supervision of individual insurers.

*Source: cr17121 - 24. Macroprudential (IMF staff report content provided).*

### 26. Cross-border Cooperation

### 26. Cross-border Cooperation and Coordination on Crisis Management

### Key recommendations on crisis management and contingency planning
- Due to the high level of cross border activities, the RBNZ should prioritize its crisis management policy and procedures, while studying how best to achieve IPSA’s principle of policyholder protection in crisis.  
- Due to the high catastrophe risk in the New Zealand market, the RBNZ should require insurers to establish and maintain contingency plans and procedures based on their specific risks in use for going- and gone-concern situations. 

### Authorities’ responses to the Detailed Assessment Report (DAR)
- The New Zealand authorities (the FMA, MBIE, RBNZ, and Treasury) thank the IMF and the insurance assessors for the assessment and welcome the opportunity to comment on the DAR.  
- Authorities strongly support the FSAP as a means of promoting and improving the quality of financial sector regulation and outcomes.  
- Historical reform context:
  - Following the 2003–04 FSAP, a 2005 working group reviewed nonbank financial institution frameworks, leading to the Reserve Bank becoming prudential supervisor for insurance under the Insurance (Prudential Supervision) Act 2010 (IPSA) and establishment of the FMA as general market conduct regulator.
  - Implementation of IPSA and a prudential regime was a major achievement; the DAR judged the new regulatory framework as reasonably “well-developed.”
  - The 2010–11 Canterbury earthquakes underscored the importance of robust solvency requirements given catastrophe risk; the insurance sector is in a much better position to absorb such shocks today.
- Post-licensing developments:
  - After licensing completion in September 2013, the Reserve Bank developed a supervisory framework broadly aligned with banking prudential regulation, reflecting a ‘three pillar’ approach (self, market, and regulatory discipline).
  - IPSA is not a zero failure regime; the Reserve Bank is not required to ensure no insurer will fail or that there will be no losses to policyholders.
  - The Reserve Bank emphasizes risk-based supervision; on-site inspections are limited to preserve incentives for insurers’ own governance.
- DAR findings and ongoing work:
  - DAR notes areas short of full observance with IAIS core principles, partly due to a maturing regime (e.g., supervisory risk assessments and regulatory reporting) and partly due to emphasis on self and market discipline.
  - IMF recommendations (e.g., enhanced disclosure, expanded powers for governance and risk management standards) are informing a statutory review of insurance prudential regulation; terms of reference released April 2016 and an Issues Paper released March 2017.
  - Authorities note IMF recommendations on conduct regulation; FMA’s remit is limited to mis-selling/misrepresentations and regulation of financial advice related to agents and brokers.
  - Ongoing FA Act review will address intermediaries but will not affect conduct regulation of insurers or non-advised sales.
  - As law reforms for financial advisers are completed, the FMA will reassess resources and insurance-specific work priorities.

### Detailed Assessment highlights — ICP 1 (Objectives, Powers, and Responsibilities of the Supervisor)
- Designation and objectives:
  - RBNZ is the single prudential regulator of insurers under IPSA (section 12) with responsibility for licensing, supervision, and taking appropriate action in relation to stressed insurers.
  - IPSA section 3(1) purposes: 
    - To promote the maintenance of a sound and efficient insurance sector.  
    - To promote public confidence in the insurance sector.  
  - IPSA section 4 includes principles the RBNZ must take into account (e.g., sustainability of the NZ market).  
  - RBNZ’s purposes in IPSA section 3 do not include an explicit reference to policyholder protection; a principle to aim adequately to protect the interests of policyholders applies only where the insurer is “in financial distress or other difficulties” (IPSA section 4(c)). RBNZ must also consider policyholders’ interests in portfolio transfer approvals (see ICP 6).
  - RBNZ is AML/CFT supervisor for relevant life insurers under section 130 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
- RBNZ powers under IPSA include (sections cited as in IPSA):
  - Impose, vary, remove, add to, or substitute any conditions of license (sections 21–22).  
  - Approve changes in control and legal form (sections 26–29).  
  - Cancel a license (section 30).  
  - Remove a director or relevant officer (section 39).  
  - Approve transfers and amalgamations (section 44).  
  - Require an insurer or associated person to provide information (sections 121–125).  
  - Require insurers or associated persons to provide reports (section 126).  
  - Conduct investigations by requiring information or appointing an investigator with power to require information or seek a warrant (sections 130–134).  
  - Require an insurer to prepare a recovery plan (sections 138–142).  
  - Issue directions to a licensed insurer (sections 143–150); recommend statutory management (section 170); apply to Court for liquidation, voluntary administration, or reduction in value of contracts (sections 151–153).
- License conditions and solvency standards:
  - RBNZ must consult with an insurer before changing its conditions of license (section 22), though conditions are widely used to impose binding requirements.
  - IPSA section 21(2) provides for license conditions to apply solvency standards (IPSA section 55), including requirements above the minimum for an individual insurer.
- Overseas insurers and exemptions:
  - RBNZ can grant specified exemptions for “overseas insurers” (sections 59, 38, 119) subject to approval and specified conditions; removal of directors (section 39) and some Part 4 powers are disapplied for overseas insurers. Jurisdictions eligible for certain exemptions are set out in Regulation 5 of the Insurance Prudential Supervision Regulations. Names of overseas insurers with exemptions are published by the RBNZ.
- Standards, guidelines, and enforcement:
  - No general power for the RBNZ to issue waivers, exemptions, or modifications of IPSA requirements beyond specified exemptions.
  - RBNZ may issue binding standards for solvency (section 55) and fit-and-proper requirements (section 36); standards are issued by notice signed by the Governor and must be presented to the House of Representatives (Parliament).
  - RBNZ may issue non-binding guidelines on Risk Management Programs (section 73).
  - RBNZ has no powers to impose administrative sanctions and penalties; breaches of IPSA are criminal offences requiring court proceedings.
  - RBNZ cannot approve directors or other individuals in advance; it may require removal where not fit-and-proper (section 39) or under Part 4 (section 149).
- Group supervision:
  - RBNZ has no explicit group supervision powers; supervision of groups relies on an “indirect approach” via powers over licensed insurers and powers to obtain information about associated persons (see ICP 3). RBNZ may impose requirements on associated persons in investigations (sections 131–132) or under Part 4 (sections 144–145).
- FMA responsibilities and powers:
  - FMA’s main objective (FMA Act section 8): to promote and facilitate the development of fair, efficient, and transparent financial markets.
  - Specific law objectives:
    - FA Act: promote sound and efficient delivery of financial adviser and brokering services, encourage public confidence in professionalism and integrity of advisers and brokers.
    - FMC Act: promote confident and informed participation of businesses, investors, and consumers and promote fair, efficient, transparent markets.
  - FMA powers applicable to insurance:
    - Insurance companies and intermediaries giving advice are subject to FA Act requirements (licensing and other powers) (see ICP 18).
    - FMA can enforce FMC Act provisions on fair treatment of customers for insurers and intermediaries (insurance is within the wide definition of financial products and services) (ICP 19).
    - FMA supervises insurance intermediaries under the AML/CFT Act where reporting entities (see ICP 22).
  - FMA may issue binding “frameworks and methodologies” for how legislative requirements are met in practice, but generally cannot set binding standards.
  - Enforcement: FMA can investigate, initiate prosecutions, withdraw licenses, and impose relatively small fines for minor infringements; cannot generally impose administrative penalties or require redress, but can accept enforceable undertakings and seek Court enforcement (FMA Act sections 46–47).
- Commerce Commission and Privacy Commission roles:
  - Commerce Commission enforces the Fair Trading Act (FTA) prohibiting false and misleading consumer information; has taken enforcement action against insurers and intermediaries.
  - Memorandum of Understanding (2014) between FMA and Commerce Commission recognizes FMA as primary in regulatory action for misleading/deceptive conduct in financial services; Commerce Commission may seek FMA consent to bring FTA proceedings in relation to financial products and services.
  - Privacy laws overseen by the Privacy Commission (Crown Entity) (see ICP 19).
- Assessment: Largely Observed
  - Legislative changes established a “twin peaks” approach: RBNZ responsible for prudential regulation and FMA for conduct in financial markets.
  - Objectives for regulators are clearly set and support protection of insurance policyholders, though RBNZ statutory objectives focus on sector soundness and promoting public confidence; neither body’s objectives conflict with policyholder protection.
  - Both RBNZ and FMA have extensive powers but, with important exceptions for RBNZ, lack powers to establish rules or binding requirements themselves or to impose administrative sanctions; reliance on government and courts for standards and enforcement persists.
  - RBNZ’s indirect approach to group supervision appears sufficient under current circumstances.
- Recommended legislative and policy changes:
  - Make explicit in the RBNZ’s purposes (or principles it must take into account) the objective of policyholder protection, consistent with distress management and existing practice (noting IPSA principles already stress eliminating risk of failure is not an objective).
  - Extend RBNZ powers to issue binding standards on the full range of prudential issues (including governance and risk management), building on existing solvency and fit-and-proper powers; amend IPSA to apply solvency standards directly (rather than by condition of license), while retaining power for RBNZ to set higher standards for individual insurers.
  - Extend powers of the RBNZ and the FMA to enable them to impose administrative sanctions, including fines, subject to appropriate procedural requirements.
  - Amend legislation to enable the RBNZ to impose or change a condition of license without consulting the insurer where immediate action is required.

### Detailed Assessment highlights — ICP 2 (Supervisor: independence, accountability, resources, standards)
- Internal governance — RBNZ:
  - RBNZ governance per RBNZ Act: Governor (Chief Executive) (section 40) with authority over matters not reserved to the board (section 41(2)); Board of 5–7 non-executive members; Board duties include oversight of IPSA functions and use of resources (section 53(1)(e)).
  - Single decision-maker model: Governor formally responsible for all decisions; some delegation to Deputy Governor and Head of Financial Stability and PSD management (section 51).
  - Internal committees with formal terms of reference:
    - Insurance Steering Group (ISG): PSD management and General Counsel to discuss supervisory and policy issues.
    - Financial System Oversight Committee (FSO): Governors, PSD senior management and heads of relevant departments for financial stability policy and certain supervisory decisions.
    - Governing Committee: Governor, both Deputy Governors and Assistant Governor for major strategic and policy issues.
  - Internal audit: Audit Services team provides internal audit across RBNZ functions; head reports to Governor; 2016 audit of insurance supervision systems and processes.
- Internal governance — FMA:
  - FMA governed by Board of Directors (5–9 members; eight at assessment time) operating via committees; provision for associate members for specialist expertise.
  - Board responsible for FMA operation and may delegate to management; Chair can enable Chief Executive to act in urgent cases.
  - Internal audit reports to General Counsel and Chair of Audit and Risk Committee; reviews regulatory and supervisory work.
- Appointment and dismissal:
  - Governor of RBNZ appointed by Minister of Finance on Board recommendation for five year terms (section 40(1)); Deputy Governors appointed by Board on Governor’s recommendation; non-executive Board members appointed by Minister for up to five years (section 54(1)(a)).
  - Disqualification and removal provisions: Governor disqualified in prescribed circumstances (section 46); removal by Order-in-Council (OiC) on Minister advice for specified causes (section 49); similar processes for Deputies and non-executives. OiC must be published but reasons need not be disclosed; no Governor or non-executive has been removed under these provisions.
  - FMA Board appointed by Governor-General on government recommendation; members serve five years; chief executive appointed by Board. As a Crown Entity, Board members may be dismissed at any time by Governor-General on minister’s advice but only for just cause; dismissals must be published though reasons need not be.
- Institutional relationships:
  - RBNZ governed by its statute and acts independently in IPSA functions.
  - Ministerial intervention powers under IPSA:
    - Minister may direct RBNZ to have regard to government policies relating to IPSA functions (section 13); direction cannot require a particular action or result for a particular person; directions must be published and require RBNZ to show how it had regard to them.
    - Minister may advise Governor-General (on RBNZ recommendation) to place a licensed insurer into statutory management (section 170) and take related statutory management actions including vesting branch assets/liabilities and reducing contract value (section 191).
  - RBNZ required to publish an annual Statement of Intent (section 162A of RBNZ Act); preparation informed by a published letter of expectations from Minister of Finance (most recent: March 2016), including expectations for early advice when a significant RBNZ-regulated institution faces material financial difficulty.
  - 2012 MoU sets out Treasury and RBNZ roles: RBNZ is lead advisor to Minister on prudential supervision; Treasury and RBNZ jointly advise on financial stability framework fit-for-purpose; Treasury has no power to direct RBNZ. Disclosure to Treasury constrained by IPSA section 135.
  - Minister responsible for regulations under IPSA based on RBNZ recommendation (regulations may cover statutory funds and IPSA implementation matters).
  - FMA is an independent Crown Entity required to perform functions independent of ministerial direction, except in support of “whole of government approach”; directions generally published and laid before Parliament. Relevant minister for FMA is the Minister of Commerce (MBIE). FMA produces a four-year statement of intent (latest: 2015–19); Minister may direct amendments to the statement (section 147).
- Independence and funding:
  - RBNZ funds insurance regulation and supervision from general resources; spending subject to a funding agreement process between Minister of Finance and Governor for five years (section 159 of the RBNZ Act).

*Source: cr17121 - 26. Cross-border Cooperation (chapter/section text provided).*

### Part 5 of the FMC Act. However, these issues are not relevant to the insurance sector or the ICP assessment.

### cr17121 - Part 5 of the FMC Act. However, these issues are not relevant to the insurance sector or the ICP assessment.

### Funding and Resourcing
- RBNZ funding:
  - RBNZ is able to allocate the agreed funding of NZD 49.6 million for 2015/2016 between its functions as it chooses.
  - RBNZ’s overall budget for PSD in 2015/16 was NZD9.6 million and the headcount was 54.
  - Ten staff, including a manager, are allocated to the supervision of insurers, of whom two are actuaries.
- FMA funding:
  - FMA is funded by Parliamentary apportion which is currently financed 40 percent by government out of budget resources and the remainder from fees and levies payable by entities subject to its regulation.
  - Levies are paid to the government and must be applied to offset FMA funding; any under- or over-collection of the levy does not affect FMA resourcing.
  - Fees for transactional work (licensing applications and exemption) are payable directly to the FMA.
  - FMA has a staff of 170 in total.
- Resource management and constraints:
  - RBNZ acknowledges resourcing is limited relative to other regulators given 96 licensed insurers and a supervisory approach emphasizing self-discipline and an absence of in-depth on-site supervision.
  - Even the largest insurers do not have a single wholly dedicated supervisor.
  - FMA allocates resources according to functions; there is no specific allocation to insurance sector work or monitoring of actual resource allocation by sector.
  - PSD has budgets for professional services (including consultants) and training.

### Transparency of Requirements and Procedures
- RBNZ:
  - IPSA section 54 requires publication of policies for determining license applications and for imposing, varying, removing, or adding to conditions of licenses.
  - Notices setting out standards are published, guidelines are published, and a regular newsletter is published.
  - RBNZ has published limited information on its supervisory processes.
- FMA:
  - High degree of transparency: publishes corporate documents including a Strategic Risk Outlook, statement of intent, detailed activity reports, extensive guidance on regulatory framework aspects, and thematic investigations.

### Review of Requirements and Procedures
- RBNZ:
  - Reviewed and reissued solvency standards in 2014.
  - Scheduled a review of IPSA for 2017/2018.
  - Section 162AB of the RBNZ Act requires Regulatory Impact Statements to assess expected regulatory impacts of proposed policies; these are published.
  - Supervisory processes for insurers were reviewed in 2015; new processes are being implemented.
- FMA and legislation:
  - Framework administered by FMA has been subject to extensive change; legislation generally provides for reviews typically within a five-year period led by government.
  - MBIE is currently reviewing the FA Act.

### Information on the Insurance Sector and Publication Gaps
- RBNZ publishes limited information on the insurance sector in its six-monthly Financial Stability Report and lacks the depth and range of detailed information on insurers needed for valuable aggregate publications (see ICP 9 and ICP 24).
- FMA publishes limited information on the sector.
- Information on the use of different channels of intermediation is limited from the FMA or any other source.
- There is published information on the regulatory system generally, including a Regulatory Charter published by the Council of Financial Regulators (CoFR).

### Appeal Against Supervisory Decisions
- Judicial review:
  - Supervisory decisions of the RBNZ and the FMA are subject to judicial review by the High Court, generally limited to review of the process followed by the regulator.
  - The Court may require the regulator not to implement its initial decision until judicial review proceedings are completed.
- FMA-specific appeals:
  - Certain licensing decisions of the FMA may be appealed to the District Court.
  - Under the FA Act section 138, decisions to refuse a license to give advice may be appealed to a District Court; disciplinary committee decisions under the Act may be appealed; decisions are not suspended pending appeal (section 140).
- IPSA appeals:
  - Right of appeal to the High Court in respect of decisions by the RBNZ to issue a direction removing a director or relevant officer of an insurer (sections 39–43).
  - Right of appeal to the District Court (on application of the RBNZ) to ban persons from participating in insurance business (sections 222–225).
  - Decisions to remove a person remain in force pending determination of the appeal unless the High Court orders otherwise (section 42(3)).
  - No other RBNZ decisions are subject to appeal.

### Confidentiality, Information Exchange, and Legal Protection
- Confidentiality:
  - IPSA section 135 provides confidentiality for wide-ranging information disclosed to the RBNZ or an investigator; disclosure permitted only if otherwise public, in statistical/summary form, for exercise of functions, or to an authority in another country with appropriate safeguards.
  - Sanctions (a term of imprisonment and a fine or both) apply to any employee of the RBNZ (or an investigator) who makes disclosures not permitted under IPSA.
  - Decisions to disclose require authorization by a Governor or Head of Department.
  - FMA staff subject to confidentiality under FMA Act section 59; disclosure provisions similar to RBNZ and require satisfaction that appropriate protections are in place (FMA Act sections 59 and 30 and 31).
- Domestic information-sharing arrangements:
  - RBNZ and FMA signed an MoU in 2011 to establish cooperation, promote transparency, reduce duplication, and identify risks.
  - Council of Financial Regulators (CoFR) established to share information and coordinate responses; permanent members include RBNZ, FMA, Treasury, and MBIE; CoFR generally meets quarterly and chair rotates between RBNZ and FMA.
- International information-sharing:
  - RBNZ may share information with any foreign authority with similar functions if (a) information is necessary for performing such functions and (b) RBNZ is satisfied necessary provision exists to protect confidentiality (IPSA sections 135(2)(d) and 135(3)).
  - RBNZ does not require a formal information exchange agreement/understanding, nor reciprocity, before considering a request; oral requests allowed for urgent cases subject to written confirmation within 10 business days (except MoU with the U.K. PRA where no timing provision exists).
  - RBNZ has extensive cooperation arrangements with APRA; 2003 MoU on banking supervisory cooperation extended to include insurance in 2012. MoU contains a general confidentiality clause and APRA commits to consulting RBNZ before forwarding confidential information obtained from RBNZ.
  - RBNZ is a signatory to the IAIS MMoU.
- Legal protection for supervisors:
  - IPSA section 230: officers, employees and directors of the RBNZ (and statutory managers and investigators) and the RBNZ itself are not liable for acts done or omitted in the exercise or performance in good faith of their functions, powers or duties under the Act.
  - IPSA section 231: government indemnifies the same persons and the RBNZ for any liability arising from the exercise of powers under the Act, unless shown to have been exercised in bad faith; indemnity expressly extends to legal costs.
  - FMA: not liable for anything it may do or fail to do in the course of the exercise of its functions, powers, or duties, unless shown to have acted in bad faith or without reasonable care (section 22 of the FMA Act). No director or employee of the FMA, nor any delegate, is liable for actions in the course of operations unless shown to have acted in bad faith.

### Integrity, Professionalism, and Use of Outside Experts
- Codes and conflict of interest:
  - RBNZ: code of conduct and conflict of interest policy requiring staff to act with integrity, behave honestly and lawfully; conflicts notified to Head of Department; specific rules on interests in or exposures to regulated entities; breaches can trigger disciplinary action.
  - FMA: staff subject to a code of conduct and requirements to disclose potential conflicts of interest.
- Outside experts:
  - RBNZ may appoint an actuary under section 46 of IPSA to prepare independent reports on transfers or amalgamations; actuary must be a fellow of the NZSA or holder of an equivalent qualification approved by the Bank.
  - RBNZ may appoint an investigator under section 130(2)(b) who must be ‘suitably qualified’ (e.g., experienced insolvency or restructuring practitioner).
  - RBNZ may require an insurer to supply a report prepared by a person approved by the Bank (section 126) and seeks appropriate independence; confidentiality for investigators covered explicitly in section 135 or via contractual terms.
  - FMA does not appoint external experts in relation to insurance supervisory functions (but does use external legal resources) and would include confidentiality provisions in contractual terms were it to engage experts.

### Assessment, Observations, and Recommendations
- Assessment summary:
  - Governance structure and decision-making processes are clearly defined for both RBNZ and FMA.
  - Transparent arrangements exist for appointment and removal of the RBNZ Governor and members of the RBNZ and FMA Boards, though reasons for dismissal need not be published.
  - Regulatory framework is clearly set out in publications; scope exists for publishing more detail on supervisory processes, approaches to use of supervisory powers, and more aggregated information on the insurance sector including distribution channels.
  - Relationship between RBNZ and government reserves supervisory decisions generally to the Bank, except appointment of a statutory manager; RBNZ works alongside Treasury and keeps Treasury informed on individual insurers.
  - FMA is protected from government intervention in supervisory decisions through its status as a Crown Entity; responsibilities of MBIE and Commerce Minister for regulatory policy are clearly defined.
  - Adequacy of resources at both agencies needs reconsideration; RBNZ resourcing appears particularly limited even given its low intensity supervisory model.
- Recommendations:
  - The RBNZ and the Treasury review their 2012 MoU with a view to clarifying and constraining the circumstances in which information on individual insurer supervisory issues are reported by the RBNZ to the Treasury, limiting exchange of information to clearly-defined cases of the Treasury’s need and avoiding a risk of increased government involvement in supervisory work; any review of the MoU could also clarify the limits of the Treasury’s involvement in development of insurance regulation.
  - The RBNZ and the FMA review their resource needs, in the light of experience of their new regimes to date and taking into account the recommendations for enhancements to their current approaches in this assessment.
  - The RBNZ and the FMA jointly review the adequacy of current and proposed new published reporting on aggregate data and trends in the insurance sector, working with industry bodies as appropriate, to ensure the availability of appropriate information for use by policy-makers and private stakeholders.

### ICP 3 — Information Exchange and Confidentiality Requirements (summary)
- RBNZ powers:
  - Wide-reaching power to obtain information under IPSA sections 121–132; may compel information from a licensed insurer, associated persons, and other persons believed to possess such information.
  - “Associated persons” includes holding companies, subsidiaries, any entity directly and indirectly having more than 50 percent voting rights, and entities that share common associated persons.
  - RBNZ may appoint a qualified person to investigate affairs of an insurer or enter and search premises to obtain information.
- Domestic and international cooperation:
  - RBNZ–FMA 2011 MoU for cooperation; operational collaboration has occurred.
  - CoFR established for regular information sharing and coordination; CoFR agenda includes work plan updates, sector risk assessments, and mitigants.
  - International sharing permissible subject to IPSA confidentiality protections; RBNZ signatory to IAIS MMoU; extensive cooperation with APRA under 2003 MoU extended to insurance in 2012.
- Assessment: Observed — twin-peak approach with cooperation arrangements in place; information exchange focused primarily with Australian authorities and supervisory colleges; formal agreement not required for sharing; sharing with other overseas authorities infrequent and generally limited to fit-and-proper enquiries.

### ICP 4 — Licensing (summary)
- Legal framework and scope (IPSA):
  - Section 7: definition of a contract of insurance (and transactions deemed not to be insurance for Act purposes).
  - Section 8: defines carrying on insurance business in New Zealand.
  - Section 12: responsibility for issuing licenses allocated to the RBNZ.
  - Section 15: requires every person who carries on insurance business in New Zealand to hold a license; makes it an offence to carry out unlicensed business.
  - Section 16: makes it an offence for a person who is not a licensed insurer to hold themselves out as being a licensed insurer.

*Source: cr17121 - Part 5 of the FMC Act. However, these issues are not relevant to the insurance sector or the ICP assessment.*

### Section 9 of IPSA allows the RBNZ to declare that a person is not carrying on insurance

### Section 9 of IPSA allows the RBNZ to declare that a person is not carrying on insurance

### Scope of exemption under section 9 of IPSA
- Section 9 allows the RBNZ to declare that a person is not carrying on insurance business under the Act where certain conditions are met, including that the person has entered into an “isolated contract of insurance,” or does so only occasionally or on a basis incidental or ancillary to a main business such that, in either case “requiring the person to obtain a license would, in the circumstances, be unduly onerous or burdensome.”
- The RBNZ considers these conditions will not easily or often be met and in practice it declined applications for declarations during the licensing round.
- Given the formulation of the licensing requirement, some overseas insurers offering insurance contracts in New Zealand may be doing so without requiring a license. There are no data on how significant such business is (it may include significant wholesale business, including reinsurance).

### Who must be licensed under section 8(1)(a) of IPSA
- Foreign insurers fall within the requirement to be licensed by the RBNZ if they:
  - have insurance contracts with New Zealand policyholders;
  - are required to be registered under the Companies Act or they are “ordinarily resident in New Zealand”; and
  - under IPSA sections 8(1)(b) and (c), they are or have been acting as an insurer in New Zealand and are liable to New Zealand policyholders.
- The RBNZ assesses foreign insurers on a case-by-case basis when considered to be writing contracts with New Zealand policyholders, taking into account factors such as:
  - whether they have a place of business, staff or infrastructure in New Zealand;
  - whether they market insurance directly to New Zealand customers.
- Crown entities subject to the Crown Entities Act 2004 are explicitly deemed not to be carrying out insurance business in New Zealand under section 8(2)(a) of IPSA (including ACC and the EQC).
- Section 11 of IPSA clarifies the Act applies to friendly societies and credit unions as if they were bodies corporate.

### Licensing process, requirements, and timing
- Licensing documentation requirements include:
  - a profile of the proposed business and corporate structure;
  - five-year business plans which includes projected New Zealand business volumes;
  - financial information and projections;
  - a copy of a fit-and-proper policy (in accordance with IPSA section 34);
  - certification that directors and “relevant officers” (defined in IPSA section 6 as the Chief Executive Officer, the Chief Financial Officer and the Appointed Actuary) are fit-and-proper persons to hold their respective positions.
- Applications are handled by the RBNZ’s insurance supervision team using a documented approval process that emphasizes identification of any gaps in application materials.
- There is no statutory decision timeframe, but the RBNZ has committed to a six-month period for deciding on applications (expressed as a final decision within six months of receiving full information on all relevant criteria) and met this standard in the licensing round that followed IPSA enactment.
- Matters under section 19 of IPSA the RBNZ must be satisfied about include:
  - The applicant’s incorporation and ownership structure, governance structure and financial strength are appropriate.
  - Its ability to maintain a minimum amount of capital set out within an applicable solvency standard.
  - Its ability to comply with proposed conditions of license (including requirements to maintain a minimum solvency margin for New Zealand incorporated insurers).
- The RBNZ’s guidance elaborates on assessment of risk management and whether the insurer is carrying on business in a prudent manner (section 22 of IPSA).
- The RBNZ has refused to issue licenses in cases discussed with the assessors.
- A register of licensed insurers is maintained on the RBNZ website as required by section 54A of IPSA; it shows the current status of the license or when the company closed (and whether it is in run-off) but does not identify branch status. Exemptions (for overseas persons or smaller insurers) are listed under a separate page on the RBNZ website.

### Licensing conditions and scope of permitted business
- Under section 21 of IPSA, the RBNZ may issue a license subject to conditions; under section 22, conditions may be imposed, modified or revoked at any time subject to notification requirements.
- Typical uses of license conditions:
  - impose generally applicable requirements above IPSA (e.g., directors annually certify to the insurer’s compliance with all regulatory requirements—a standard condition);
  - direct insurers to apply appropriate solvency standards and require notification if the insurer proposes to carry on other types of insurance not covered by the specified solvency standard;
  - require individual insurers to hold an additional capital buffer (solvency margin) above the standard (e.g., for insurers exposed to high levels of claims and Canterbury earthquake uncertainties).
- Licenses do not generally authorize specific classes of business (variable annuity business is an exception requiring explicit authorization).
- Life insurance must be undertaken in a statutory fund, but an exemption applies where gross premium from life policies is less than NZ $1.5 million.
- The RBNZ may impose a condition that a specified amount or proportion of the insurer's insurance business relates to New Zealand policyholders; it has not imposed such a condition in practice.
- Conditions of license are not shown on the RBNZ’s public register; they may be disclosed by insurers themselves.

### Branches, subsidiaries, and home jurisdiction assessment (section 19(j) and Regulation 5)
- Before granting a license to an overseas person, the RBNZ must be satisfied:
  - The law and regulatory requirements of the applicant’s home jurisdiction are at least as satisfactory as New Zealand’s law and regulatory requirements, having regard to whether they achieve the purposes of IPSA.
  - The nature and extent of prudential supervision that applies to the applicant and insurers generally in the home jurisdiction are similarly appropriate.
- Under section 19(4), the RBNZ must treat home country laws, regulatory requirements and prudential supervision as appropriate if the jurisdiction is prescribed in the Insurance Prudential Regulations, Regulation 5.
- Prescribed jurisdictions currently are: Australia, Bermuda, France, Germany, India, Japan, the Netherlands, the U.K., and the U.S. states of Delaware, Illinois, and Indiana.
- Decisions on inclusion of a jurisdiction emphasize whether solvency requirements are accepted as equivalent to New Zealand’s. The RBNZ’s 2013 guidance states it makes an overall assessment rather than detailed matching of each law and regulatory matter in section 19.
- Insurers operating as branches may be granted waivers from certain requirements, including the RBNZ’s solvency standards (section 59 of IPSA). In practice:
  - all overseas non-life insurers and Australian life insurers have been granted such an exemption and are listed on the RBNZ website.
- The RBNZ consults with overseas supervisors for branches and subsidiaries, covering issues such as adequacy of capital and parental capacity to provide financial support.
- For overseas insurers seeking to conduct cross-border insurance without physical presence, the RBNZ considers whether the business falls within the scope of section 8’s definition and takes into account the insurer’s legal advice, internal legal advice, and consultation with home supervisors as appropriate.

### Assessment and recommendations
- Assessment: Largely Observed.
- Comments:
  - Licensing requirements in IPSA are clear and comprehensive, with detailed RBNZ guidance drawing on licensing experience when IPSA came into effect.
  - A number of applications were rejected, exited, withdrawn, or deterred as the RBNZ’s approach developed.
  - Legislation gives the RBNZ discretion to determine scope of licensing, particularly for overseas insurers, and the policy approach has been accommodating to foreign companies.
  - The RBNZ has licensed insurers with particularly high levels of business overseas, posing challenges to effective supervision.
- It is recommended that the RBNZ:
  - Review the approach to licensing of overseas insurers to ensure an appropriate balance between attracting foreign involvement and applying a rigorous test of the equivalence (and readiness to cooperate in practice) of foreign jurisdictions.
  - Review the requirement in IPSA section 19(4) to treat home country regulation and supervision as appropriate if the jurisdiction is prescribed in the regulations and/or the list of jurisdictions in the current regulation.
  - Review, with other authorities and the industry, the extent and risks of insurance cover provided to consumers from abroad and whether any change is required in the scope of the licensing requirement or any other changes in regulation.
  - Develop a policy for the use of IPSA powers to restrict the amount or share of total business which insurers may write outside New Zealand.

*International Monetary Fund — cr17121, “Section 9 of IPSA allows the RBNZ to declare that a person is not carrying on insurance”*

### Section 26(2) of IPSA requires the RBNZ to be notified before a change in control of an

### cr17121 - Section 26(2) of IPSA requires the RBNZ to be notified before a change in control of an

### Changes of control — legal requirements and practice
- Section 26(2) of IPSA requires the RBNZ to be notified before a change in control of an insurer can take place (and where a person would become a holding entity of the insurer).
- Section 27 requires the RBNZ to be notified before an insurer’s corporate form is changed (for example, a change of a mutual company to a stock company or vice versa).
- Section 28 requires the RBNZ to be satisfied that all the requirements of licensing are able to be met following a proposed change in control.
- The RBNZ has received and considered a number of changes of control since IPSA came into effect and uses internal guidelines to elaborate supervisory processes for handling changes of control.
- The legislation does not require RBNZ approval of the proposed controller or the transaction itself; the assessment criteria for the proposed change of control are the same as for a new license (ICP 4).

### Definition of control and scope
- ‘Control’ is defined in section 26(4) of IPSA as:
  - ‘a person who has the power, directly or indirectly, to exercise, or control the exercise of, 50 percent or more of the voting rights of the insurer; or has, together with one or more specified persons, the power, directly or indirectly, to exercise, or control the exercise of, 50 percent or more of the voting rights in the insurer.’
- IPSA does not define control in terms of powers to appoint or remove directors or volume of shares held regardless of voting rights.
- Control includes both direct and indirect power to exercise or control the exercise of 50 percent or more of the voting rights.
- Sections 26 to 28 apply to an acquisition or change of control where the intermediate or ultimate beneficial owner is outside New Zealand (or the home jurisdiction of a branch); details must be submitted on notification.
- The RBNZ requests insurers to provide a list of other regulatory approvals that must be obtained in relation to the change of control, and contact details for regulators; it coordinates, as necessary, with those supervisors.

### Notification, timelines, and thresholds
- There is no requirement for the RBNZ to be notified or to assess changes in ownership that fall short of a change in control as defined in IPSA.
- The RBNZ may take a view on changes in significant owners (those with significant interests but which fall below the 50 percent threshold for control), but is under no obligation to do so and there are no requirements on how to make its assessment.
- After receiving a change of control notice, including all of the information required, the RBNZ has 20 working days to give written notice of the decision together with a statement of reasons.
- IPSA does not require the RBNZ to be notified if there is a significant decrease below the 50 percent level of control.

### Portfolio transfers — approval process and criteria
- IPSA section 44(1) requires a licensed insurer to obtain the written approval of the RBNZ for a transaction that involves the transfer of all or part of the insurer’s insurance business to another person (for an overseas insurer, this applies to transfers of all or part of the New Zealand insurance business only). Transfers of reinsurance business are covered.
- Section 48 requires the RBNZ to consider, before approving or refusing approval of the transaction:
  - The ability of the transferee to comply with the ongoing prudential requirements on insurers under IPSA, including the statutory funds requirements for life business.
  - The interests of the policyholders of the insurers that are parties to the proposed transfer or amalgamation.
  - Any other matter the Bank considers relevant.
- Key parts of the RBNZ process include:
  - The actuarial review: under section 46, the RBNZ may arrange for an independent actuary (or any other suitably qualified person) to report on a proposed transfer; in practice, independent actuarial reports are required and must include consideration of the impact on policyholder interests.
  - Consultation with policyholders: the RBNZ requires applicants to consult with policyholders as part of the transfer process and that the notification period be a minimum of three weeks.
  - RBNZ assessment of the impact on policyholders: draws on a summary of policyholders’ views on the proposed transfer.
- The RBNZ has 20 working days to make a decision after it has received all required information and the independent actuary report (or any other required report).
- The RBNZ may give approval unconditionally or subject to conditions (which may relate to section 20 requirements on carrying on business in a prudent manner).
- The RBNZ has considered many applications for transfers and has not had to reject any as yet.

### Observations and supervisory assessment
- Assessment: Partly Observed.
- Comments:
  - The legislation requires notification of changes in control and proposed portfolio transfers to the RBNZ, which must either assess whether the insurer would continue to satisfy licensing requirements in case of the change of control, or must approve the transaction in the case of a transfer.
  - The threshold for the definition of control in IPSA is high relative to prevailing international practices, which define control more broadly or focus approval requirements on significant owners rather than just majority shareholders.
  - RBNZ seeks to limit notification and evaluation to the most significant (and high risk) transactions given high participation of foreign insurers and the role of the home supervisor, but this approach exposes RBNZ to the risk that detrimental changes in significant owners occur without its knowledge.
  - The RBNZ has received a large number of applications for approval of transfers under IPSA, reflecting consolidation in the insurance sector.
  - Although policyholder protection is not an objective of the RBNZ under IPSA, decisions on portfolio transfers are primarily based on assessment of the impact on policyholders, drawing on actuarial input.

### Recommendations (changes to legislative and supervisory approach)
- IPSA be amended to extend the requirements on changes in control to require notification of shareholder changes which involve a lower level of ownership (shares or voting rights) or which otherwise carry with them the right to appoint one or more directors.
- An approval process (rather than a re-evaluation of licensing requirements) also be considered, as well as powers to disenfranchise unsuitable shareholders, if consistent with the general New Zealand law framework.
- The RBNZ develop a risk-based approach to carrying out assessments, enabling it to undertake, for example, a reduced level of work where a home supervisor is involved, consistent with its general approach to overseas insurers.

### Corporate governance, fit-and-proper, and governance guidance
- Section 19 of IPSA specifies that RBNZ should take into account ownership structure, ownership, governance structure, and financial strength in assessing an insurance license application.
- Section 21 allows the RBNZ to issue license conditions relating to the insurer’s ability to carry on business in a prudent manner.
- Section 20 restricts RBNZ consideration of “prudent management” to:
  - Financial and human resources in relation to the size and nature of the business.
  - Internal controls.
  - The size and type of insurance risk carried.
  - Reinsurance arrangements.
  - Non-insurance activities and their impact on solvency.
  - Nature and extent of related party transactions.
- License conditions require directors to provide an annual certification to the RBNZ covering compliance systems, accuracy and completeness of financial information and solvency returns, and accuracy of information provided to the actuary and auditor.
- Fit-and-proper:
  - IPSA requires an insurer to have an internal fit-and-proper policy for directors and “relevant officers” (CEO, CFO, Appointed Actuary).
  - Section 37 requires a fit-and-proper certification for new directors and relevant officers within 20 working days of appointment.
  - Section 6 of the Insurance (Prudential Supervision) Regulations requires reassessment at least once every three years.
  - Section 39 gives the RBNZ power to remove directors and relevant officers if no longer fit-and-proper.
  - RBNZ issued Fit-and-Proper Standards in 2011 under section 36 to clarify expected content; material changes to internal policies are subject to RBNZ approval.
- Risk management:
  - Section 73 requires each insurer to have a written risk management program, appropriate to nature of operation and regularly reviewed, specifying procedures to address insurance risk, credit risk, liquidity risk, market risk, operational risk, and any other risks specified in regulations.

### RBNZ Guidelines and thematic review findings
- Governance Guidelines (2011) expectations include:
  - Governance structure: effective oversight, separation from ownership, access to information.
  - Board composition: sufficient size (minimum two) and skillset, transparent nomination and appointment methods, policy on resolving conflict of interest.
  - Independence: at least half of the board should be independent and the chairman should be independent.
  - Qualifications and experience: board should collectively have full range of skills, knowledge, and experience.
  - Board committees: a separate audit committee with majority independent directors; other committees depending on size and type of business.
- Risk Management Program Guidelines (2010) clarify interpretation of section 73 and provide indicative examples (documentation, roles and responsibilities, information flows, contingency plans, etc.). RBNZ expects insurers to review risk management programs regularly.
- RBNZ expects board responsibilities relating to risk management to include:
  - The solvency, capital adequacy and liquidity of the insurer.
  - Establishing and communicating risk tolerances.
  - Approving reporting requirements, policies, procedures and controls.
  - Monitoring risk exposures and compliance.
  - Managing conflicts of interest and ensuring related party transactions are on arm’s length terms.
- The RBNZ conducted a thematic review of the quality of risk governance in 17 insurers in 2014; a report was published in February 2015.
  - Methodology: desk-based review of documented framework plus two interviews (CEO/relevant executives and chair of board risk committee).
  - Out of seven aspects reviewed, areas in which at least three insurers were assessed weak include: incentives, independent assessment of risk frameworks, communication and challenge, and risk management function.
  - RBNZ comment: “Whilst we are encouraged by the overall quality of risk governance and there are some examples of reasonably strong risk governance in place, we also came across examples of weak risk governance combined with a lack of awareness of weaknesses.”

### Gaps and further recommendations on governance and supervision
- Assessment: Partly Observed.
- Comments:
  - Effectiveness of governance is central to RBNZ’s supervisory emphasis on self-discipline; ensuring governance frameworks are appropriate and effective should be ongoing beyond initial licensing.
  - Current framework is less comprehensive and binding compared to the ICP. The 2014 thematic review underscores the need for clearer and more comprehensive RBNZ articulation of expectations.
  - There are no expressed expectations on governance relating to parents of branches operating in New Zealand.
- Recommended actions:
  - RBNZ use the FMA Corporate Governance Principles as a baseline and strengthen or introduce higher standards where appropriate (example: raise independent directors requirement to one-half, as already in Governance Guidelines).
  - Adopt a two-tiered approach: legally binding regulations for key governance requirements and non-binding guidelines for others (noting additional legal power may be required).
  - Design an ongoing monitoring strategy to assess ongoing effective self-discipline, incorporating in-depth understanding of each insurer’s governance into ongoing supervision and periodic thematic reviews on a selective basis.

*NEW ZEALAND — INTERNATIONAL MONETARY FUND*

### Section 73 of IPSA requires insurers to establish a risk management framework that is

### Section 73 of IPSA requires insurers to establish a risk management framework that is

### Risk management framework requirements (Section 73)
- Insurers must establish a risk management framework appropriate to the nature and scale of their operations.
- The framework should address all material risks, including the specified risks listed in the legislation: insurance, credit, liquidity, market, operational, and any other risks prescribed by regulation.
- The RBNZ is required to consider an insurer’s internal controls in assessing its ability to carry on business in a prudent manner at the licensing stage.
- The RBNZ expects a risk management program to cover all activities that expose the insurer to threats to its financial security.
- The “Risk Management Programme Guidelines” include an indicative list of elements and expectations:
  - A documented risk management program.
  - Comprehensive enough to capture all material risks to which the licensed insurer is exposed.
  - The roles and responsibilities for people who accept risk and manage risk.
  - Information flows between operational staff and senior management.
  - A system exists to address any exceptions, or observed instances of non-compliance.
  - Contingency plans.
  - A process for reviewing risk management systems, policies and procedures on an ongoing basis.
  - The Risk Management Programme is linked to the solvency policy which includes its policy on the amount of capital required to provide a buffer against losses arising from unanticipated events.
- Subsequent to assessment at licensing stage, the RBNZ’s ongoing monitoring to date has been limited to ensuring that the insurer’s risk management framework on file is current, and one thematic review of risk management functions of 17 insurers in 2014.

### Internal controls (interpretation of section 20)
- The RBNZ’s guidelines clarify that “internal controls” refers to operationalized risk management embedded in day-to-day business practice.
- Internal controls are concerned with preventing errors, ensuring legal compliance, and generally controlling quality.
- Issues that may be considered include:
  - Management of information.
  - Security of information systems, data storage (soft and hard copy), security of premises and the protection of functionality of information technology.
  - Access to confidential information, storage of client data, transport of data, and destruction methods used for confidential data.
  - Internal audit procedures and assessment of policy against practice.
  - Financial system controls including appropriate accounts reconciliation and auditing.
  - Expense management.

### Actuarial function (Section 76 and solvency standards)
- IPSA section 76 requires every insurer to have an Appointed Actuary who must be either a Fellow of the NZSA or holding an equivalent professional qualification approved by the RBNZ.
- The Fit-and-Proper Guideline indicates that, given the Appointed Actuary’s position, the insurer should consider whether there is a risk that his independent professional judgement may be unduly influenced.
- IPSA requires the Appointed Actuary to review the actuarial information contained in, or used in the preparation of, the financial statements or group financial statements of the insurer.
- The Appointed Actuary is to provide a report to the RBNZ stating, among other things, whether:
  - The actuarial information contained in the financial statements and any group financial statements has been appropriately used and included in those statements (and if not, the respects in which it has been inappropriately included).
  - The insurer is maintaining the statutory solvency margins.
- The solvency standards require the Appointed Actuary to prepare a Financial Condition Report that, amongst other things, provides the actuary’s comment on:
  - The material risks facing an insurer that pose a threat to the ability of the insurer to maintain a solvency margin and the management of these risks.
  - Any contingent liabilities not included in the financial statements.
  - The adequacy of the Resilience Risk Capital charge, including the risks involved in assets and liabilities mismatches.
  - Assumptions used in calculating the solvency margin.
  - Sensitivity of solvency margin to various assumptions.
  - Reinsurance arrangements.

*IMF staff summary of cr17121 (Section 73 of IPSA; actuarial and internal control provisions).*

### Section 80 of IPSA specifies that the Appointed Actuary must have reasonable access to the

### Section 80 of IPSA specifies that the Appointed Actuary must have reasonable access to the

### Appointed Actuary access and duties
- Section 80 of IPSA specifies that the Appointed Actuary must have reasonable access to the accounting records and other documents of the insurer to carry out his duties.
- The Appointed Actuary’s review of the financial statements and the Appointed Actuary’s report are key inputs to supervisory assessments.

### Compliance and internal audit functions
- RBNZ expectations on control functions depend on the size and type of the insurer’s business.
- There are no requirements that insurers must have dedicated internal audit or compliance functions.
- In the absence of dedicated control functions, insurers may rely on other suitably skilled and senior internal resource and/or external expertise.
- There is no requirement on independence, authority and resources for these functions.
- There are no specific triggers for insurers to provide the RBNZ with information on the appointment, assessment or dismissal of the heads of control functions — unless they are considered to be a Relevant Officer (CEO, CFO, and Appointed Actuary) under the Act.

### Outsourcing
- The RBNZ has not established a specific policy regarding outsourced functions; outsourcing is considered within the general requirements of the risk management framework and the requirements for insurers to operate in a prudent manner.
- At licensing stage, the RBNZ assesses the use of outsourcing, outsourcing policy, and management in evaluating the applicant’s human resource adequacy.
- An applicant is required to include details of its major outsourcing providers and what activities they are employed in for the RBNZ’s assessment.
- Considerations include suitable business continuity arrangements should any outsourcing fail.
- Subsequent to licensing, there has been no ongoing RBNZ review of new, or changes in the existing, outsourcing arrangements.

### Assessment — Partly Observed (control functions and outsourcing)
- Legal requirements on risk management and internal controls are less prescriptive and legally binding than what the ICP requires.
- The risk management framework and prudent manner of operation are subject to rigorous assessment at the licensing stage.
- While the requirement for, and responsibilities of the Appointed Actuary are specified in the primary legislation and solvency standards, there are no explicit binding requirements for insurers to have other control functions (risk management, compliance, and internal audit).
- There is a lack of clear indication of insurer’s responsibility for outsourced functions.

### Recommendations (control functions and outsourcing)
- Require the establishment of dedicated risk management, compliance, and internal audit functions. To reduce the burden on smaller insurers, some of these functions may be outsourced.
- Issue an outsourcing standard, incorporating its consideration and assessment methodology used at licensing stage, and setting out the insurer’s oversight responsibility and accountability for outsourced functions.
- Incorporate an assessment of the effectiveness of the insurer’s risk management framework into its ongoing supervisory process.
- Strengthen the enforceability of its risk management requirements (see ICP 1 on the scope of the RBNZ’s powers to issue directly enforceable standards).

### ICP 9 — Supervisory Review and Reporting: powers and framework
- RBNZ’s legal authority and supervision powers are set out in Part 3 of IPSA, including:
  - Information-gathering powers under section 121 (basis for regular reporting requirements).
  - Powers to obtain information from associated persons under sections 122–123.
  - Powers to conduct audit or third party review under section 125.
  - Powers under section 126 to require a report by a person approved by the Bank.
  - Powers to carry out an investigation under section 130.
- Conditions of license have been used to collect relevant information or alter reporting.
- RBNZ outlined its risk-based approach in its July 2015 newsletter, expecting insurers with greatest significance to be subject to greater intensity of supervision.
- Internal framework (iPRESS) involves:
  - Determining insurer’s impact by market share based on the greater of gross annual premium and total assets; impact assessment is undertaken quarterly.
  - Assessing probability of failure considering inherent risks: strategic, insurance, operational, liquidity, credit and market, and investment risk; adequacy of controls.
  - Key inputs include review of financial statements and report of the Appointed Actuary, business risk profile, financial soundness, and review of risk governance and Risk Management Program.
  - Directing supervisory attention to insurers with higher probability of failure and significance to financial stability.
- A management override can move higher risk insurers into more intensive supervision.

### Framework implementation and scope
- The framework has been implemented but remains under development in parts and has not been fully applied to all insurers.
- Ranking guidelines are under development.
- At the time of assessment, 10 insurers had been subject to the full risk assessment process.
- The framework applies to all insurers, including branches of foreign companies, taking into account exemptions from RBNZ solvency standards.
- Where greater intensity is needed, a licensed insurer is assigned a designated supervisor and referred to as a designated insurer; there are 24 such companies at present.
- The remainder (of 96 in total) are supervised on a portfolio basis as ‘portfolio-managed insurers.’
- Probability assessments for designated insurers are completed at least annually (half yearly for the largest).
- For portfolio insurers, a formulaic approach incorporates reported solvency, financial strength ratings, newness of the insurer, and known distress factors.
- All supervisory issues are logged on an issues register.
- Risk ranking scores are moderated by an ‘insurance rating committee’.
- iPRESS generates supervisory action plans expected to involve some on-site activity.
- No part of the iPRESS output is communicated explicitly to insurers.

### Reporting requirements and practices
- Insurers are required to provide, within four months of the financial year end:
  - Their audited annual financial statements (where mandatory) and audit report.
  - The Appointed Actuary’s review of the financial statements.
  - A Financial Condition Report; Insurer Return (basic data) and Solvency Return (detailed information on compliance with solvency standards).
  - Annual certification in accordance with their conditions of license stating compliance with the Act, the Regulations and the Standards, any condition of license, direction, and other requirements imposed by the RBNZ.
- Interim Financial Statements and half yearly Insurer Return, Insurer Solvency Return and certification are required.
- Larger insurers (excluding specialist reinsurers) are required to report financial and exposure information on a quarterly basis.
- Insurers are required to correct and resubmit returns where errors have been identified, but at present only for the regular data returns and not for solvency returns, Financial Condition Reports (FCR), or financial statements.
- Ad hoc reporting may be required or frequency increased (example: monthly solvency update for one company in relation to Canterbury earthquake exposures).
- Reporting is based on legal entities; insurers subject to solvency standards on insurer and subsidiaries must also report solvency on that basis.
- Overseas Insurers exempt from solvency standards must submit reports provided to the home regulator and an FCR under the exemption notice.

### Reporting gaps and assurance
- There is limited reporting of off-balance sheet exposures.
- Insurers are not explicitly required to report material outsourced functions and activities or significant changes to corporate governance.
- Insurers must seek approval of changes in fit-and-proper policy (section 34 of IPSA) and risk management program (section 73); RBNZ approval is required before either is amended in a material way.
- RBNZ requires the annual Solvency Return to be audited and provided guidance (September 2012) on the level of assurance required:
  - Directors must obtain either a reasonable or limited assurance engagement on whether the Solvency Return has been prepared in accordance with the relevant Solvency Standards.
  - Directors can, but are not required to, obtain an assurance engagement on the Catastrophe Risk Capital Charge component and on the projected solvency position within the return.

### Off-site monitoring, actuaries, and on-site supervision
- Off-site monitoring validates baseline compliance annually or more often depending on designated or portfolio status; outcomes are recorded centrally.
- An automated system to manage supervision activity, including baseline compliance monitoring, was under development and expected to be rolled out during 2016.
- Off-site activities include responding to approval requests for changes in insurers’ fit-and-proper policy and risk management program.
- The RBNZ’s actuaries provide specialist technical advice and support; there are two actuaries in the supervisory team.
- A key role for the actuary is reviewing the Appointed Actuary’s report and the FCR.
- On-site supervision typically involves Prudential Consultation Meetings (PCMs) with designated insurers and thematic reviews; PCMs are annual meetings with senior managers and directors and relevant officers (CEO, CFO, Appointed Actuary).
- The RBNZ has undertaken thematic reviews (e.g., risk governance review involving 17 insurers) with interviews conducted at insurer premises.
- Follow-up to PCMs includes a letter to senior management on main issues; findings from thematic reviews were communicated to participant insurers and summary findings published on the RBNZ’s website.
- Supervisors monitor follow-up actions via the Compliance Risk Register and risk assessment process; there is regular review of outstanding issues.

### Limits of on-site work and use of external assessments
- The RBNZ has used powers to obtain independent assessments from external parties approved by the Bank (e.g., independent actuarial assessment) and has used section 130 (investigations) for full assessments; it has not carried out in-depth on-site supervisory work itself.

### Assessment — Partly Observed (supervisory review and reporting)
- RBNZ has full supervisory powers and a developing set of tools governed by a supervisory framework taking a structured approach to assessing risk and allocating resources.
- The regime is new and the supervisory framework is still evolving while being implemented.
- Baseline monitoring appears thorough; supervisors leverage limited resources for thematic work.
- Routine supervisory engagement with insurers, even the largest, is focused mainly on reporting, regulatory transactions, and the annual senior management meeting.
- RBNZ does not routinely carry out detailed on-site assessment of governance or controls for risk assessment or remediation purposes; limited supervisory resources constrain risk identification and response across the insurer population.
- Reporting requirements were introduced recently and phased in; there have been issues with completeness and accuracy of insurer reporting.
- Requirements lack granularity on investments, off-balance sheet exposures and reporting of material outsourcing.

### Recommendations (supervisory review and reporting)
- Complete implementation of the current supervisory framework, elaborating supervisory strategies and action plans; use these to communicate, in writing and at supervisory meetings, RBNZ’s assessment of individual insurers and key expected management actions; consider disclosing appropriate parts of the risk assessment to insurers.
- Review approach to supervisory tools to identify where increased on-site supervisory work will most benefit risk assessment or remediation (for example, assessing effectiveness of governance and controls), and start carrying out such work in practice.
- Develop reporting requirements over time to capture more information not in financial statements or current reporting, including investments and off-balance sheet business; enforce compliance with accuracy and timelines of reporting by all insurers.
- Review need for increased supervisory resources to implement the supervisory approach and recommended enhancements.

### ICP 10 — Preventive and Corrective Measures (overview)
- IPSA requires every person who carries on insurance business in New Zealand to hold a license and makes it an offence for an unlicensed person to hold itself out to be a licensed insurer.
- RBNZ may initiate court proceedings at its discretion.

### Corrective powers and escalation
- RBNZ may intervene using:
  - its authority to persuade insurers to take corrective action;
  - power to impose a condition of license;
  - powers in Part 3 of IPSA to require information or carry out an investigation;
  - powers in Part 4 on distress management, including recovery plans (subpart 1) and directions (subpart 2).
- RBNZ’s overall supervisory objective:
  - For designated insurers: enable early identification and resolution of prudential issues.
  - For portfolio-managed insurers: understand sector risks and supervise more reactively with enforcement where there is non-compliance.
- Internal processes record compliance issues centrally in the Compliance Issues Register (CIR), assess severity and consider action, including referral to investigations and enforcement or initiating a supervisory response.
- Expedited decision-taking is provided for in RBNZ’s internal processes, including through delegation.
- A key tool used is imposition of a condition on license under section 21 of IPSA as a response to supervisory concerns or breaches; conditions may relate to ‘carrying on business in a prudent manner’ and any other matters prescribed under section 20(2)(g).
- An insurer’s solvency margin requirement may be varied under the Act.

*Source: IMF country report text provided in the content unit.*

### section 21 to require additional solvency cover.

### section 21 to require additional solvency cover.

### Escalation tools and use
- The RBNZ has implemented additional solvency margin requirements in respect of some insurers exposed to risks related to Canterbury earthquake claims.
- The RBNZ does not have a formal, prescribed ladder of intervention, but seeks to escalate actions:
  - It typically starts with a management letter from the Bank to the insurer outlining the issues and its expectations on remediation, typically signed by either the Head of Prudential Supervision or the Senior Manager Supervision.
  - Where concerns remain, it may use the Part 3 information-gathering powers to validate its concerns; and raise the insurers’ awareness of the issues. The powers are exercisable where an insurer has failed or is likely to fail to maintain a solvency margin, is not carrying on business in a prudent manner, is operating fraudulently or recklessly or has failed to comply with any direction, condition, or other requirement imposed by or under IPSA or the regulations (section 126).
  - It may then impose conditions of license under section 21 to achieve the outcome it requires.
- These tools have all been used by the RBNZ on several occasions since IPSA took effect.

### Recovery plans (Part 4)
- Under Part 4, the RBNZ may require an insurer to prepare a recovery plan where, under section 138, it has reasonable grounds to believe the insurer has failed or is failing or is likely to fail to maintain a solvency margin or its business is not being conducted in a prudent manner or the insurer has failed or is failing to comply with any direction, condition, or other requirement.
- The RBNZ must approve the recovery plan and any amendments (sections 139 and 141).
- It is an offence not to comply with requirements set out in a recovery plan.
- IPSA provisions require the plan sets out an appropriate timetable but do not specify a range for what "appropriate" means.
- Plans may be prepared with the assistance of a person specified by the Bank.
- The RBNZ has not yet had cause to use this power.
- Commentary:
  - Recovery plans require RBNZ approval and may only be amended with the consent of the Bank (sections 139 and 141).
  - Supervisors would need to ensure tight deadlines for delivery and timely implementation of commitments to restore the insurer to a satisfactory financial condition.
  - The power to require a recovery plan is clearly triggered by failure to meet minimum solvency requirements, but may also be used when an insurer is likely to fail to meet (but is still exceeding) the minimum.

### Directions (sections 143–147, 144(2))
- The RBNZ may give directions to an insurer based on similar grounds to those used to require a recovery plan and, in addition, where changes in the insurer’s governance and, for overseas insurers, whether the home supervisor has taken regulatory action or changed its supervision.
- The RBNZ has used this power on one occasion by requiring an insurer to provide projected solvency calculations because it was concerned about a likely breach of solvency requirements.
- A direction may require a licensed insurer to:
  - Consult with the RBNZ about the circumstances of the insurer and the actions or proposed actions of the insurer in respect of resolving any difficulties facing the insurer.
  - Cease entering into any new contracts of insurance.
  - Carry on its business, or any part of its business, in accordance with the direction.
  - Cease to carry on its business, or any part of its business, in accordance with the direction.
  - Take the action that is specified in the direction to address a failure, or potential failure, to comply with any direction, condition, or other requirement imposed by or under the Act or the regulations.
  - Ensure that any officer or employee of the insurer ceases to take part in the management or conduct of its business except with the permission of the RBNZ and so far as that permission extends.
  - Take the action that is specified in the direction to address any circumstances of financial difficulties.
- A direction must not require the licensed insurer to cease to enter into contracts of insurance by way of renewal of contracts originally entered into before the direction was given (section 144(2)).
- The RBNZ may give an associated person of a licensed insurer a written direction if it has reasonable grounds to believe the circumstances of the associated person are such as to be prejudicial to the solvency of the insurer or its ability to comply with the Act or the regulations (section 145).
- The RBNZ may amend, modify, replace, or revoke a direction (section 147(2)).

### Communication, monitoring, and follow-up
- Progress with implementing corrective measures is monitored through supervision directed at holding the insurer’s management or board to account for resolving the issue.
- Supervisors may require copies of reporting by management to the board that evidences board taking action to address the issue of concern.
- Compliance issues are communicated to the supervisor’s primary contact at the insurer; RBNZ senior management may be involved as necessary.
- For designated insurers, the PCM (see ICP 9) provides an opportunity to discuss issues with management and board, if required.
- Material or repeated compliance issues are typically escalated to management first and then to the board.
- Assessment: Largely Observed.
- Comment: The legislative framework and RBNZ internal procedures provide for escalation from supervisory action through to imposing enforceable requirements, including directions, according to severity. There is no requirement for publication of any of these corrective actions.

### Enforcement powers and internal processes (ICP 11)
- The legislation provides enforcement responses including:
  - Requiring reports and recovery plans.
  - Giving directions covering a wide range of matters.
  - Removing directors, CEOs, CFOs, auditors or actuaries.
  - Prosecutions for violations of requirements in the Act or regulations.
  - Applying for liquidation of an insurer.
  - Recommending an insurer be placed in statutory management.
- IPSA powers used for corrective action may also be used for enforcement, including imposing conditions of license (section 21) and issuing directions (sections 143 and 145).
- Imposing conditions of license is done by notice with an opportunity for the insurer to make submissions to the RBNZ; other measures do not require prior notice once the Bank is satisfied there are reasonable grounds.
- In deciding to exercise enforcement powers, the RBNZ must take into account the principles of IPSA (section 4), including:
  - Protecting the interests of policyholders and the public interest and ensuring failure does not significantly damage the financial system or the economy of New Zealand.
  - Desirability of consistency of treatment of similar institutions (section 4(c) and (f)).
- Publication of enforcement measures is not required.
- The RBNZ is developing an enforcement strategy, for publication, including guidance to insurers on the approach they can expect.
- Internal process: The Compliance Issues Register (CIR) tracks instances of non-compliance and resolution status. Supervisors must assess likely breaches against criteria for referral to the investigations and enforcement team, including whether an issue is material, discrete or potentially systemic; whether there is an emerging pattern of non-compliance; whether the issue could undermine public confidence.
- Since IPSA came fully into force, there have been no formal referrals to the investigations and enforcement team of insurers.

### Enforcement against individuals and sanctions
- The RBNZ may require an insurer to ensure any officer or employee ceases to take part in management except with the RBNZ’s permission (section 144(1)(f)) and may remove, replace, or appoint directors, auditors or actuaries (section 149).
- The RBNZ may remove directors and relevant officers not fit-and-proper (section 39). Sections 149 and 39 do not apply to directors of overseas insurers, though other enforcement powers apply as relevant.
- Under section 222, the RBNZ may apply to the court for an order banning a person from participating in insurance business, including banning a person from being a director, employee or shareholder.
- IPSA specifies offences with court-imposed penalties (maximum fine is NZD 1,000,000) including failure to comply with:
  - conditions of license (section 23);
  - reporting and disclosure requirements of solvency standards (section 57);
  - risk management requirements (section 75);
  - statutory fund requirements of life insurers (section 118);
  - recovery plan requirements (section 142).
- These are court-based sanctions; the RBNZ has discretion to initiate prosecutions. No statutory barriers prevent the RBNZ from taking preventative and corrective measures while pursuing sanctions.
- Assessment: Largely Observed.
- Comment: Legislation sets out enforcement tools and sanctions against individuals and insurers. RBNZ internal procedures record and manage breaches to resolution. Powers are largely untested given the newness of the regime; more severe interventions following the Canterbury earthquakes used powers predating full IPSA implementation.
- Recommendation bullets (as stated in the source):
  - in the context its review of IPSA and the development of its enforcement strategy, the RBNZ assess:
    - Whether to seek additional enforcement powers such as infringement notices, administrative fines or enforceable undertakings.
    - The merits, and appropriateness in the wider New Zealand context, of taking powers to restrict or suspend dividend or other payments to shareholders and to mandate portfolio transfers, to the extent these are not clearly covered by the power of direction.
    - It should review the significant limitation on the power to require licensed insurers to cease to enter new business in section 144(2).

### Winding-up and Exit from the Market (ICP 12)
- The legislation defines a range of options for exit and establishes criteria and procedures for dealing with insolvency of insurance legal entities, prioritizing protection of policyholders and minimizing disruption to benefits.
- RBNZ powers under Part 4 (sections 138 to 199) include:
  - Requiring a recovery plan under section 138 where there are reasonable grounds for concern over solvency or regulatory compliance; the recovery plan must be in writing, set out timetable and specific actions, and is subject to RBNZ approval.
  - Giving written directions under section 143 to an insurer and/or associated persons for concerns over solvency, regulatory compliance, governance, or foreign supervisory actions. Such directions may require consultation, cessation of new contracts, carrying on or ceasing business, specified actions to address compliance failures, removal of officers from management without RBNZ permission, or actions to address financial difficulties.
  - Power to remove, replace or appoint directors, auditor or actuary; but for an overseas branch RBNZ does not have the power to remove its directors (section 149).
  - Applying for liquidation of insurers (section 151) in accordance with the Companies Act and applying to the High Court to appoint a liquidator; the High Court may reduce policy values if assets are insufficient.
  - Applying for appointment of an administrator under the Companies Act (section 153).
  - Approving voluntary liquidation or appointment of administrator by an insurer (section 154).
  - Approving any transfers or amalgamation of insurance business (section 44).
  - Recommending statutory management to the Minister (section 170) where RBNZ reasonably believes:
    - the failure of the insurer may cause significant damage to the financial system or the economy of New Zealand; or
    - the insurer is or may be operating fraudulently or recklessly and statutory management may limit or prevent further deterioration of financial affairs or effects of fraudulent activity (section 173(1)).
  - The RBNZ must also be satisfied those objectives cannot be adequately secured in some other way (section 173(2)).

*IMF staff summary based on the provided section of cr17121 - section 21 to require additional solvency cover.*

### Section 173(2) restricts RBNZ to use this option as a last resort.

### Section 173(2) restricts RBNZ to use this option as a last resort.

### Statutory management, overseas branches, and scope
- If the insurer subject to statutory management is an overseas branch, the requirements apply to the property, rights, assets, and liabilities relating to its New Zealand business (section 171).
- Branches are not required to hold assets in New Zealand.

### RBNZ power to reduce insurance amounts in insolvency (bail-in parallel)
- RBNZ may apply to the High Court to reduce the amount of insurance in insolvency (parallel to bail-in), permitting recapitalization or sale of an insolvent insurer by reducing the value of its liabilities.
- This power could be used if the Minister did not consent to appointment of a statutory manager.

### Cancellation of license (section 30)
- RBNZ may cancel an insurance license provided the insurer no longer has any policy liabilities in respect of its New Zealand business.
- Circumstances for cancellation include: cessation of insurance business, breach of licensing conditions, removal from the company register, deregistration from the Financial Service Providers Act, liquidation, winding-up or dissolution.
- RBNZ must give notice of reasons for cancellation to the insurer at least 20 working days before the effective date of the cancellation.
- After license cancellation, RBNZ must give public notice of the cancellation.

### Policyholder protection: legal framework and gaps
- Guiding principle: IPSA section 4 requires RBNZ in dealing with an insurer in financial distress to adequately protect interests of policyholders and the public interest and ensure insurer failure does not cause significant damage to the financial system and economy [section 4(c) of IPSA].
- RBNZ must consider policyholders’ interests when approving portfolio transfers or amalgamation (section 48 of IPSA).

Specific measures and arrangements
- Life insurers must maintain at least one statutory fund in respect of life insurance business (section 82 of IPSA), unless exempted by the Governor-General.
- In practice, all Australian branches are exempted on the basis that Australia has an equivalent statutory fund requirement and that New Zealand policyholders in the Australian statutory fund have the status as Australian policyholders.
- In liquidation or winding up of a life insurer, assets of a statutory fund must first be applied to liquidation expenses and fees, after which policyholders have priority claim before general creditors.
- If assets are insufficient to discharge all policy liabilities of the life insurance statutory fund, the High Court will direct how remaining assets (if any) are to be applied.
- There is no statutory fund requirement for non-life insurers; non-life policyholders are treated as other creditors.
- There is no policyholder compensation scheme.

Assessment and observed practices
- Assessment: Largely Observed.
- The RBNZ has a range of options for voluntary and involuntary liquidation and chooses based on circumstances (examples: run-off pending arbitration after Canterbury earthquakes; allowance of voluntary liquidation in another case).
- While policyholder protection is a principle of IPSA, the only specific protective measure is priority of claim for life policyholders.
- There is no intention of establishing a policyholder protection scheme.
- The largest life insurer in New Zealand by assets is an Australian branch: subject to home jurisdiction’s solvency standard and statutory fund requirements; not required to hold assets in New Zealand; winding-up process and New Zealand policyholders’ rights are not within RBNZ’s control.

Recommendations to achieve IPSA’s policyholder protection principle
- Extend the statutory fund requirement to non-life insurance.
- Remove the exemption from statutory life fund requirement granted to Australian branches.
- Provide a general priority of claim for all policyholders in IPSA in the absence of a statutory fund.

### ICP 13 — Reinsurance and other forms of risk transfer (description and findings)
- IPSA section 20: reinsurance arrangements are one aspect of prudent management required.
- RBNZ guidelines on prudent management indicate a reinsurance program should include:
  - Establishment and management of a robust and sustainable reinsurance strategy.
  - Consideration of selection process and ongoing management of reinsurers, including relevant experience, expertise and counterparty security.
  - Compatibility of reinsurance arrangements with risk management program and business plans.
  - Ongoing operational management of reinsurance treaties.
- Reinsurance between a life insurer’s statutory funds is not permitted (section 95 of IPSA).
- Financial Condition Report (FCR) must consider reinsurance arrangements and material risks in accordance with NZSA professional guidelines.
- Solvency standards require life insurers to include a reinsurance statement in the FCR listing all reinsurance contracts and contractual details from 1 January 2015.
- No requirement for transparency in reinsurance arrangements to allow supervisor to understand economic impact of reinsurance (ICP 13.2).
- No direct requirements for insurers to finalize reinsurance contracts in a timely manner; solvency capital credit rules indirectly encourage contract finality.
- RBNZ does not assess insurer liquidity monitoring, relying on Appointed Actuaries to highlight potential liquidity issues in the FCR.
- No prohibition against risk transfer to capital markets; no such activities identified.

Assessment and recommendations
- Assessment: Partly Observed.
- RBNZ recognizes reinsurance importance given catastrophe risk, but regime lacks specific requirements on standards of reinsurance arrangements and places responsibility on Appointed Actuary.
- Recommended actions:
  - Amend prudent management guidelines to include timely finalization of reinsurance contracts.
  - Require insurers to have a board-approved reinsurance strategy as part of risk and capital management strategy.
  - Include a reinsurance statement in the FCR for both life and non-life insurers.
  - RBNZ should review reinsurance statements to form its own view on compatibility with insurer’s reinsurance strategy.

### ICP 14 — Valuation (assets and liabilities)
- Overseas insurers exempted from New Zealand solvency standards must follow home jurisdiction requirements for regulatory capital purposes.

Assets
- Assets backing insurance liabilities required to be measured on a fair value or similar basis.
- Assets not backing insurance business may be valued using alternative methods allowed under NZ IFRS (e.g., historic cost with amortization).
- Many insurers designate all assets as supporting insurance business and use fair value measurement for all assets.
- Assets not carried at fair value are subject to impairment testing; fair value relative to carrying value must be disclosed.
- For regulatory solvency purposes, certain assets are ascribed as having no value.

Liabilities
- NZ IFRS requires insurance technical provisions to be valued on a current net present value basis, taking into account all future projected cash flows.
- Solvency Standards require liability calculation consistent with NZSA professional standard.
- Life insurance professional standard: “in valuing any options the Appointed Actuary should have regard to materiality, given the expected take up rates and analysis of the entity’s own experience.” (Professional Standard 20, para 9.7.4).
- Non-life insurers: liabilities valued on central estimate basis (including claims handling expenses) plus explicit risk margin; for solvency purposes risk margin set at a 75 percent probability of sufficiency.
- Life insurers: policy liabilities measured as best estimate liability plus present value of future profit margins; value of future profit margins set to eliminate profits emerging at point of sale and used as a prudent margin over best estimate.
- For solvency purposes, life policy liabilities use prescribed prudential margins above best estimate assumptions, including:
  - use of risk free rate as discount rate,
  - 110 percent of best estimate mortality rates,
  - 90 percent of annuitant mortality rates with 2 percent additional annual improvement rates,
  - 120 percent of permanent disability rates,
  - 150 percent of disability income rates,
  - 40 percent adverse experience in lapse rates.
- Exceptions to discounted present values may apply for short term contracts (majority of non-life provisions) or where alternative methodology is not materially different.

Discount rate
- Where liability value not materially impacted by discounting (typically claims expected to be settled within one year), discounting not required.
- For contracts where contractual benefits do not depend on asset performance, discount rates are risk free and based on current observable, objective rates related to nature, structure and term of future obligation/cash flows.
- For contracts dependent on asset performance (e.g., investment-linked), market returns on assets backing liabilities are to be used.
- Although government bond yields indicated as potential starting point for determining risk free rates, there is no prescribed mechanism within accounting framework, RBNZ solvency standards, or actuarial standards to determine risk free rates from market observed government bond or swap rates, nor on method for durations beyond observable market rates.

Assessment and recommendation
- Assessment: Largely Observed.
- LO rating due to lack of guidance on choice of discount rates for long maturity businesses.
- Recommended that RBNZ work with NZSA to establish a methodology for selecting discount rates (example: Treasury’s table of discount rates for 50 years applicable to Government reporting entities).

### ICP 15 — Investment (governance, limits, actuary role, complex instruments)
Investment governance and expectations
- “Risk Management Programme Guidelines” expect insurers to have documented and monitored investment strategy covering risk tolerance, investment needs and agreed investment strategy (para 36(b)).
- Guidelines expect board responsibility for establishing and communicating risk tolerances (para 20(b)).
- Guidelines silent on asset-liability management and investment process such as strategic and tactical asset allocations.

Investment limits and statutory fund restrictions
- Companies Act: a subsidiary generally cannot hold shares in its holding company or maintain voting right in respect of cross-held shares (Section 82 of Companies Act).
- RBNZ generally does not impose investment limits, instead discouraging risky investments via higher capital charges.
- Life insurer statutory fund investment restrictions under regulations include:
  - Prohibition against a statutory fund’s assets being mortgaged or charged except to obtain a bank overdraft for the business of the statutory fund [s 94(3)].
  - Prohibition against unsecured borrowing for the business of the statutory fund [s 94(4)].

Actuary’s responsibilities in FCR
- Appointed Actuary must consider suitability of investments relative to liabilities and associated risks in annual FCR per NZSA professional standards:
  - Comment on insurer’s approach to asset management, state investment philosophy and summarize asset allocation.
  - Take into account relationship between nature and term of assets and corresponding liabilities and comment on material risks arising from:
    - Currency and duration mismatches of assets and liabilities (if any).
    - Liability profile and liquidity needs.
    - Credit policy.
    - Investment and other assets.
    - Investment guarantees.
    - Methods for valuing assets and non-insurance liabilities.
    - Treatment of derivatives and the impact on the solvency margin.

Complex instruments and less transparent assets
- No specific requirements for investing in complex and less transparent instruments beyond general principles requiring appropriate internal controls and ability to identify, assess, and monitor risks.

Assessment and recommendations
- Assessment: Partly Observed.
- NZ requirements are principles-based and consistent with ICP, allowing freedom to invest provided insurers maintain appropriate capital.
- Supervisory influence is indirect via capital charges and NZSA professional standards.
- RBNZ is not collecting the detailed investment information needed to monitor investment exposures and evolving risk appetite.
- Recommended actions:
  - RBNZ collect more granular breakdown of assets to understand investment exposures, including higher risk or innovative instruments.
  - RBNZ provide greater clarity on expectations regarding investment governance.

### ICP 16 — Enterprise Risk Management for Solvency Purposes
- IPSA section 73 requires insurers to have a written risk management program setting procedures for identification and management of:
  - Insurance risk.
  - Credit risk.
  - Liquidity risk.
  - Market risk.
  - Operational risk.
  - Any other risks prescribed by regulations (none so far).
- RBNZ’s Risk Management Programme Guidelines provide general considerations on risk planning, contingency planning, review process, accountability, and interpretation of risk categories.
- Solvency standards require the Appointed Actuary to prepare an annual FCR identifying and describing material risks that threaten the insurer’s ability to maintain required solvency margin; where practicable, quantify such risks and comment on steps taken or proposed to address them, including risks associated with asset-liability mismatching (Section 6.3 life, Section 5.3 non-life).

*International Monetary Fund — Extract from New Zealand insurance sector assessment (cr17121).*

### Section 24 of IPSA requires an insurer to report to RBNZ when it has reasonable grounds to

### cr17121 - Section 24 of IPSA requires an insurer to report to RBNZ when it has reasonable grounds to

### Enterprise Risk Management (ERM) — assessment and key gaps
- Assessment: Partly Observed
- Findings:
  - ERM is defined as the process of identifying, assessing, measuring, monitoring, controlling, and mitigating risks.
  - RBNZ guidelines on risk management provide indicative overall approaches (e.g., documented risk identification process and mitigation procedures) that meet ICP 8 but do not fully meet ICP 16 ERM requirements.
  - Key gaps identified:
    - There should be a rigorous process of risk identification and measurement (ICP 16.1) involving all aspects of the operations.
    - The insurer’s risk management policy should include a description of the insurer's policies towards risk retention, risk management strategies (reinsurance, the use of derivatives), and address the relationship between pricing, product development and investment management. (ICP 16.3)
    - Asset-liability management. (ICP 16.5)
    - The ERM framework should include mechanisms to incorporate new risks and new information on a regular basis and incorporate a feedback loop (ICP 16.9 and 16.10).
  - The Financial Condition Report is objectively prepared, serves a particularly useful function, and is less extensive than ORSA.

- Recommendations:
  - Consider the feasibility of issuing comprehensive ERM guidelines to promote proper risk management process on an enterprise-wide basis.
  - Require insurers to conduct own risk and solvency assessments to identify the relationship between risk management and the level and quality of financial resources needed and available on a group-wide basis. This could be achieved through an enhancement of the Financial Condition Report.

### ICP 17 — Capital Adequacy: solvency standards and calculations
- Assessment: Largely Observed
- Description and findings:
  - RBNZ solvency standards issued for: (1) life business; (2) non-life business; (3) non-life insurers in run-off; (4) non-life captives; (5) New Zealand local government insurance corporations; and (6) variable annuity business.
  - An internal models approach to regulatory capital is not allowed, except for variable annuities where modelling is required using stochastic methods or scenario-based analysis or a combination.
  - Overseas branches of Australian life insurers (3, including the largest life insurer in New Zealand by assets) have been exempted from New Zealand solvency standards. Overseas non-Australian life insurers (2) must establish custodial arrangements to support statutory funds required by IPSA.
  - Solvency measurement:
    - Solvency Margin = Actual Solvency Capital – Minimum Solvency Capital.
    - Each insurer must maintain at least a positive solvency margin by way of licensing conditions.
    - Additional solvency margin may be imposed via licensing conditions; applied, for example, after the Canterbury earthquakes and subsequently reviewed and adjusted.
  - Eligibility of capital resources: qualified capital must satisfy criteria relating to permanence, loss absorption, servicing charges, ranking upon winding-up, and other measures; examples include ordinary shares, revenue and other reserves, retained earnings.

- Deductions from Actual Solvency Capital (exact items listed):
  - Intangible assets.
  - Deferred tax assets.
  - Equity investments in, and subordinated loans to, related parties.
  - Equity investments in, and subordinated loans to, other financial institutions (or holding companies of such) classified as counterparty grade 1, 2 or 3 in excess of 15 percent of Actual Solvency Capital.
  - Equity investments in, and subordinated loans to, other financial institutions (or holding companies of such) classified as counterparty grade 4 or 5.
  - Unrealized gains and loss on liabilities arising from changes in the insurer’s own credit risk.
  - Fair value gains on assets not based on observable market data or transactions.
  - Any surplus, net of any associated deferred tax liabilities, in any defined benefit superannuation fund sponsored by the licensed insurer as employer.
  - Deferred Acquisition costs in excess of specified limits (non-life).
  - Solvency margin relating to its overseas branches that are not freely available to meet losses.
  - Declared but unpaid dividend or capital repayment.

- Minimum Solvency Capital — Life insurers:
  - Minimum Solvency Capital = Total Solvency Requirement – (Policy Liabilities + Other Liabilities), where:
    - Total Solvency Requirement = insurance risk charge + catastrophe risk charge + asset risk charge + reinsurance recovery risk charge.
    - Asset risk charge = resilience (credit, foreign currency, interest rate, and solvency liability resilience) + concentration risk charges.
  - Insurance risk charge: similar to Best Estimate Liability but calculated using prescribed conservative assumptions and subject to a minimum of current termination value.
  - Interest rate risk impact derived from the most adverse of a 175 basis points increase or decrease in nominal interest rate instruments and 60 basis points increase or decrease in real interest rate instruments (subject to a minimum of 0).

- Minimum Solvency Capital — Non-life insurers:
  - Minimum Solvency Capital is the sum of:
    - Insurance risk charge.
    - Catastrophe risk charge.
    - Asset risk charge (risk weighted exposure, derivative, concentration).
    - Foreign currency.
    - Interest rate.
    - Reinsurance recovery.
  - Catastrophe risk charge definition (extreme event exposure is the greatest of):
    - (a) projected insurance losses due to a major earthquake event affecting Wellington (defined as everywhere within a 50-kilometer radius from the Beehive), calibrated to a minimum loss return period of 1 in 1000 years; or
    - (b) projected insurance losses due to a major earthquake affecting any place other than Wellington (as defined above), calibrated to a minimum loss return period of 1 in 1000 years; or
    - (c) projected insurance losses due to a non-earthquake extreme event occurring anywhere within New Zealand or elsewhere, calibrated to a minimum loss return period of 1 in 250 years.

- Fixed Capital Amount:
  - Minimum Solvency Capital is subject, in aggregate, to a minimum of NZD 5 million for life insurers and NZD 3 million for non-life insurers (termed the Fixed Capital Amount).

- Risk factors not included in capital requirements:
  - Operational risks are not taken into account in the minimum solvency capital amount, other than a 0.25 percent allowance in relation to investment-linked business.
  - RBNZ considers liquidity risk is best addressed through risk management processes and is less of an issue for insurers than other risks, outside of catastrophe situations where reinsurance can assist.

- Recognition of reinsurance:
  - Reinsurance arrangements may be recognized. For life insurer minimum solvency capital requirements, reinsurance cannot be recognized unless there is genuine risk transfer, the insurer is a party to receipt, and reinsurance contracts are legally binding, in writing, and signed by authorized persons.

- Group solvency:
  - IPSA is legal entity based. RBNZ requires insurers and their insurance subsidiaries (in or outside New Zealand) to calculate a consolidated solvency margin by applying the solvency standard to consolidated financial statements. Insurers must meet both legal entity and consolidated solvency requirements via license conditions.

- Solvency control levels and supervisory response:
  - Solvency standards specify only one solvency control level: the Solvency Margin.
  - RBNZ may request a recovery plan when it has reasonable grounds to believe “the insurer has failed, is failing, or is likely to fail to maintain a solvency margin” [IPSA section 138(1)] or issue directions [IPSA section 143(1)(a)].
  - “The insurer is failing to maintain a solvency margin” is grounds for application to the High Court for liquidation [IPSA section 151(2)].
  - RBNZ may allow temporary non-maintenance of the Solvency Margin but has not developed a formal process to determine appropriate responses relative to the level of Solvency Margin.

- Recommendations to enhance solvency standards:
  - Establish two solvency control levels as described in ICP 17.3 and 17.4 to enable less intrusive early intervention.
  - Develop internal guidance on appropriate actions for each solvency control level, particularly the strongest actions when the insurer fails to maintain the lower solvency control level.
  - Apply the New Zealand solvency standard to all statutory funds to improve comparability across branches and subsidiaries.
  - Establish regulatory capital requirements in an open and transparent process (ICP 17.6); make the basis and circumstances for imposing additional solvency margin via licensing conditions more transparent through solvency standard amendments or guidance.

### ICP 18 — Intermediaries: regulation, licensing, and conduct
- Assessment: Partly Observed
- Description and findings:
  - Intermediation channels: direct sales (including internet), agency arrangements (tied agents and banks), and brokers.
  - No comprehensive data on intermediation channels.
  - For regulatory purposes, a broker is defined in the FA Act (section 77A) as a financial services provider who holds (or transfers or makes payments with) money or property on behalf of clients; not all who call themselves brokers meet this definition.
  - FMA is the main regulatory authority for financial advice and fair treatment of customers, administering the FA Act and FMC Act.
  - Code of Professional Conduct for Authorized Financial Advisers (AFA Code) applies to AFA advisers and influences wider market conduct.
  - FMA guidance applicable to insurance intermediaries includes the Sales and Advice report (November 2015).

- Licensing and oversight:
  - Many intermediaries that provide only sales/execution services are not covered by the FA Act; in practice FMA considers most significant intermediaries captured by a wide definition of advice (FA Act, section 10(1)).
  - Insurance intermediaries must register under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and, where applicable, belong to one of four dispute resolution schemes.
  - No explicit treatment or exemption for intermediation ancillary to another service (e.g., travel agents selling travel insurance).
  - Registration and licensing apply to business conducted with persons in New Zealand and where undertaken in New Zealand; services provided from overseas or to overseas persons out of New Zealand are captured. Reinsurance broking is included.

- Categories under the FA Act:
  - Qualifying Financial Entities (QFEs):
    - Organizations that provide financial advice on a range of products may apply to be QFEs.
    - There are 57 QFEs; one third are insurers; estimated 26,000 individual staff (“QFE advisers”).
    - QFE advisers may advise only on simpler products (Category 2) or more complex products (Category 1) sourced by their employer or group.
  - Authorized Financial Advisers (AFAs):
    - Individuals providing personalized advice on Category 1 products; around 1,800 AFAs (June 2015).
  - Registered Financial Advisers (RFAs):
    - Individuals required only to register under the FSP Act; may advise on Category 2 products (includes insurance products except investment linked insurance). Around 6,500 RFAs (June 2015).

- Regulatory differentiation and oversight:
  - QFE/AFA applications reviewed against capability and competency requirements; QFE applications may involve on-site visits; AFA applicants must meet criteria including good character and competency (section 54).
  - RFAs have no minimum competence/qualification requirement before registration; registration involves criminal and financial history test.
  - QFEs and AFAs subject to ongoing supervision: annual compliance reporting, on-site visits, thematic reviews, and periodic review of conditions; reporting to FMA within five business days for significant issues.
  - RFAs are not subject to ongoing oversight.
  - FMA powers apply to all three categories and FMA performs thematic work that can include RFAs.

- Requirements, disclosures, and client money:
  - Requirements on adequate professional knowledge, integrity, and competence exist in laws and AFA Code; all advisers subject to section 33 FA Act duty to “exercise care, diligence, and skill.”
  - No explicit requirement on corporate governance for intermediaries; governance guidance exists from FMA.
  - Disclosure requirements:
    - AFAs and QFEs: binding disclosure requirements in FA Act (section 22) and FA (Disclosure) Regulations (types and amounts of payments and commissions; fee disclosures).
    - No explicit requirement for intermediaries to disclose relationships with insurers (ICP 18.5.9).
    - RFAs: no explicit disclosure requirements on remuneration conflicts.
    - Brokers: not subject to broker-role-specific disclosure requirements; FMA guidance asks them to disclose material interests or relationships.
  - Client money:
    - Insurance Intermediaries Act 1994 sections 4 and 5 treat payment by insured to intermediary as discharge to insurer; payments by insurer to intermediary do not discharge to insured.
    - Section 14 requires establishment of a ‘broking client account’ with limitations on use, investment, and insolvency protections favoring the insured then insurer.

- Enforcement and perimeter:
  - FMA enforces requirements for QFEs and AFAs; required to notify breaches of AFA Code to Financial Adviser Disciplinary Committee which can impose penalties including up to a $10,000 fine or cancel authorization.
  - Commerce Commission has taken action against brokers under the FTA.
  - Offences under FA Act sections 114 and 115 for providing financial adviser service without permission or holding out as AFA/QFE.
  - FMA acts to enforce regulatory perimeter and remove entities abusing registration.

- Assessment comments and recommendations:
  - Strengths: well-developed framework for complex-product advisers (AFAs and QFEs), licensing assessments, ongoing supervision, and guidance; strong client money protections.
  - Weaknesses: registration-only regime for RFAs (simpler products) is limited and open to abuse; evidence of poor conduct by RFAs; limited oversight and minimal entry assessment.
  - Recommendations:
    - Government to revise legislation to strengthen or remove the registration-only regime, introducing minimum competence and disclosure requirements for all advisers, including insurance brokers; consider proportionate regime for intermediation not currently captured (pure sales, ancillary intermediation).
    - FMA to assess need for insurance-specific requirements on intermediation and develop an insurance-specific work program; assess need for more insurance-specific skills and expertise medium to long term.

### ICP 19 — Conduct of Business: framework and gaps
- Assessment: Partly Observed
- Description and findings:
  - Conduct regulation set out across multiple laws; FMA is principal regulator.
  - Main elements:
    - FA Act obligations where insurers provide financial advice.
    - General conduct obligations under Part 2 (Fair Dealing) of the FMC Act overseen by FMA.
  - No overarching insurance contracts legislation; privacy law applies (Privacy Act 1993).
  - No general licensing and oversight framework for insurance conduct; possible for insurers and intermediaries to establish businesses not subject to licensing and conduct requirements if they do not provide advice as defined in FA Act.
  - No requirement for prior approval of individual insurance products.
  - Most comprehensive insurance-specific conduct standard: ICNZ Fair Insurance Code (general insurers) enforceable against ICNZ members but without statutory backing; no equivalent code for life insurance.

- Conduct requirements and gaps:
  - For financial advice, FA Act regime contributes to good outcomes, but there are no explicit legal/regulatory provisions requiring insurers and intermediaries to act with due skill, care and diligence in all aspects of the policyholder relationship.
  - Fair dealing provisions in FMC Act mainly prohibit misleading or deceptive conduct.
  - No explicit requirements for:
    - Policies and procedures on fair treatment of customers as integral to business culture.
    - Considering different types of customers when designing and marketing products; no product approval framework.
    - Servicing policies to the point obligations are satisfied; disclosure of contractual changes during contract life; product-type-specific disclosures.
    - Policies and processes for timely and fair claims handling.
    - Policies and processes for timely and fair complaint handling.
  - FMA guidance covers expectations (Sales and Advice Report, November 2015) and requires advice to be appropriate; FMA views the section 33 duty as effectively requiring expectations set out in guidance, though untested.

- Privacy and information:
  - Privacy Act 1993 includes core principles and requires entities to have a privacy officer; no insurance-specific requirement to have policies and procedures for customer information protection.

- Information on conduct issues:
  - FMA publishes findings and issues warnings on fair treatment risks; supports National Strategy for Financial Literacy; publishes research such as a white paper on behavioral insights.

- Assessment comments and recommendations:
  - Strengths: focus on financial advice, FMA resources increasing, guidance and thematic work, self-regulation and dispute resolution services help.
  - Weaknesses: many aspects of insurer–customer relationship (claims, complaints, simpler-product advice by RFAs) effectively unregulated or reliant on self-regulation; risk RBNZ/FMA may not allocate sufficient insurance-specific focus/expertise.
  - Recommendations:
    - Government and FMA to review scope of conduct regulation for insurance across the product life cycle and develop a regulatory framework including:
      - Minimum standards on all (or all higher risk) issues.
      - A licensing framework to screen new entrants and clearly identify regulated insurers and intermediaries.
      - A minimum level of risk-based supervisory oversight applying to the licensed population, avoiding duplication with financial adviser regulation.
    - FMA to review requirements for increased insurance-specific expertise and resources (recommendations under ICP 18 apply to ICP 19).

### ICP 20 — Public Disclosure: requirements and practice
- Description and findings:
  - Public disclosure is generally based on New Zealand accounting standards complying with IFRS, sometimes with NZ-specific requirements or limits.
  - Licensed insurers subject to additional disclosure requirements by IPSA and RBNZ guidelines:
    - IPSA requires disclosure of financial strength ratings prepared by approved rating agencies to policyholders before issuing policies, in advertisements, and on websites; RBNZ also discloses these ratings on its website.
    - Solvency standards require disclosure of solvency position and regulatory capital information in financial statements and on websites.
    - For branches exempted from NZ solvency requirements, exemption conditions require disclosure of regulatory capital requirements (home jurisdiction methodology) in NZ branch financial statements.
    - RBNZ Guidelines on Governance create an expectation (not binding) on disclosure of governance arrangements via corporate governance statements in annual reports.
  - Except for a closed group of seven small insurers exempted from producing financial statements, all insurers must produce audited financial statements and lodge them with the appropriate Registrar within four months of financial year end.
    - For insurers with subsidiaries, group financial statements are required for general purpose financial reporting; insurers without subsidiaries submit entity financial statements.
    - Insurers subject to RBNZ solvency requirements disclose solvency information on a solo entity basis.
    - Statements available to the public free of charge from the Companies Office website; some firms publish them on company websites.

- Disclosure specifics:
  - NZ IAS 1 requires disclosure of:
    - The domicile and legal form of the entity, country of incorporation, and address of principal place of business.
    - A description of the nature of the entity’s operations and principal activities.
    - The name of the ultimate parent of the group.
    - If a limited life entity, information regarding the length of life.
  - NZ accounting standards require disclosure of key accounting policies, methods and assumptions used in preparing financial statements and determining insurance contract related assets, liabilities, revenue, and expenses; sensitivity to key assumptions and impact of assumption changes are required to be disclosed as well.
  - Degree of detail left to insurer judgment, balanced against principles of understandability, relevance, reliability and comparability (NZ IFRS 4).

*Source: cr17121 (PDF chapter/section)*

### Appendix C 14.1.7, Appendix D 17.6.4).

### cr17121 - Appendix C 14.1.7, Appendix D 17.6.4)

### Determination and adequacy of technical provisions
- Information required includes:
  - The size and adequacy of the non-life insurance risk margin in addition to the central estimate methods and assumptions.
  - The sensitivity of the life insurance liability to key assumptions changes.
  - The provision is subject to a liability adequacy tests relative to expected future cash flows.
  - Disclosure of the “run off result”, i.e., past claims development, except for claims expected to be resolved within one year.

### Solvency and capital disclosures (New Zealand / RBNZ / IAS)
- IAS 1.134 requires disclosure that enables users to evaluate the entity’s objectives, policies and process for managing capital.
- Life insurer disclosure requirements:
  - Must disclose the solvency margin of each life fund and the aggregate solvency margin for all life funds of the insurer.
  - A group must disclose the solvency margin of each life insurer in the group.
  - The amount of equity retained for the purpose of financial soundness and the basis of establishing that amount must be disclosed. A group must make this disclosure for each insurer in the group.
- RBNZ solvency standards require disclosure of the following components of regulatory capital in the financial statements and on an insurer’s website (description of regulatory capital methodologies is not required):
  - Actual Solvency Capital.
  - Minimum Solvency Capital.
  - Solvency Margin (= Actual Solvency Capital – Minimum Solvency Capital).
  - Solvency Ratio (= Actual Solvency Capital over Minimum Solvency Capital).
- For foreign branch operations exempted from New Zealand solvency requirements, the same solvency information applies, but determined in accordance with the home jurisdiction’s requirements, the fact of which is disclosed.

### Branch financial statements and accounting standards
- Branches are required to submit to the Registrar:
  - Financial statements of the overseas parent company (or group) prepared according to accounting standards of its home jurisdiction.
  - Financial statements of the New Zealand branch prepared according to New Zealand accounting standards.
- Financial statements of the branch and the parent company (or group) are required to be lodged with the New Zealand Companies Office.
- The FMA has exempted branches of overseas banks and insurers from applying the New Zealand accounting standards until 2020 [Financial Markets Conduct (Overseas Registered Banks and Licensed Insurers) Exemption Notice 2015].

### Disclosure on Investments
- New Zealand accounting standards require disclosure of:
  - The significance of financial instruments to financial position and performance.
  - The nature and extent of the risks arising from financial instruments and how those risks are managed.
  - General approach to valuation and measurement of financial assets and liabilities.
- A company is not required to disclose its investment objectives or policies and procedures.
- Disclosures include exposure information, sensitivity and maturity analysis.
  - Sensitivity analysis focuses on the impact on equity and profit rather than impacts on minimum regulatory capital.

### Disclosure on Risk Management
- Accounting standards require disclosure relating to the nature and extent of the risks arising from insurance contracts, before and after reinsurance, including sensitivities to insurance risks and risk concentration. Disclosures include:
  - Objectives, policies and processes for managing risks arising from insurance contracts and the methods used to measure those risks.
  - Information about insurance risk before and after mitigation by reinsurance:
    - Sensitivity.
    - Concentrations.
    - Actual claims compared to previous estimates.
  - Credit, liquidity, market and other risks.
- Non-life insurers are required to disclose information that describes how the insurer’s reinsurance program is structured.
- There is no disclosure on asset-liability management practices, or sensitivity of regulatory capital and provisions for mismatching due to changes in discount rates or asset values.

### Disclosure on Financial Performance
- Required disclosures include:
  - Statement of financial performance, other comprehensive income, changes in equity, and statement of cash flows.
  - Financial performance and balance sheet items for each statutory fund, split between investment-linked and non-investment linked business, are separately disclosed.
  - Accounting standards require segmentation into key operating segments, but few splits are given in the New Zealand context.
- Life insurers must provide an analysis of earnings such as:
  - Planned margins of revenues over expenses.
  - The difference between actual and assumed experience.
  - The effect of changes to underlying assumptions.
  - Loss recognition (i.e., liability adequacy test impacts).
  - Investment earnings on assets in excess of liabilities.
  - Other material sources of profit.
- Non-life insurers are required to provide underwriting results.
- Disclosure of key sources of revenue is required. Life insurers must provide investment revenues from equity securities, debt securities, property and other with appropriate relevant sub-categories (e.g., rent, dividends, unrealized gains or losses), split by statutory fund and by unit linked vs non unit linked business lines.
- Claims development tables are required, except for claims expected to be settled within one year.

### Disclosure on Corporate Governance
- RBNZ’s Guidelines on Governance indicate insurers should disclose:
  - Information on corporate governance policies, practices and processes.
  - Information about the directors, how the governing body operates and any committees of the governing body.
  - General disclosure requirements under the Companies Act.
- The Guidelines do not have the force of law.

### Assessment and Comments on Disclosure (Assessment: Partly Observed)
- Comments:
  - Disclosure requirements are based on accounting standards and focused on financial statements, supplemented by regulatory requirements on disclosure of financial position, including required ratings, and corporate governance.
  - The usefulness of disclosures is hampered by:
    - Use by branches of home jurisdiction methodologies for presenting solvency information.
    - Published solvency information not taking into account requirements which RBNZ can and does impose on individual insurers (see ICPs 4 and 17), which may mislead as to true financial strength.
  - Compared to the ICP, financial statements disclosure is less comprehensive and descriptive in areas of investments, asset liability management, description of risk concentration, and interaction between capital adequacy and risk.

### Recommendations on Disclosure
- It is recommended that the RBNZ consider the following:
  - Strengthen disclosure in the following areas:
    - Risk management (asset-liability management practices, sensitivity of regulatory capital, and provisions for mismatching).
    - Financial position (capital management policy, capital adequacy information).
    - Investment (objectives, policies, and procedures).
  - Consider ways to improve the solvency disclosure information to facilitate comparability across insurers and between subsidiaries and branches. (see ICP 17).
  - Enhance the quality of governance disclosure and its enforceability.

### ICP 21 Countering Fraud in Insurance
- Supervisor requires insurers and intermediaries to take effective measures to deter, prevent, detect, report, and remedy fraud in insurance.
- Description:
  - Fraud in insurance is a criminal offence under legislation including the Crimes Act, Proceeds of Crimes Act, Financial Market Conduct Act, and FTA.
  - Crimes Act offences relating to dishonesty include obtaining by deception or causing loss by deception (including fraud) section 240; offences are liable for punishment by terms of imprisonment.
  - Insurance Law Reform Act 1977 permits insurers to avoid a policy where material incorrect statements were made in the proposal or other documents.
- Fraud awareness and supervisory cooperation:
  - Multiple institutions involved in detection, investigation and prosecution: New Zealand Police, Serious Fraud Office (SFO), FMA and Commerce Commission.
  - New Zealand Police maintains a Financial Crime Group that includes a Financial Intelligence Unit (FIU) and Asset Recovery Units.
  - The Insurance Council of New Zealand (ICNZ) operates the Insurance Claims Register (ICR) and provides a confidential fraud reporting framework (online form and fraud ‘hot line').
    - Four insurers own and oversee the ICR (with administration provided by the ICNZ). They account for 85 percent of personal lines insurance business.
    - Provisions exist for others to participate for a fee.
  - ICNZ and the SFO publish examples of action taken against fraudsters and examples of actual cases of insurance fraud.
  - Under the Serious Fraud Office Act 1990, the SFO investigates and prosecutes serious offenses relating to fraud; the SFO reports to the Minister of Police.
  - The New Zealand Police host an annual financial crime conference; RBNZ participates.
  - Reserve Bank cooperates and exchanges information with other authorities, subject to provisions of IPSA (see ICP 3 and ICP 25).
- Supervisory requirements:
  - IPSA and RBNZ guidelines require insurers to comply with a Risk Management Programme (section 73 of IPSA) (ICP 8).
  - Risk Management Guidelines note requirements on operational risk include fraud risks (section 40).
  - RBNZ’s supervision and enforcement work (ICPs 9 and 11) include consideration of risk management including operational risk.
  - Fraud risk is not a priority focus of RBNZ supervision; supervisors’ awareness derives from particular cases.
  - Insurers expected to monitor fraud in conjunction with industry bodies and criminal authorities.
- Assessment: Observed
- Comments:
  - Fraud related to insurance is captured by general criminal law and authorities cooperate to identify and prosecute insurance-related fraud.
  - Supervisory bodies are part of a network of official agencies cooperating in this area (less formal than for AML/CFT).
  - Industry commitment evident via established claims registry service.
  - Fraud covered in RBNZ guidelines (in connection with risk management); fraud prevention and controls are covered in supervisory work within its risk-based approach.
  - Other priorities have led to limited specific focus to date on fraud issues.
- Recommendations:
  - As part of planning for supervisory work and resource planning, RBNZ schedules thematic or firm-specific work on fraud controls.
  - RBNZ, in due course, includes guidance to supervisors on evaluation of fraud risks in the iPRESS framework.

### ICP 22 Anti-Money Laundering and Combating the Financing of Terrorism
- The supervisor requires insurers and intermediaries to take effective measures to combat money laundering and the financing of terrorism.
- Description:
  - Institutional framework and key requirements:
    - RBNZ and FMA are two of three designated AML/CFT competent authorities under the AML/CFT Act.
    - RBNZ is the AML/CFT supervisor for life insurers who are reporting entities.
    - FMA covers brokers and financial advisers. DIA covers all other reporting entities.
  - Life insurance coverage and exemptions:
    - Life insurance is covered by the AML/CFT Act, with exemptions for business closed to new customers and new premiums; and pure risk/protection policies (AML/CFTaus (Exemptions) Regulations 2011).
    - There are 14 life insurance company reporting entities at present.
  - Non-life insurance:
    - Non-life insurance is not covered owing to its lower vulnerability (this is under review, not expected to change).
  - Advisers and intermediaries:
    - Advisers which undertake business in more complex products under the FA Act and all intermediaries which accept client money are reporting entities and subject to FMA oversight.
  - Reporting entities, general insurance providers and intermediaries are subject to the Financial Transactions Reporting Act 1996 (FTRA), and are required to report suspicious matters to the New Zealand Police FIU.
- RBNZ functions and supervisory approach:
  - Section 131 and section 132 of the AML/CFT Act outline RBNZ functions and powers.
  - RBNZ monitors and assesses AML/CFT risk across reporting entities via licensing, risk management requirements, and supervision undertaken by a specialist AML/CFT unit of four staff.
  - RBNZ has issued guidance for insurers specifically (the AML/CFT Insurance Business Coverage Guideline).
  - Section 56 requires appointment of an AML/CFT Compliance Officer (AMLCO); AMLCO must report to a senior manager.
- Risk assessment and supervisory work:
  - RBNZ publishes an AML/CFT Sector Risk Assessment (SRA) for sectors it regulates, including life insurers. The most recent version was published in 2011.
  - SRA feeds into the National Risk Assessment (NRA) led by the New Zealand Police FIU.
  - Section 60 requires each reporting entity to prepare an annual report for its AML/CFT supervisor.
  - RBNZ uses mandatory annual AML/CFT reports and occasional surveys to undertake baseline monitoring and feed into the SRA; conducts annual assessments of risk in individual insurers, ranking vulnerability.
  - Mandatory annual reports include data on use of intermediaries and estimates of business per annum generated via foreign intermediaries.
  - Life insurance providers generally rated as the ‘lowest risk’ reporting entities supervised by RBNZ since the most recent SRA.
  - Using the Entity Risk Assessment, RBNZ determines frequency, intensity and focus of targeted reviews. Two life insurance providers were visited in 2016.
  - RBNZ conducted a thematic survey of the life insurance sector and published papers on findings. Supervisory framework is outlined in an internal AML/CFT Supervision Manual.
- Enforcement and cooperation:
  - RBNZ has issued private formal warnings to banks, but not yet to life insurers; enforcement powers include accepting enforceable undertakings and seeking civil penalties. RBNZ cannot impose administrative penalties.
  - Failure to comply with AML/CFT requirements is not grounds for suspension or withdrawal of a license.
  - FMA supervises reporting entities under its oversight (around 800), collects annual reports and requires independent AML/CFT audit reports from some; in 2014–15 none of its on-site visits or thematic reviews were in relation to insurance intermediaries.
  - RBNZ is a member of the AML/CFT Supervisors’ forum (meets fortnightly) and AML/CFT National Coordination Committee (meets monthly). RBNZ cooperates with international authorities, including on-site work with Australian authorities.
- Mutual Evaluation issues:
  - An Asia-Pacific Group Mutual Evaluation Report published in 2010 noted deficiencies in the AML/CFT framework for insurance; October 2013 follow-up noted regulatory reforms have addressed lack of regulation.
  - Next mutual evaluation review is due in 2019.
- Assessment: Observed
- Comments:
  - RBNZ monitors life insurance providers using reports and analysis about vulnerabilities, conducts desk-based reviews and a small number of on-site inspections, taking a risk-based approach.
  - Intensity of supervision is considerably lower than for banks.
  - Resources devoted to AML/CFT are limited but RBNZ benefits from a specialist unit of expertise and relationships with other authorities, including Australia.
  - FMA collects information, carries out reviews and publishes findings for reporting entities, although there is no specific program for insurance intermediaries.

### ICP 23 Group-wide Supervision
- The supervisor supervises insurers on a legal entity and group-wide basis.
- Description:
  - RBNZ operates on the assumption that the home supervisor is the group-wide supervisor.
  - There are 18 foreign-based insurance groups and financial conglomerates involving a total of 34 New Zealand-licensed insurers operating in New Zealand.
  - Cooperation and coordination with overseas supervisors is primarily with APRA due to dominance of Australian insurers in New Zealand.
  - There are 17 New Zealand-based insurance groups and financial conglomerates involving a total 19 New Zealand-licensed insurers, with market share of 15 percent by premium.
  - RBNZ’s supervision is on legal entity basis, and it does not practice full group-wide supervision over insurance groups or financial conglomerates, although it does monitor solvency of groups where the group comprises an insurer and subsidiaries (see ICP 17).
- Overseas business and exceptions:
  - One insurance group derives over 95 percent of its income from overseas insurance operations. Since the overseas insurers are subsidiaries of the holding company, RBNZ does not have direct supervisory power over the holding company nor the overseas subsidiaries. It may require information from these companies as “associated persons” through the licensed entity.
  - One insurance group has significant market shares in the South Pacific islands. RBNZ has not established relationships with the host supervisors.
- Identification of legal entities:
  - At licensing, applicant must provide information on incorporation, ownership and legal structure for RBNZ to identify all legal entities in an insurance group including non-regulated entities.
  - After licensing, RBNZ is notified and approves changes in control and transfer and amalgamation (see ICP 6).
  - IPSA gives powers to RBNZ in relation to insurance legal entities with no explicit provisions for groups. RBNZ’s power over holding companies and non-RBNZ regulated entities within the group is only through the regulated entity (the “indirect approach” to group supervision) and through “associated persons” which is widely defined in IPSA. It has wide power to compel information from associated persons. (See ICP 1).
- Assessment: Partly Observed
- Comments:
  - Supervision of insurance is a new regime. RBNZ has just completed its licensing process in

*Source: cr17121 - Appendix C 14.1.7, Appendix D 17.6.4).*

### 2013. The extent of group-wide supervision is limited at this point. While it has obtained

### 2013. The extent of group-wide supervision is limited at this point. While it has obtained

### Group-wide supervision and licensing
- RBNZ obtained information of all legal entities in a group at the licensing stage, but this knowledge will become out of date in the absence of regular reporting and monitoring on group membership and group structures, except where there is a change of control (see ICP 5).
- RBNZ has not established in-depth relationships with overseas supervisors other than APRA mainly due to resource constraints. In the case of APRA, the nature of cooperation is more reactive than proactive.
- Recommendation:
  - Develop a strategy on group-wide supervision reflecting its supervisory philosophy and available resources. It should take into account the significance of its domestic insurers in foreign markets (having negative impact on New Zealand’s reputation).
  - Review its approach to licensing insurers with a substantial amount of business undertaken outside New Zealand and whether and when to use its powers under section 21(2)(d) of IPSA to set requirements on minimum levels of domestic business.

### ICP 24 — Macroprudential Surveillance and Insurance Supervision (description and findings)
- Role: The supervisor identifies, monitors and analyses market and financial developments and other environmental factors that may impact insurers and insurance markets and uses this information in the supervision of individual insurers. Tasks should, where appropriate, utilize information from, and insights gained by, other national authorities.
- Context:
  - RBNZ’s macroprudential work accounts for the small size of insurers relative to banks and their limited systemic importance.
  - The Crown Entities ACC and EQC substitute to an extent for private insurance, reducing sector scale and significance.
  - Ownership linkages between banks and insurers are limited by requirement that banks registered in New Zealand not own insurers larger than 1 percent of their own size. Three domestic banks nonetheless have insurance interests. More significant links are to Australian banks: all four major banks have interests in insurers in New Zealand, one subsidiary being a major life company.
  - Insurers have claims on banks and other financial institutions via the investment book.
- Macroprudential instruments under development are to be used with respect to banks only.
- RBNZ’s Financial Stability Report reports on risks and macroeconomic conditions affecting the insurance sector at a high level, but RBNZ is not performing market-wide analysis or stress-testing to identify vulnerabilities across the sector.
- Information on non-insurance business is not regularly collected (though it was in the licensing process and was identified to be low).
- Data collection and aggregation:
  - Analysis of sector trends will be developed as more detailed financial information, including exposure data by type and class of insurance, becomes available on a consistent basis across all insurers.
  - Majority of data being collected is, and will remain, in respect of the licensed insurer, or for the New Zealand branch in case of branches.
  - RBNZ has not yet published aggregate market data based on its returns, but intends to consult on this shortly, after improved reports become available.
- Solvency returns and Financial Condition Reports contain key risks and trends at the insurer level but have not been aggregated.
- Sector-wide response to Canterbury earthquakes:
  - RBNZ took a sector-wide approach to monitoring risks related to the Canterbury earthquake claims and responded with supervisory tools such as increased solvency requirements on insurers with material net risks associated with the earthquakes.
  - Monitoring included additional monthly returns and looking at future adverse claims development scenarios.
  - Information on Canterbury earthquake exposures has been fed to the industry and individual insurers.
- Solvency standards include allowance for events with systemic impact:
  - Catastrophe solvency requirements for property insurers: 1 in 1000-year earthquake losses.
  - Catastrophe solvency requirements for life insurers: pandemic losses of extra deaths at 1 per thousand.
- iPRESS supervisory framework:
  - Considers relative impact of insurers on IPSA objectives, connections between insurers (but not between insurers and banks), and size of insurer.
  - Does not capture non-traditional insurance or non-insurance activities; has no allowance for potential risks from subsidiaries or parents of insurers.
- Market concentration and systemic assessment:
  - With increased availability of information by class, RBNZ will be better-placed to identify where insurer market positions could threaten availability of insurance cover if the insurer failed.
  - The largest non-life insurer has a market share of 45 percent of gross premium income.
  - At present, RBNZ considers that there are no systemically significant insurers in New Zealand.
- Assessment: Partly Observed
- Comments:
  - Supervision is focused largely on individual insurers; system-side view hampered by limited detailed comparative information.
  - A more macroprudential approach was taken in response to the Canterbury earthquakes.
  - With increased data availability from late 2016, RBNZ will be better able to identify market-wide risks, assess potential systemic significance and publish aggregate information on the sector.
  - Development of macroprudential supervision will contribute to individual insurer supervision but will not substitute for it and is likely to require additional supervisory resources.
- Recommendations:
  - Increase market-wide analysis of the sector from 2017, defining regular outputs (for internal use) such as standard reports on market trends, interconnectedness and other potential sources of systemic risk and templates for the publication of aggregate information (it already has plans for consultation in this area).
  - In the medium term, consider stress-testing exercises.
  - Undertake cross-company analysis of information in Financial Condition Reports, supplemented by requiring increased reporting of sensitivity analysis, as necessary.

### ICP 25 — Supervisory Cooperation and Coordination (description and findings)
- Role: The supervisor cooperates and coordinates with other relevant supervisors and authorities subject to confidentiality requirements.
- Domestic arrangements:
  - RBNZ is responsible for prudential supervision; FMA is responsible for conduct supervision of insurers and intermediaries.
  - RBNZ and FMA signed a MoU in 2011; CoFR established to ensure coordination in response to financial market events.
- International cooperation and market structure:
  - The insurance market is dominated by overseas insurers’ branches and subsidiaries. Of the 90 insurers excluding captives, overseas insurers have a 76 percentage market share by premium income.
  - Table (ultimate ownership of licensed insurers, 2015):
    - Australia: Number of Insurers 19, Count % Total 21, 2015 Premium (NZD millions) 5,940, % Total 66, 2015 Assets (NZD millions) 22,024, % Total 75
    - NZ: Number of Insurers 43, Count % Total 48, 2015 Premium (NZD millions) 2,205, % Total 24, 2015 Assets (NZD millions) 4,646, % Total 16
    - Others: Number of Insurers 28, Count % Total 31, 2015 Premium (NZD millions) 874, % Total 10, 2015 Assets (NZD millions) 2,576, % Total 9
    - Total: Number of Insurers 90, Count % Total 100, 2015 Premium (NZD millions) 9,019, % Total 100, 2015 Assets (NZD millions) 29,245, % Total 100
  - Eighteen of the 19 Australian insurers operate as branches.
  - A large life insurer (18 percent market share by premium and 45 percent by assets) is an Australian branch, although the largest non-life insurer (44 percent market share by premium) is an Australian subsidiary.
  - The largest life insurer (29 percent market share by premium) is owned by an Australian bank.
  - RBNZ’s insurance oversight team needs interaction with the banking supervisor in APRA.
- Branch exemptions and home supervisor role:
  - RBNZ has exercised powers to exempt branches from complying with RBNZ governance and solvency requirements; Australian life branches also exempted from statutory life fund requirements. APRA is key as home supervisor for these branch operations.
  - APRA has undertaken on-site supervisory work for larger Australian operations in New Zealand; RBNZ has attended. Cooperation with APRA on Canterbury-related issues; cooperation with U.K. supervisors on a further Canterbury-related case.
- New Zealand-based groups with overseas operations:
  - There are 6 New Zealand-based insurance groups having overseas operations in Australia, South Pacific, and Europe.
  - One group has operations in 30 countries including Europe, Latin America, the Middle East, and Southeast Asia, with over 95 percent of its annual revenue derived from outside of New Zealand, mostly from Europe, although most business is written by the New Zealand licensed insurer rather than in group legal entities.
  - RBNZ has not established supervisory colleges for its domestic insurers with overseas operations and has not established a process to identify group-wide supervisors for these groups.
- Cooperation instruments:
  - RBNZ has entered into MoUs with APRA and U.K. PRA. It is also a signatory to the IAIS MMoU.
- Trans-Tasman Council on Banking Supervision (TTBC):
  - Established in 2005; composed of the Australian and New Zealand Reserve Banks, respective Treasuries, APRA, ASIC and the FMA.
  - Scope extended to insurance in June 2014 to cover financial stability, efficiency and integration through the wider financial sector.
  - Proposed work program areas for 2015/2016:
    - Cooperation on supervision.
    - Trans-Tasman crisis response preparedness.
    - Regulatory alignment.
- Cross-border group-wide supervision arrangements:
  - Group-wide supervision practice not well established.
  - For branches, RBNZ operates on basis that home supervisor is lead supervisor.
  - RBNZ participates in the supervisory college for one Australian non-life insurer, one American and one Hong Kong insurer; attends Australian supervisory college meetings regularly; attends others via teleconference.
  - RBNZ has not contemplated establishing supervisory colleges as lead supervisor for its insurance groups operating overseas.
- Assessment: Largely Observed
- Comments:
  - New Zealand has an open and cooperative attitude towards supervisory cooperation, although more reactive than proactive.
  - Despite large foreign participation (Australia represents 66 percent of market by premium), RBNZ’s active participation in supervisory colleges is mainly limited to one.
- Recommendations:
  - Establish a process to more proactively evaluate the need to identify a group-wide supervisor, and the need to establish supervisory colleges for cross-border insurance groups; process will instill discipline and clarity of supervisory responsibility.
  - Initiate contacts with host supervisors where New Zealand insurers have large market shares to understand risks to New Zealand-owned operations in those markets.
  - Increase engagement with insurers with substantial overseas operations.

### ICP 26 — Cross-border Cooperation and Coordination on Crisis Management (description and findings)
- Role: The supervisor cooperates and coordinates with other relevant supervisors and authorities such that a cross-border crisis involving a specific insurer can be managed effectively.
- Context and bilateral relations:
  - New Zealand market dominated by foreign players, particularly Australian-owned insurers; RBNZ maintains a strong bilateral relationship with APRA.
  - TTBC provides impetus for trans-Tasman cooperation; TTBC extended to include insurance in 2014 in principle, although agreement hasn’t been officially amended.
  - RBNZ officials recently began discussion with APRA about crisis management and resolution issues.
- Legislative commitments:
  - Section 68A of the RBNZ Act requires RBNZ to support Australian authorities in meeting statutory responsibilities in prudential regulation and financial system stability, and to the extent practicable avoid action likely to have detrimental effect on financial system stability in Australia.
  - Equivalent provisions in Australian legislation: APRA Act 1998, Banking Act 1959 and Financial Sector (Transfer of Business) Act 1999.
- Branch operations and policyholder preference:
  - RBNZ has exempted Australian branch operations in New Zealand from New Zealand solvency requirements; branches are not required to hold assets in New Zealand. They represent nearly a quarter of the total industry by premium income.
  - Regulation 7 of the Insurance Prudential Supervision Regulations requires disclosure by rating agencies of existence of overseas policyholder preference and whether there is material disadvantage to New Zealand policyholders.
  - For Australian life branches, New Zealand policyholders are part of the Australian statutory fund, having the same degree of protection as Australian policyholders; on this basis it is deemed there is no overseas policyholder preference.
- Crisis information powers:
  - Section 121 of IPSA allows RBNZ to require insurers to provide any information, data, or forecasts about matters relating to business, operation, or management for prudential supervision.
  - Section 122: power to compel information from associated persons.
  - Section 124(1): power to compel information from any other persons RBNZ has reasonable grounds to believe are in possession of relevant information or data.
  - Section 124(2)(b): RBNZ may specify “the time by which, and the manner in which, the information, data, or forecasts must be supplied.”
  - RBNZ has not yet defined its information needs for crisis management.
- Assessment: Partly Observed
- Comments:
  - The largest non-life insurer in New Zealand (locally incorporated) has a 44 percent market share. There would be a serious impact on the New Zealand market should it be in distress, similar to the AMI situation during the Canterbury earthquakes.
  - New Zealand policyholders of foreign branches may be in a vulnerable position given possible overseas policyholder preference.
  - Effective cross-border crisis management is a key issue for New Zealand policyholder protection and financial stability. RBNZ is in early scoping phase of developing policy for managing insurers in crisis.
- Recommendations:
  - Due to high level of cross border activities, RBNZ should prioritize its crisis management policy and procedures, and study how best to achieve IPSA’s principle of policyholder protection in crisis.
  - Due to high catastrophe risk in New Zealand market, RBNZ should require insurers to establish and maintain contingency plans and procedures based on their specific risks for going- and gone-concern situations.

*International Monetary Fund — New Zealand financial sector assessment (selected sections).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17121.pdf_