JO GOODHEW (Junior Whip—National) Link to this
I seek leave to have all parts of the Insurance (Prudential Supervision) Bill taken as one question.
The CHAIRPERSON (Lindsay Tisch) Link to this
Leave is sought for that purpose. Is there any objection? There is no objection.
Hon NATHAN GUY (Minister of Internal Affairs) Link to this
I think it is appropriate to acknowledge that this bill has good cross-party support. It had its first reading in December 2009, and it received 57 submissions, 31 of which were heard by the Finance and Expenditure Committee. The committee worked particularly well through this process and made some useful refinements to the bill.
The bill generally focused on licensing and prudential regulation for all insurers carrying on insurance business in New Zealand. All insurers are to be licensed and supervised by the Reserve Bank. They must comply with prudential requirements, and the Reserve Bank will be both the regulator and the supervisor. The bill aligns New Zealand with international regulatory benchmarks and expectations. It is a stand-alone measure, rather than an adjunct of the Reserve Bank of New Zealand Act.
The bill’s primary purpose is the promotion of a sound and efficient insurance sector and the promotion of public confidence in the sector, which, as I am sure the Committee would agree, is particularly important. The bill covers all categories of insurers carrying out business in New Zealand: life, non-life, and medical. All insurers must have a financial strength rating, except the very small insurers and the friendly societies. All insurers must have a satisfactory, fit, and proper risk management programme, and life insurers must maintain a statutory fund to protect their long-term policy liabilities.
As I mentioned before, the Reserve Bank will have broad information-gathering powers of supervision, including an active role in the management of distressed insurers. The bill has had extensive stakeholder consultation, and its purposes and approach have generally been accepted by the industry.
Hon SHANE JONES (Labour) Link to this
Mōrena, Mr Chair. Without wanting to protract our deliberations, the record of Parliament must show that this side of the Chamber supports the Insurance (Prudential Supervision) Bill. Although it deals with a very technical area, the underlying theme is common with what we said yesterday in relation to improving the quality of administration and the safeguards around the broader elements that comprise the commercial sector. For those reasons, the Reserve Bank is viewed by us as being a very suitable location from which the prudential powers should be located and exercised.
The difficulty, as I recall hearing from Mr Garrett, is that from time to time if insurance companies are not adequately supervised, they will be like a host of other commercial institutions and be prone to whim, fancy, or whatever passes as the mood in the investment community—that which is enjoying vogue at that point in time. These are very important institutions, and, indeed, a number of speakers earlier in the debate made reference to the fact that insurance companies are critical to their lives, because they have a type of insurance that they are entitled to gain access to if they are without a job. I do not fit into that category, because I never imagine that I will be without a job. The difficulty may be that I am not paid for the job that I end up with, but such is the life associated with assuming a role outside the paid workforce. My relation Hone Harawira and I can speak at length about those matters.
Of course, the deeper problem that I have alluded to earlier in relation to this bill is that we are applying another responsibility to the Reserve Bank of New Zealand Act, but we are not dealing with the underlying writ of the Reserve Bank of New Zealand Act, which a number of my colleagues have referred to publicly. That is, if we are to promote an export-led level of growth, if we are to promote—[Interruption]—perhaps a type of lashing is needed. My train of thought was disturbed not only by looking at Mr Foss but by the whips ringing Dr Blue.
No, I can rest assured. I will repeat what I said yesterday. Out of The Wizard of Oz comes the story of someone looking for a heart, another person looking for a brain, and another looking for courage. I will leave Mr Foss to determine which of those qualities he seeks in his political career. However, let me come back to the deeper problem, which is the ambit—
Paul QuinnI accept that Mr Quinn, when he originally heard the story, did not quite know what I was talking about, but he did pick up on the reference to Gonzo the Muppet. However, the broader challenge in terms of the responsibilities of the Reserve Bank concerns whether we have the right mix of focus in our current monetary policy, over which the Reserve Bank has an exclusive level of authority. That largely is its writ.
We look forward to actually engaging in a broader debate beyond the refinement of the prudential obligations that the insurance industry should observe, which will be located in the Reserve Bank. But at a broader level, if the current Government is good for its word and is interested in fostering an export-led economy, I ask it what ideas and remedies it has to deal with the volatility and the current arc that our currency is going through. I want to know whether it is time for monetary policy, which has been in place for 20 to 25 years, to be opened up and debated in a very robust way, to see whether it can play a more useful function in relation to advancing an export-led recovery.
There is a real contrast between the type of sophistication that has been brought to the economic area by the current Government and that brought by the previous Labour Government. In changes of this nature, broadly, the current Government has built on what Labour did in its time in office. We were particularly interested to ensure that we laid down the broad architecture for those policies, whether they were savings policies or measures to improve the institutions that really are the pillars of our commercial communities, such as insurance and the administrators’ insurance. This Government, over the last 18 months, in the absence of any radical or sustainable ideas about how to grow the economy, has ended up exhausting energy and time both on cutting taxes and on other issues.
STUART NASH (Labour) Link to this
As my colleague Mr Jones alluded to, the Insurance (Prudential Supervision) Bill amends the Reserve Bank of New Zealand Act and gives the Reserve Bank prudential supervision over the insurance industry. I suppose we can have no discussion at all about the Reserve Bank without mentioning monetary policy. As Mr Jones alluded to, monetary policy, I suspect, will be one of the election issues where National wants to keep the status quo, thereby inhibiting the potential of our exporters to really, really grow and achieve their potential in this day and age of globalisation. Labour, conversely, has a bold new plan—that is, p-l-a-n; but I know that those chaps on the other side do not know how to spell it, let alone what it means—to really deal with one of the three major problems that the New Zealand economy has at the moment, which is a volatile exchange rate. A volatile exchange rate at this point in time means that exporters have no ability to plan with any type of certainty in relation to how much they are going to produce, where they are going to sell to, and how they are going to do that. The only way to do it is to work with the Reserve Bank, and with the Reserve Bank of New Zealand Act.
The introduction of this legislation, the Insurance (Prudential Supervision) Bill 2009, is another significant step towards achieving clear, robust regulatory arrangements across the financial sector. Again, when we talk about what has happened in the financial sector, we can say it has been an absolute disaster—an absolute disaster—as many thousands of Kiwis have lost literally millions and millions of dollars. I am talking about the financial sector here—
Amy AdamsI will get to that. If that member had something worthy to say, then we might listen, but she should keep quiet and wait for her turn.
What this bill does—[Interruption] If people listen, they might actually learn something. The bill will replace outdated and disjointed legislation. It will fill gaps where no prudential regulation currently exists. If that is not part of the financial system, then I am not too sure what is. Having said that, I say that Government members of the Chamber have no idea, at all; they want to retain the status quo when it comes to the financial systems of this country, but we know that the status quo has not worked. People always go back to the status quo when they do not have a plan on how to move things forward—but, anyway!
This bill will remove the inconsistent application of requirements between different insurance sectors. The purpose of the bill is to encourage the maintenance of a sound and efficient insurance sector that promotes confidence among policyholders and the general public. Of course, confidence among the general public in the financial industry has been at an all-time low, due to a dreadful state of governance, maintenance, and management, to date.
Hone HarawiraThank you very much. The bill establishes a licensing regime for insurers and prudential regulators, with compliance being largely self-administered while supervision is provided by the Reserve Bank. As mentioned, this is another tool in the Reserve Bank’s arsenal of tools. We think the Reserve Bank could do a hell of a lot more in driving the economic growth of this country, but it does not have the statutory power to do that. The Labour Government, which we will have here in the next—I do not know—12 or so months, will change things; we have a plan. The bill will cover most entities that undertake insurance business in New Zealand, including life insurance, health insurers, captive insurers, and the insurance activities of incorporated societies. It is a sensible bill, and it is one that we support. It establishes, as we have mentioned, a prudential regulatory framework for the insurance industry, and in doing so it gives a number of powers to the Reserve Bank to carry out its new role.
I will mention some of the key provisions of the bill. It will require insurers, for example, to obtain a licence—and criteria for eligibility will have to be met in order to do that—and to maintain solvency. Well, that makes sense, does it not? Of course we want our financial institutions to maintain solvency, because if that does not happen, we will get what happened with the finance companies: they were insolvent, so Kiwis lost millions and millions of dollars. In fact, I hope the new Minister of Consumer Affairs will take a call on this bill, because this legislation does affect consumers, and consumers are at the heart of it.
Hon Ruth DysonHe is passionate about it; he is indeed. So I hope he comes to the Chamber.
The bill also requires insurers to obtain and publish financial strength ratings, which allow consumers to have choice, but not the sort of choice that they had in respect of financial companies. This means that an insurer is transparent, it is out there, and consumers can look at it and understand what they are getting into.
Those companies will have to meet fit and proper standards for directors and relevant officers. Again, that is most important. If we look at the financial sector in the past 3 or 4 years, we could very strongly make the case that one of the reasons why it acted so dismally—in fact, it failed—is that there was not a sound governance structure, at all. In fact, the structure was deficient; it was missing. Insurers also have to comply with a risk management programme. Again, that was a provision that was missing from finance companies. Insurers have to appoint an actuary, and they have to prepare an annual financial condition report and annual and 6-monthly financial statements.
This is all in the new bill; it is a fantastic bill, because it provides certainty for the consumer. Insurers also have to maintain at least one statutory fund that relates to their life insurance business, which is solely for the purpose of meeting life insurance liabilities.
This bill recognises and accommodates supervision by the home regulator of overseas insurers based in New Zealand—subject, of course, to such regulation meeting the satisfaction of the Reserve Bank. The bill also allows for cooperation with overseas regulators. In essence, this means that if an insurance company with a parent overseas meets a whole lot of conditions deemed necessary by its governance authority—say, an authority in Australia, for example—then that company does not have to go through the whole rigmarole in New Zealand if the company can prove that it is good, sound, and robust, as a lot of those key provisions that I mentioned allude to.
The bill obliges the Reserve Bank to supervise insurer compliance with the bill and with regulations. In the event of non-compliance, the bill enables the Reserve Bank to escalate supervision through investigations, and, ultimately, through distress management and liquidation. Some regulations will be new to insurers, and a transition period of 2 to 3 years will follow enactment, to facilitate a path to compliance for insurers that are unable to meet the licensing requirements at the time of enactment. The insurance market is very large and diverse in this country, so the transition period is important to make sure that we give every company the opportunity to comply. More specifically, the bill sets out a framework of prudential regulation and supervision for the New Zealand insurance sector. The approach is generally aligned to internationally accepted insurance regulatory practice, and will recognise the diversity of the New Zealand insurance market.
I will go through some of the main areas of the bill, and these are as follows—
The member over there yawned; that is astounding, is it not? Many of that member’s constituents have lost hundreds of thousands of dollars due to a very, very lax set of regulations governing the financial sector. But he does not care one bit, at all. I challenge that member to call a public meeting and invite to that meeting every single person in his area—I know he does not hold an electorate, and has no hope of holding one of the Hutt electorates—who has lost money to one of the finance companies, and explain to them why this sort of financial regulation is not important and why it is not needed.
The CHAIRPERSON (Eric Roy) Link to this
This legislation is about insurance, not finance companies. The member will continue.
I will cover some of the main areas of this bill. In respect of the licensing of insurers, licensing ensures that a consistent set of minimum standards is met by all insurers. The standards must be obtained to receive a licence, and once a licence is granted insurers are able to be monitored against those standards. There is a minimum set of standards that every insurer must meet. That is most important, but it is also common sense, as legislation should be. That reduces the need for consumers to make complex inquiries regarding an insurer’s financial strength and other indicators.
One of the criticisms I have is that there is such a DIY mentality to investment in this country that we need to make that licensing incredibly clear: the level of financial literacy is low, so we need to make it very clear and very simple so that consumers know what they are getting into. This bill does that. Insurers covered by this new regime will need to be licensed before the legislation comes into force. The bill will come into effect 18 months after it has received its Royal assent. After that date it will be an offence to carry on, or hold out that one can carry on, an insurance business in New Zealand without a licence. That is most sensible. Thank you.
CRAIG FOSS (National—Tukituki) Link to this
Well, that speech from Stuart Nash was the best indication that voodoo economics is on the way back. The platform of the Labour Party at the next election will be monetary policy, apparently. Its platform will not be tax cuts, affordability, the cost of living, climate change, or jobs; its policy, going around the traps, will be monetary policy.
I look forward to seeing Mr Raymond Huo, Mr Choudhary, etc. going around the traps and talking about monetary policy. At every meeting we will furnish our candidates and MPs with the report of the inquiry into future monetary policy, which was started and completed under the previous Government at the whim of Dr Cullen and the Labour members on the Finance and Expenditure Committee, what was it, 2 years ago? In September 2008, I think, that report was presented to the House.
It was very interesting, because the terms of reference of that inquiry—I am just replying to Stuart Nash, the previous speaker—were agreed to and formulated by the National members, including me, on the Finance and Expenditure Committee and members of the previous administration. As two other speakers have already brought this debate into the realm of monetary policy, for some reason—
The CHAIRPERSON (Eric Roy) Link to this
It was my error to allow the previous speaker, Stuart Nash, a second call. I regret that, but that does not mean—[ Interruption] That member can go outside for half an hour. I am on my feet; I mean that. That does not give any other member the opportunity to move the debate away from the bill. We are on the Insurance (Prudential Supervision) Bill. Members will speak to the bill in the Committee stage.
Thank you, Mr Chairman; I totally agree with you—I reiterate that the Insurance (Prudential Supervision) Bill falls under the ambit of the Reserve Bank. I make one qualification: the bill has nothing whatsoever to do with the Reserve Bank of New Zealand Act, as some members have indicated, although the Reserve Bank sponsored the bill and its officials helped the Finance and Expenditure Committee during the bill’s select committee process. As we are now in the Committee of the whole House, it is appropriate that the officials are in the Chamber to assist the Minister and the Committee of the whole House where necessary.
It is very pertinent to not confuse this Insurance (Prudential Supervision) Bill with any type of regulation to do with finance companies. I think I am correct in saying that not one cent has been lost within New Zealand, or even in the United States, from memory, from collapses of insurance companies. Attention has been focused on the need for this type of supervision and for a more generic approach to all things financial. But Mr Chairman is quite right to say that bringing the debate into the realm of finance companies in Lower Hutt or somewhere has absolutely nothing to do with insurance. I reiterate that I do not believe that even one cent has been lost by New Zealanders from their funds held by insurance companies in New Zealand.
This bill is a preventive measure and it is quite a prudent measure—the word “prudential” is in the bill’s title. Prevention is better than cure. This bill is a recognition that in modern finance, where funds in finance companies and companies in the insurance industry are exposed, or where there is any cross-pollination or exposure of each other’s funds, it is good to have the same regulator at the top of the tree keeping an eye on everything. There are some common themes between how this bill works and how banking supervision works. Even though some of the funds involved are ring-fenced in many aspects, their supervision needs strengthening. Many of these funds are quite substantial and they dwarf the funds in some of the institutions that members opposite were speaking about in those two earlier speeches.
As tempting as it is to discuss that matter—and I note Mr Chairman’s comment earlier about sticking quite narrowly to the bill, but, goodness gracious me—I look forward, I suppose, to hearing further speeches from members opposite to counter some of the comments made. However, I agree with Mr Chairman’s ruling that the previous speaker went outside the scope of the debate. Basically, my assertion is that those members were totally wrong. That those members are putting monetary and fiscal policy into one bucket and giving it to the Reserve Bank—which is kind of what I heard—is very interesting indeed.
The Finance and Expenditure Committee had 57-odd submissions on this bill. I acknowledge the process, the officials who were involved, and the members of the committee. I realise that members opposite are voting for this bill, and once we got to the nitty-gritty, there was only one point of real interest, or angst, perhaps, in the bill for one or two select committee members. I recall them speaking about that point in the second reading debate.
We opened for submissions on 8 December 2009 and closed on 10 February 2010. The point is that there was ongoing consultation. There was the normal process of a bill coming to the committee, and then the committee opening it up for public submissions, particularly from those who had not been involved in any process, pre-consultation, or discussions with the Reserve Bank, or whoever might be running the bill. If it were a tax bill, the discussions would have been with Inland Revenue Department officials. Really, parallel conversations were going on. That was the correct process, because the committee was totally informed as to who was involved in those discussions, what material or policy changes had been made, and which strong debates, discussions, or areas of disagreement there still were.
Efficiency in the public sector, if you like, took one great leap forward in so far as this bill was concerned, because it is quite substantive. If we look at just some of the background documents and some of the organisations that were involved, we see, overall, that only one particular sector was not as happy at the outcome as others, and that sector was the captive insurance industry. To its credit, it made its case very, very strongly. But I made the point in the committee, I think, that the control missing from some of those arguments was in trying to quantify the risk to New Zealand and to our reputation and aspirations as a First World financial centre if we were to be included in the same group as the Cayman Islands, Jersey, Guernsey, and various other places like that. That would be a deliberate choice for New Zealand. On balance, I am quite confident that we made the right choice.
The committee made some substantive changes. Initially, we had quite interesting discussions and debate about what insurance was, in fact. We talked about whether insurance was discretionary. Members would not believe how many organisations that discussion picked up. Even if someone contributes to a fund, a trust, or a friendly society, the key point was whether that person would have discretion on payout. Some professional bodies were included in that discussion, including some Wellington organisations, like the Loyal Britannia Lodge, from memory. All sorts of interesting things came out of that discussion. These were organisations where fund members had put in a few dollars every week for their funeral costs, intending that fund to mature in 10, 20, or 30 years, or whenever it might be. Originally, those organisations were picked up by this bill. It is a credit to the select committee process and the Reserve Bank officials that those organisations were carved out. I think we put the cap at $1.5 million, or was it $3 million? But, basically, there was no mischief whatsoever. The risk to the insurance part of the New Zealand financial system was very, very small in so far as those bodies were concerned.
As it turned out, there were two or three types of groups. There were the very small groups. There were professional bodies, such as those that offer some medical insurance, veterinary insurance, or dental insurance. Then there were the larger players whom we all know about, such as AMI Insurance and the big-end-of-town insurance companies. Overall, I still attest that, on the whole, they were generally comfortable. There was some detail that they were not comfortable with, and some are still not very happy, but all the rhetoric and allegations around this bill have quietened down quite massively. Some of the allegations about there being an increase in premiums because of this bill, etc., have not come to pass, because those who made the allegations were being a wee bit facetious. They had built in those premiums and made changes anyway because of other changes to the taxation treatment of the life insurance side of their businesses and the normal insurance side of the business. One side is the balloon side and the other side is the user-pays, “pay as you go” - type stuff.
One point I will raise is that other members had concerns about the impact on the balance sheets of large New Zealand insurance companies. As I said in my speech in the second reading debate, that concern has been flagged for quite some time. I cannot quite remember when the bill was first introduced to the House, but there have been discussions on it for quite some time. With regard to the effect of the bill having an impact on insurance companies’ balance sheets, I say it will be something like 3 or 4 years all up from the first discussion of this measure to when those companies must comply. There have been allegations as to the cost for some of the policyholders, trust holders, or unit holders, if you like, for those institutions. Actually—and this came into the discussion of New Zealand regulation versus Australian regulation—after 3 or 4 years of lead time, a balance sheet moves around and investment decisions are made. Some companies make those decisions based on regulatory arbitrage, perhaps, and others make them based on tax arbitrage.
This is a very good bill. I acknowledge the Opposition for supporting it. Thank you.
Hon MARYAN STREET (Labour) Link to this
I am pleased to speak in the Committee stage of the Insurance (Prudential Supervision) Bill. Without wishing to try the Committee’s patience, I want to take my few minutes in this call to describe the bill in terms of what it is not, because sometimes describing something in the negative is as beneficial as describing it in the positive. We will see how we go and how much I try members’ patience in the process.
Clearly Labour supports this bill. Our main concern was to ensure that it benefited insurance policyholders through ensuring the security, the transparency, and the fairness of a supervision scheme. Of course we are in agreement with that. We also support the Minister of Finance’s Supplementary Order Paper, Supplementary Order Paper 155. There is a 200-page bill and a 10-page Supplementary Order Paper, and both of them reflect what the bill could have been but did not go into.
We support the bill, and we support the Supplementary Order Paper, but the question arises from the Supplementary Order Paper as to whether this bill seizes the opportunity that was before the Government—and before the Finance and Expenditure Committee, but at the direction of the Government. In doing something essential, which this bill does, it achieves what it sets out to do, and that is to encourage by its own purpose the maintenance of a sound and efficient insurance sector that can promote confidence amongst policyholders and the general public.
However, these are extraordinary times. To improve the insurance sector and the transparency and security of it is good in these extraordinary and uncertain times. But, in fact, the Government could have taken the opportunity to do something even more substantial. Here in this bill, a portion of our economic structures are being given into the hands of the Reserve Bank in order for that monitoring and supervisory function to be performed. That is a good thing.
But what the Government could have done was to take another look at the functions of the Reserve Bank and to expand its functions in a way that addresses—
The CHAIRPERSON (Eric Roy) Link to this
There is a point of order. I think I can anticipate what it is, and, without even hearing it, I will uphold it. The member needs to clarify the argument she is putting in relation to the bill before us.
The CHAIRPERSON (Eric Roy) Link to this
No. I have spoken. I have just said that the member must talk about the bill. You can make a comparative example, but you must draw it into the bill.
Hon MARYAN STREET Link to this
The treatment of the insurance sector, as I have already said, is a valid, important, and justifiable thing to do. But why do we not accompany that with some additional measures that relate to comparable sectors in the financial structures that we have, and deal with a comprehensive range of the financial tools that are available to this Government—or that could be available to the Government with some imagination and boldness?
In this bill, we have a cringing timidity on the part of this Government that restricts it from looking at the creation of other financial and economic institutions or powers within the Reserve Bank, and limits it only to the purpose of this bill, which is, in fact, to encourage the maintenance of a sound and efficient insurance sector. We do not disagree with that, but it cannot go unnoticed in the context of describing what this bill does, that the Government could have done more.