Hon BILL ENGLISH (Minister of Finance) Link to this
I move, That the Insurance (Prudential Supervision) Bill be now read a second time. I want to begin by thanking the members of the Finance and Expenditure Committee for their prompt but rigorous handling of the bill. This is fairly complex legislation that brings prudential regulation to an industry that has not previously been legally subject to such requirements. The bill has been widely consulted on with stakeholders prior to the select committee, which received and considered 57 submissions and heard 31. Not unexpectedly, the submissions covered a broad range of issues. The committee is to be congratulated on the depth of its analysis and its unanimous recommendations. I think that unanimity may well have come from the fact that this Parliament has spent a good deal of time in the last 3 or 4 years, under the previous Government and this one, updating the regulation of the whole financial sector.
The key purposes of the bill are to promote the maintenance of a sound and efficient insurance sector and to promote public confidence in that sector. It will achieve this through the establishment of a framework for the prudential regulation of insurers, including the licensing of insurers; imposing prudential requirements on them; providing for the supervision by the Reserve Bank of insurers’ compliance; and conferring certain powers on the Reserve Bank to act in respect of insurers in financial distress or other difficulties. The bill focuses on the licensing and prudential regulation of insurers carrying out business in New Zealand. It does not offer New Zealand licensing to insurers that do not carry on or propose to carry on business in New Zealand or that do not have New Zealand policyholders.
Overall, the provisions and requirements of the bill are generally aligned with established worldwide insurance regulatory practice and, despite imposing new requirements on insurers, they are not radical in comparison with other measures internationally. The industry has generally acknowledged this approach, and as a result is in general support of the regulatory model in the bill. Compliance costs associated with this bill are not considered to be high, with a largely self-administering approach being applicable to compliant insurers.
The bill contains a strong emphasis on the obligations and accountability of directors and senior officers. The committee has recommended a number of practical refinements to clarify the scope and application of the bill. Refinements are recommended to the key definitions of “contract of insurance” and “carrying on insurance business” in order to avoid the unintentional capture of certain activities that are outside the scope of the bill, such as discretionary mutual providers, and trade associations and union groups that provide limited insurance coverage that is incidental to the primary purpose of those organisations. In addition, and as a means of ensuring that compliance costs are not disproportionate for very small insurers, limited exemptions from certain compliance requirements are recommended for existing very small insurers with premium levels below a specified level and for friendly society insurers.
Considerable thought has been applied to the treatment under the bill of overseas insurers carrying on insurance business in New Zealand. The bill will continue to allow overseas insurers to operate New Zealand branches. The Reserve Bank will publish a listing of overseas regulatory jurisdictions approved as satisfactory for overseas insurers seeking the home host exemptions potentially available to them in respect of the fit and proper requirements, the solvency standards, and the statutory fund requirements. The approval of an overseas regulatory jurisdiction as satisfactory will be conditional upon the regulatory standards in the home overseas jurisdiction being comparable with the New Zealand standards.
In respect of the solvency standards that will attach to the bill, the committee has recommended that the Reserve Bank must have regard to similar standards in relevant offshore jurisdictions for the purpose of ensuring that solvency standards do not apply in an unreasonable manner as a result of an insurer’s country of incorporation, whether that is here or overseas.
In addition, the bill now provides for matters relating to minimum capital requirements for insurers. Recommended changes to the licensing requirements within the bill include a requirement that all licensed insurers must meet the qualified person criteria contained in section 13(a) of the Financial Service Providers (Registration and Dispute Resolution) Act, regardless of whether or not the licensed insurer is required to register under that Act.
With regard to the financial strength ratings of overseas insurers, the bill now requires rating agencies to refer to any overseas policyholder preference that may apply. In addition, the disclosure requirements relating to ratings have been amended slightly to make them more practicable and cost efficient. In areas such as fit and proper requirements and statutory funds requirements, a reasonable amount of technical detail has been transferred from the bill to regulations. This will make the bill less complex as well as enabling more flexibility if future changes are required, which is entirely possible with a new regulatory regime.
A number of changes are recommended that are intended to improve the practicality and efficiency of the bill. These relate mainly to requirements in areas such as solvency standards, statutory funds, transfers and amalgamations, and disclosure and confidentiality of information.
There have also been a number of minor drafting changes. I will take this opportunity to signal my intention to introduce at an appropriate later stage a Supplementary Order Paper to deal with some minor technical drafting issues discovered since the bill was reported back, and also to clarify the commencement provisions of the various sections of the bill.
The enactment of this legislation will repeal a number of existing and outdated pieces of insurance legislation in New Zealand, and it will remove inconsistent legislative application between different insurance sectors. It will bring New Zealand more into line with international standards and benchmarks and with expectations around the financial services sector. Although the New Zealand insurance industry is not considered to be an industry in distress, this legislation is intended to ensure that the industry collectively and its insurers individually will be well positioned to manage such distress should such a situation arise in the future. It is pleasing to be part of a process that is regulating the sector ahead of a time of crisis or a time of distress, by getting the Reserve Bank in place as a regulator and putting in a new framework for the individual insurers.
I must pay a compliment to the industry. It has taken a constructive role in this process going back a number of years, including under the previous Government, which has helped to improve this legislation. I commend the bill to the House.
Hon DAVID CUNLIFFE (Labour—New Lynn) Link to this
I rise to commend the Insurance (Prudential Supervision) Bill to the House in its second reading, and to support, in large part, the comments of the Minister of Finance, who has just resumed his seat. I note that there is bipartisan support for this bill, that the genesis of the bill lay with the previous Labour administration, and that its execution and implementation have been carried on with thoroughness and efficiency by officials of the Reserve Bank of New Zealand, under the stewardship of the current Government. I commend the Finance and Expenditure Committee, its chairman Mr Craig Foss, its members on all sides, and the officials who have supported it. I also commend the insurance industry, which I believe has taken a broad and national interest - based view on the very serious matters that are the subject of this bill.
I reflect upon the fact that the context for the genesis of this bill was a series of extraordinary events that brought the world economy itself to the brink of a depression unprecedented since the 1930s. In October of 2008, on a day I will never forget, we received news that Lehman Brothers, the American investment bank, had collapsed. Lehman Brothers was at the heart of the New York financial infrastructure, so world credit markets froze. In the weeks and months that followed, the Reserve Bank of New Zealand rose to probably its toughest challenge, and it did so with grace and rigour. It was not many months later that the world’s largest insurer, IAG Group, sought a bail-out by the US administration. The world was advised that there was a real prospect that global credit card payment systems would be suspended, and that every New Zealander would have—
Hon DAVID CUNLIFFE Link to this
Thank you—AIG; I have “acronym-itis”, and I thank my colleague for the correction.
Every New Zealander who had a credit card would have noted the situation and would have felt the disruption that that caused. So we have a bill here that sets about bringing the insurance industry and the re-insurance industry within the prudential supervision purview of the Reserve Bank of New Zealand. In doing so, the bill further underscores the importance of New Zealand having what is known as a “full service” Reserve Bank, one that is responsible for both the conduct of monetary policy and the supervision of the printing issuance of currency, and also for the integrity of financial markets, in noting that financial stability is so much more than simply price stability.
That brings me to the key provisions of the bill. We will debate these provisions in the Committee stage in more detail so I will not go through them now, other than to single out the issue that was of most concern to the committee, which was the treatment of overseas insurers operating in New Zealand. When I reread some of the language in these notes, I believe that some clarification is merited. The committee wrestled with the issue of whether New Zealand - based insurers would be disadvantaged by the provisions of this bill, which allows the Reserve Bank to grandparent foreign, mainly Australian-based, insurers into the New Zealand market. We spent hours discussing and receiving evidence on whether New Zealand - based insurers—and I can say publicly that AMI is the key example there—would be disadvantaged. On balance, the committee was reassured by officials that there would be no such disadvantage in the way in which this legislation was implemented. But I do want to lay down a very serious marker, which is that the Labour Opposition will remain vigilant on that matter, and that the sovereignty and strength of the New Zealand financial markets is a matter of the highest national importance. We have a continuous bleed on our external accounts because most of our financial systems are overseas-owned, and we must not hollow that out.
Let me come to the second major theme that I wish to advance today—that is, that the extension of prudential supervision to the insurance sector has clearly required legislation. It is also appropriate that the extension of the current Reserve Bank role to macro-prudential supervision of the monetary system, and the counter-cyclical use of macro-prudential policy, should have legislative amendment akin to this bill. The counter-cyclical use of a prudential policy to achieve monetary policy objectives is not provided for explicitly in the Reserve Bank of New Zealand Act as it currently stands. It is not provided explicitly in that Act as it currently stands. The Reserve Bank is interpreting the Act as being broad enough to accommodate both roles. The Labour Opposition, as part of its extensive review of monetary policy, recommends—
Mr DEPUTY SPEAKER Link to this
We have a speaker on his feet speaking, and there is a cross-dialogue going on here that has nothing to do with the debate.
Hon DAVID CUNLIFFE Link to this
It is a matter of great regret that given the seriousness of the financial issues that surround our economy, this matter of the extension of the Reserve Bank of New Zealand Act into macro-prudential policy has not yet been accommodated.
A third theme that I wish to advance today is that ensuring the integrity of insurers goes to the heart of our financial system. The insurance industry requires public confidence, just as the institutions of Government more broadly require public confidence. That is why we have a Cabinet Manual, that is why we have the Standing Orders, and that is why we require Prime Ministers to enforce the provisions of the Cabinet Manual for all Ministers. If they do not do so, the public has no insurance that those who operate to supervise their markets and their country are acting with integrity. It is a matter of great sadness and some concern that the public of New Zealand—
Paul QuinnHon DAVID CUNLIFFE Link to this
Mr Quinn would do well to note that the public of New Zealand hold politicians to be less trustworthy than prostitutes. This matter is a matter of grave concern. The member may laugh, but on a day when it has been revealed that New Zealand’s Minister of Trade has used information found during his conduct of ministerial duties to enrich himself through the shadowy operation of a private trust, and has failed to declare that publicly, that is a matter of concern, because it corrodes the integrity of the Government and of this House. I wonder why the Prime Minister of New Zealand has lowered the standards of ministerial accountability—standards that are so far lower than those that patently apply in the New Zealand Labour Party—because Ministers in this Government are allowed to enrich their private interests when on public business; they are allowed to buy and trade shares—
Mr DEPUTY SPEAKER Link to this
We are getting into the territory of accusing a member of points that are not part of this debate. I ask the member to withdraw that comment and to proceed.
Hon DAVID CUNLIFFE Link to this
I withdraw the comment made in relation to any particular member, but I trust that you, Mr Deputy Speaker, will not require me to withdraw the sentiment that ensuring the integrity of our political institutions, including our Cabinet, is a matter of the highest national importance. In that regard, it has to be regretted when a Prime Minister lowers those standards of accountability. The Minister of Finance might smirk about that matter because he has been on the receiving end of that leniency on several occasions, and other members might find themselves in need of such leniency, but the net effect for this country is that the public’s esteem of the Government will fall further. How can the public be sure that when a Minister is gaining information about markets, the information will be used for the public interest and not the private interest?
CRAIG FOSS (National—Tukituki) Link to this
I will talk to the Insurance (Prudential Supervision) Bill. I acknowledge the points made by the previous speaker, the Hon David Cunliffe, in the first half of his speech about the bill. I tend to agree with most of what he said about the bill. Unfortunately, he went off the track a bit by talking about trust and integrity. In a hypothetical situation, if someone was lurking around sending letters, perhaps under the cover of darkness, but was caught out by security cameras, it would not look good in terms of trust and integrity. Of course, there are also interesting issues of privacy, etc., and, in terms of how people get access to confidential information, which is something that the previous member spoke about, it would be interesting to also raise issues of confidential video catalogues and recordings of proceedings in various places. We should all be vigilant, and we thank the member for acknowledging the point that some politicians need to be careful and constantly vigilant. It is well noted.
I will return to the bill. First of all, I thank the members of the Finance and Expenditure Committee for scrutinising the bill; the previous speaker is a member of this committee. The committee as a whole came together in respect of this bill. Quite a few changes were made to the bill, some of which were more major than others. We had a very active submission process, and I think we drew on the ability of those around the table, and particularly of officials, to get to some of the points and changes that we have made. I acknowledge the officials and the Reserve Bank of New Zealand, which sponsored and worked on this bill. It is not very often that we get a bill—“driven” is not quite the right word—managed, perhaps, by the Reserve Bank itself.
I acknowledge not only the work of the commercial sector but also the parallel process that officials went through, as issues arose in ongoing consultation with the committee. That process works very well, because we catch up and we do things cumulatively. As we can see from the changes to the bill, this system has worked, although not necessarily to the satisfaction of all submitters. Some submitters were very active in their proposals around their particular part of the sector, but, again, as the previous speaker started to speak about, there are some risks to the New Zealand financial system. I note, again, that this bill is called the Insurance (Prudential Supervision) Bill. Thus it relates to the insurance sector, which is part of the finance sector. We need to be constantly vigilant. We are very lucky in this country that we have not had any major insurance incidents. Another member talked about an American company, but that was not in respect of any insurance company failure through this process having created a problem. Some of the investment banking and highly leveraged stuff had created the problems in the first waves, if you like. But the concerns are acknowledged.
Just quickly, I will mention a couple of changes that I like in particular—and I know that another member may talk to some issues, as well. Of the 57-odd submissions made to the committee, several were in respect of smaller entities. The industry is pretty much split into some very small players and some very large players. The very small players argued—some quite successfully—that, firstly, they were not really in the insurance business, and, secondly, that they were self-contained, if you like, or had not done much in quite some time. So I acknowledge the Minister, the officials, and the committee for coming to recommendations and conclusions, and for proposing the amendments that we see in the bill now. The recommendations carved out the small players and looked after them. There was no particular mischief going on, in a prudential sense, and, of course, those entities are also covered under other legislation and regulation, anyway. But the larger players have been picked up by this legislation.
Finally, I will make a couple of points about the recognition of other regulatory agencies, or, basically, other central banks. We had quite a discussion about that. I think that the point that we have got to in this bill is very helpful, in respect of the commitments from the Reserve Bank as it goes through the process. We have provided greater clarity than was in the original legislation. Also, I note for participants in the New Zealand insurance industry that it has been about 18 months since the first signals were given—probably longer, because the previous speaker noted that this legislation started under the previous Government—of some of the changes in respect of the conservative or prudential ratios that were going to arrive for this industry. There is also a lead time, once this bill is passed. There is still quite some time for balance sheet management to occur, so there should not be any sudden shocks to the shareholders of those particular companies, their unit holders, their local shareholders, or whatever they may be.
I commend the bill to the House. I again acknowledge the ongoing hard work of the select committee. Again, putting politics aside for a moment, I say the way that the select committee dealt with this bill across the parties produced good public policy and a good document for New Zealand. I acknowledge the contribution of all members of the select committee, as well as the contributions of the officials and the sector. Thank you.
BRENDON BURNS (Labour—Christchurch Central) Link to this
I acknowledge, first, the role that Craig Foss, as chair of the Finance and Expenditure Committee, played in this Insurance (Prudential Supervision) Bill. He did indeed steer it through the select committee well.
I do not want to go too far. I will comment on the background to the bill and about a particular aspect of it that, as my colleague David Cunliffe has indicated, the Labour members on the committee will be watching to ensure that it works in the way that the Reserve Bank has assured us it will work. I will also look at a missed opportunity in respect of this bill.
The background to this bill was the collapse of financial markets 2 years ago in the United States, which spread across the rest of the world. We have seen moves in this country to reinforce regulation of the way in which banks and financial institutions operate, and that left the question of where the insurance industry was. Although the insurance industry in New Zealand was not in any distress, the global financial crisis illustrated very clearly the vulnerability of the financial sector as a whole; hence the emergence of this bill through that process. The bill requires all insurers operating in the New Zealand market to be licensed and supervised by the Reserve Bank, and to comply with minimum prudential requirements. Compliance will largely be self-administered under the bill, but the Reserve Bank has an important supervisory role.
The Labour Party supports the bill. But one comment Labour members would make is that it does not go far enough in dealing with one of the key economic issues that we face as a nation—that is, the need to put exporters at the centre of monetary policy. If we needed a further illustration of that today, I guess it came in the announcement, not unexpected, from the Reserve Bank governor that the official cash rate will rise by another 0.25 basis points, to 3 percent. This is not an unexpected decision, but one that reflects on our current monetary policy settings. Indeed, the Reserve Bank governor has little choice. Given the focus of the current Act, he must reflect his concerns for the future rise of inflation. That is the only policy setting he has to pay any real regard to.
We note that in the last 3 weeks the Prime Minister was in my electorate of Christchurch Central to address a forum of exporters. He stood up and said—with some audacity, I have to say—that the monetary policies of this country were “the best in the world”. If the best in the world means that our exporters continue to get stick because of the settings of monetary policies—
We have indicated very clearly. Phil Goff has given a speech, which the Prime Minister chose to pan, in which he said that we should be looking at monetary policy settings. We can be bipartisan. We have indicated a wish to be bipartisan on many measures within this bill, but we cannot let it go without any commentary suggesting that if we are to be bipartisan on the future of the insurance industry, then why can we not be bipartisan on monetary policy?
Hon Dr Jonathan Coleman Link to this
You guys can’t even be bipartisan within your own party at the moment.
The exporters of this nation are telling MPs like Jonathan Coleman, every day in his electorate, that it is screwing the scrum in respect of their capacity to export and earn for this nation. There is no one magic bullet on monetary policy, but there is a need to review the settings, as Australia has done.
We hear often from members on the other side of the House that New Zealand wants to catch up with Australia. It has been indicated in the last couple of days, of course, how well, or not, we are doing in that respect. The Australian Reserve Bank looks at a number of factors, including the inflation rate. It looks at the whole issue of the state of the economy. It looks at employment, it looks at the dollar, and it looks at the health of the economy. Those are important factors when we are considering the role of the Reserve Bank in monetary policy settings.
Therefore, we say that this was another opportunity that the Government has missed. The Government could have widened; it could have looked at the issue of monetary policy and made a decision to review the current obsession with inflation. It is not that this is not a crucial factor in economic settings, but we cannot play the whole game on one ruling. That is why we say we had an opportunity here. The opportunities are still before the Government, and it is disappointing to see that when Phil Goff gives a speech that says we could consider a review of monetary policy, there is an instinctive response to bag it. The Prime Minister had the audacity to stand up and tell a Canterbury exporting audience that our monetary policy settings are the best in the world. We see the results today with, presumably, a rising dollar and rising interest rates.
Let us return to the substance of the bill, which concerns the prudential supervision of our insurance industry. One of the key elements of the bill is the impact on the New Zealand insurers and overseas insurers that are covered by the extension of prudential frameworks. Most particularly, there are questions around whether this bill would disadvantage New Zealand - based insurers that are subject to the regimes, whereas an insurance company based in another country that meets the agreed requirements of the Reserve Bank can operate under the prudential regime of that host country.
I disagree, in part at least, with the Minister of Finance, who affirmed in his commentary on the bill earlier that no real cost was involved for our insurance companies to meet in this bill. We had a submission from AMI Insurance, which is New Zealand’s largest New Zealand - based insurance company, that suggested meeting the cost of the new prudential regime—meeting the cost of the new capital adequacy ratios—was in the order of $35 million. That is not a sum to be sneezed at, even for a relatively large corporate like AMI Insurance. I think most New Zealanders would acknowledge that AMI Insurance is a very good insurance company, wisely based in the Christchurch Central electorate.
We were assured, however, by the Reserve Bank officials—and the select committee spent considerable time on these issues—that the regime as proposed in the bill would not disadvantage New Zealand insurers. There are exemptions in the bill in relation to a number of clauses for overseas-based insurance companies. But those would be granted only if the insurance company operating from overseas was subject to a home jurisdiction that met the standards of the Reserve Bank. The regime of those foreign-based companies, taken as a whole, would actually meet the standards of the Reserve Bank’s prudential regime.
The select committee, as I mentioned, did hear some concerns still expressed by entities, including AMI Insurance, which noted the difference in capital adequacy ratios between Australia, specifically, and New Zealand—quite a difference—on various aspects of investment, but we will monitor how this works. We will see whether the Reserve Bank’s assurances are borne out as the legislation takes effect and the industry makes its changes.
Obviously one of the great concerns we have at the moment is that a great bleed of capital goes on. Our current account balance has never been in the black since I was a schoolboy, which is a wee while ago. We will watch to see whether overseas-based insurance companies come back and use the legislation in respect of whether they can take further insurance moneys back out of the country. That should be a concern to members opposite, given that our current account balance has been in the red and is heading further into the red. That is an issue that “New Zealand Inc.” needs to take note of.
We know that we need to have regulation of financial markets; Labour has never been shy of regulating financial markets or any markets. Some members opposite do not believe in regulation. They say the market will always rule—
Hon Steve Chadwick Link to this
I raise a point of order, Mr Speaker. I am sorry to interrupt my colleague, but because of the interjections coming from the other side, I cannot hear him.
Mr DEPUTY SPEAKER Link to this
That is a fair comment. I have raised this point before. Members should be listening to the speech. If they want to interject against the speaker, that is fine, but the cross-barraging of other points that bear no relationship to the debate is unacceptable.
As I was saying, regulation needs to be judicious and it needs to make sure that it works in the interests of New Zealand, so we will watch to ensure that the exemptions that have been provided by this legislation to overseas insurers do not do so at any disadvantage relative to New Zealand insurers, which have to meet the New Zealand Reserve Bank’s requirements. On balance that was the decision the select committee took.
The exemptions in the law before us are there because a strong argument emerged about not duplicating regimes in one country and another. We were advised that duplication of the Australian prudential regime, for example, for New Zealand would be inappropriate. We have accepted that advice on the basis that the Reserve Bank’s assurances are that this is the best way to go forward, but we will watch very, very carefully to ensure the judgments that the Reserve Bank makes as it sees this law come into effect do not create any particular disadvantage to New Zealand - based companies such as AMI Insurance.
DAVID GARRETT (ACT) Link to this
This is another one of those pleasant occasions for me as a new member where all sides of the House agree, including the Greens; there is no imprisonment involved in the Insurance (Prudential Supervision) Bill, so they are in support as well. All sides of the House have come together to support this sensible legislation. Who can downplay the importance of insurance in an uncertain world? The vicissitudes of life can affect all of us, and the one thing standing between us and perils of many kinds is insurance.
There are many kinds of insurance. Some of them are sourced from within New Zealand, but other types are more traditionally sourced from overseas. I think particularly of maritime and shipping insurance, which, of course, is the preserve of Lloyd’s of London. But another specialist area of insurance, also frequently offered from overseas—and I raise this because this bill particularly deals with overseas insurers—is employment protection insurance. Being found without a job can be a devastating event for anyone, and anyone can be exposed to that peril; even members of the House can find themselves without a job suddenly and without warning. All of us, I think, would have to admit, as I do, that we are here on 3-year fixed-term contracts with no right of renewal.
Grant RobertsonAbsolutely; I have maintained my income protection insurance, I tell that member, because I am very aware of that—
I note the member has, too. So we are two prudent members, and this bill is the Insurance (Prudential Supervision) Bill. We need income protection insurance, and mine, perhaps like Mr Robertson’s, is underwritten by an overseas insurer, like AIA Group in my case. This bill serves to ensure that that insurer is able to meet claims when claimants suddenly find themselves, for whatever reason, expelled from employment; they are terminated, kicked out, and unable to continue the lifestyle that they have been accustomed to. On that point, if people have become accustomed to a particularly lavish lifestyle, and then suddenly find themselves—
—without an income, then, bang, they need to fall back on income protection insurance. The point I am working up to is that any insurance contract is only as good as the company behind it. It does not matter what sort of flowers are on the front of the document or how ornate, elaborate, coloured, and pretty the contract is. If the underwriter of that contract is no good—if the underwriter has “feet of clay”, as we say in the legal trade—then that contract is no good. So this bill is to be welcomed, particularly by those of us who have employment protection insurance, by those of us who may be thrown out without warning, even short of our 3-year fixed-term contracts, for whatever reason. Misconduct could be one of those reasons.
I tell Mr Gilmore that it could apply to anyone. That is the point, and that is what insurance is about. It protects us from the vicissitudes of life that come out of nowhere. People can be going along and doing their job to the best of their abilities, or so they think, and all of a sudden something happens and they are gone. It can happen very, very quickly, sometimes within hours or several days. They are left unable to pay their mortgage, or, for example, unable to pay for the overseas trip they booked or the new suit they ordered. If people do not have income protection insurance backed up by a company of sound and prudential renown, they are in trouble, in the colloquial sense. They are in an unenviable position with no income and a lavish lifestyle, and they are cast out. So this bill is to be welcomed.
As I have said, the bill has particular emphasis on overseas companies to ensure that they are supervised properly in a prudential sense. If our hypothetical employment protection insurance contract needs to be honoured—if someone is forced to call upon it unexpectedly, without warning, as is the way of life, sadly—this bill ensures that that company will be sound and that the holder of that contract is at least cushioned to some degree from the harsh, cold reality of finding himself or herself suddenly without a job. We in the ACT Party are very happy to join with other parties in the House to support this bill, and we applaud it. Thank you.
AMY ADAMS (National—Selwyn) Link to this
It is a great pleasure to take a call in the second reading debate on the Insurance (Prudential Supervision) Bill. As has been mentioned, this bill spent some time at the Finance and Expenditure Committee, which is ably chaired by my friend and colleague Craig Foss. He did an excellent job of shepherding a very difficult bill through the committee. It was a bill that the committee worked very well on, certainly very cohesively, and with one purpose in mind, and that was to ensure that we got the best legislation we could get in this important area.
In my first reading contribution on this bill I spoke about the importance of trust and confidence in our financial sector. I think that given the years just behind us—not only in New Zealand but also in the world—everyone is very aware of the importance of that trust and confidence, and how easily it can be damaged, and also the damage that can be done when confidence and trust fall. We have seen all sorts of examples, even in more recent times, of what happens when there is no confidence in our very important financial sector. Insurance is an important part of that. When we have been looking at reform of the financial sector, a lot of the focus has been on finance companies and the like, but in this legislation we are focusing on the insurance sector. It covers life, medical, non-life, and, as my friend Mr Garrett talked about, employment protection insurance for people who suddenly find themselves in a less secure employment position than they might have been at the start of the day.
This is a strong regime and an important regime. The committee had to get a balance ensuring that the response was enough to protect New Zealanders who rely on the financial sector and the insurance sector, and ensuring that it was not overly onerous for companies and did not go any further in terms of red tape and bureaucracy than we needed to go. That is where a lot of the committee’s work was focused.
As we have heard, the bill requires the licensing of all applicable insurers. A big part of our work was determining who should fall outside that catchment. We spent a bit of time talking about overseas insurers and to what extent the bill should cover them. The decision was that it should not apply to anyone not carrying out business in New Zealand. The two exemptions I want to briefly touch on in this contribution are the exclusions we recommended for trade associations and other professional associations that offer discretionary voluntary insurance benefits as part of their work. I think it is important that we are careful we do not bring into the ambit of a bill like this any organisation that was not intended to be caught. Clearly, the mischief we are trying to deal with in this legislation is those organisations in the insurance sector proper, not those that offer some discretionary membership benefits and are not really in the nature of a pure insurance company as we would think of it. We recommended that some work be done on excluding those associations from the bill.
We also spent time thinking about small insurers and ensuring that we do not apply overly onerous requirements to them, particularly around some of the solvency requirements of the bill and the financial strength ratings. Existing insurers will have the ability to be exempt if their gross annual premium income is over a figure that will be set; we are thinking it will be in the region of $1 million to $1.5 million of gross premiums a year. Existing insurers in that category will be able to be exempt from the bill but, as I said, not all of the conditions of the bill—primarily financial strength ratings, some of the capital adequacy requirements, and some of the solvency requirements. I think that is an important part of the bill. As I said, we do not want to be unduly onerous on small insurers who are in business and are carrying on their work adequately, and who certainly were not expecting this when they set up their business model.
Those are the two exemptions I wanted to touch on in this contribution; I know that other members will address other parts of the bill. I think the committee can be rightly proud of the work it has done. Certainly, it is not an easy area; it is a complex one. Under the careful chairmanship of Craig Foss, I am very happy with where the bill has come to. Thank you.
Hon SHANE JONES (Labour) Link to this
Kia ora nō tātou e te Whare. Ko Te Wiki o Te Reo Māori, tēnā koutou, tēnā koutou, tēnā tātou katoa. There is such randomness in the life of a politician. Given that I have enjoyed a promotion on to the very fine and powerful Finance and Expenditure Committee in the last week, it falls to me to support Mr Burns and Mr Cunliffe, to show that our party, the Labour Party, supports the Insurance (Prudential Supervision) Bill, and to say that the legislation was actually Labour Party policy. It was part a suite of options that we introduced to ensure that institutions essential to good commerce are adequately regulated.
The ideas lying behind this bill serve as a very timely reminder that those of us who are parliamentarians need to be vigilant when problems strike the commercial sector, so it is very sad that I cannot say that about my colleagues on the other side of the House. Mr Hotchin and Mr Watson live free, but they hound Hubbard. This legislation, based not on rumour but on institutional transparency in the insurance industry, ensures that people will be held to account for their decisions, and will demonstrate the commercial discipline that we expect in key institutions in this sector.
This bill has had a long gestation period. Its gestation period, unfortunately, has been held up whilst our colleagues over there visited their attention on relatively petty things, and on their impact on the economy. That is why there is a great deal of support for it on our side of the House. We want to see that those New Zealanders who rely on insurance institutions have institutions that not only are adequately managed and capitalised but are held to account in a very strong, transparent way. That is why this bill will enjoy support from our side of the House.
My colleagues have turned the debate on to a very important but largely unseen area, and that is prudential circumspection.
I tell Mr Quinn not to get that word wrong. Circumspection will reign very highly to ensure that when people save, when people dedicate funds, and when overseas investors come here, they will know that our institutions are regulated to the highest standard possible.
I do not want to have the debate deviate on to people with mental problems being put in prison; that lies with Mr Garrett. Let me come back to the actual purpose of this legislation, which in a broad global sense ensures that New Zealand has maintained its high-quality reputation. A bit of work has taken place in the broad area of where savings are held, how equities might be invested in, and how people can take confidence that once they need help, either from a bank or an institution such as an insurance company, it will be there. But in order for that to happen, capital needs to flow. The Capital Market Development Taskforce with its fantastic ideas repudiated, was in large a very good idea. It was picked up by our leader but parried aside by the other side of the House. That shows that there is a broad level of interest in these commercial matters.
There is one thing on which I must agree with the South Island member Amy Adams. She correctly pointed out that smaller organisations will not be afflicted by this tide of red tape that we are seeing day after day, whether that is because of foolish notions or an unwillingness of courage to make the right decisions—about driving regulations or making the connection between alcohol and bad decision-making. It is not that I can blame alcohol, but we have had an enormous amount of bad decision-making over the course of this week from that side of the House.
This bill will finally come to pass as a consequence of our support, and of the Government taking forward the original policy, which was laid down by that peerless parliamentarian Dr Cullen. Was he dwarfed by the current Government front bench? No. Had it not been for his commitment to savings and his conservative macroeconomic management, the current Government would not have had the opportunity to make even the puny attempts that it has made to improve the prospects of our economy.
When prudential regulations, for example, are made, we need to ensure that they are adequately scrutinised. We cannot suffer a further reversion to Muldoonism, which we are beginning to see signs of from that side of the House. That was a style of Government where regulatory-making power was used holus-bolus, without the quality of parliamentary scrutiny over such important issues as regulating the commercial sector when people’s savings or wellbeing were at risk at vulnerable points in their life.
The member from ACT has talked about his impending vulnerability. After the “three-strikes” debacle he has much to thank the insurance industry for, because it will be his sole source of livelihood. He will no longer be back in this House, and that will be an interesting episode in our recent political history: how a person from relatively obscure origins could come, distort the criminal code, and then go. But that is another matter.
A key part of what the insurance industry has to deal with is distress management. Today and yesterday we saw a fine example in Mr Brownlee. He stood up and lectured us on gaps. But beneath his rhetoric was evidence of great distress, because that man identified the standard that he desired to be judged upon—that is, the gap between the earnings of a Kiwi and the earnings of an Aussie. He has demonstrated, despite his inviting the rest of the country—and indeed us, perish the thought—to judge his performance on that basis: firstly, that he did not understand it; secondly, that he no longer believes in it; and, thirdly, that he is reverting to half-recalled, vague recollections to do with the OECD. That is why not only is the insurance industry successful in identifying distress; we as parliamentarians on this side of the House have seen an example of distress management in the form of Mr Brownlee.
I turn my attention to another reason why we will support the entirety of this bill, which is recovery plans. I find that that particular segment of the bill, the recovery plan, has a certain resonance. We need to ensure that all institutions that respond at a point when a society, firms, or individuals suffer a calamity, have the ability to rise again.
As a member of the Finance and Expenditure Committee, and as a proud member of my caucus, I look forward to enabling this bill to actually play a key role—a key role—in ensuring that people do not disappear or lose the ability to cope with stress. We have seen an inordinate amount of it in the front benches today; I do not have much to say about Mr Groser. The Prime Minister is completely and utterly incapable of articulating how he might see such an essential institution in the world of commerce as the insurance industry play a role.
The key point I will finish on is that we look forward to supporting this bill. We know that the thousands of New Zealanders listening as the bill goes forward will thank us for that. Kia ora tātou.
AARON GILMORE (National) Link to this
If ever there was a moment to talk about insurance, it is right now, with a particular gentleman and the Labour Party’s needing insurance. One cannot insure political parties, unfortunately. The Insurance (Prudential Supervision) Bill is about insurance. One cannot insure against mislaid documents, and one cannot insure against misused bits of paper that disappear, but one can insure against other financial misfortune. That is what this bill is all about: the ability to take into account prudential issues in the insurance sector. Every now and again people might get waylaid, documents could get misplaced, or things could go disastrously wrong, and in those situations one never knows what might happen or where things might end up.
Exactly.
I will talk seriously about two aspects of this bill, which are issues around the solvency requirements. It is very important that insurance companies are kept solvent for Kiwi mums and dads. We never know who may have invested their money in insurance companies, to cover unexpected circumstances such as death or loss of income. We never quite know when we might need income replacement insurance. Some people might be very interested right now in how safe their money is. I must say that I am quite relaxed about that. I am lucky; I am fortunate. I am very happy with my insurance situation at the moment. My life insurance is invested with a very safe company, and it will only be made safer by this bill. I think that is a great thing.
The solvency requirements in this bill will improve the safety of the insurance companies that Kiwi mums and dads have invested in. If I were in the Labour Party, I would be worried about where its investments might be in terms of solvency, whether it has invested in real estate or in other things. The Reserve Bank has put in place some very good rules to make sure that the money that Kiwi mums and dads invested in insurance companies is nice and safe.
I will talk quickly about one other thing: the issue of captive insurance companies. This bill allows captives to thrive, and, particularly, New Zealand - based captives to be able to operate within a regulatory arrangement. That is good for big companies in New Zealand that operate large infrastructure businesses. I know we debated the Infrastructure Bill earlier. These sorts of companies like to self-insure their major assets through New Zealand - owned and operated captives, and this bill goes a long way to assist them in continuing to operate. I think that is a really good thing, particularly for big State-owned enterprises like Solid Energy, KiwiRail, and Transpower, as well as other big entities operating in the infrastructure sector. I think it is highly positive that the hard-working people who use those services will have the trust and the knowledge that those assets will be better looked after and more safe because of this bill.
During the debate of this bill, some members touched on the great work that the Finance and Expenditure Committee did. I thank my colleague the deputy chair, Amy Adams, who did a lot of the work during the submission phase. Amy Adams has to be congratulated on the work she did in that area, particularly because the chair was quite busy doing other things every now and again. I thought she did a very, very good job dealing with issues brought up by the submissions. There were about 50-odd submissions, and we heard about 30 of them. They were very varied. I vividly remember the one from the Air Line Pilots’ Association. There were many comments about its worries about insurance. Many comments were made about pilots’ worries about insurance. People who fly a lot would be very concerned to ensure the pilots were adequately insured in order for the planes to keep flying so that members of Parliament, if they so choose, can continue to travel overseas.
I will wrap it up there. This bill is pretty much self-explanatory. Members are comfortable with it across the House and there is pretty much a unanimous perception that it is a good step in the right direction by the hard-working, John Key - led Government.
STUART NASH (Labour) Link to this
I rise to support the Insurance (Prudential Supervision) Bill 2009. The aim of this bill is to reform and extend the present law relating to the prudential supervision by the Reserve Bank of New Zealand of the insurance industry in New Zealand. This bill establishes a licensing regime for insurers, and prudential regulations, with compliance largely self-administered, while supervision is provided by the Reserve Bank. 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.
This bill is important to the people of New Zealand for three reasons, and it is those reasons that I will outline and elaborate on. The first is that this bill is another step in achieving clear, robust laws and regulations across the financial sector. The second reason is that it will provide a much higher level of scrutiny and security to New Zealanders with exposure to the insurance industry. The third reason why this bill is so important is that it tidies up legislation in a sector where there is an unacceptable level of uncertainty at the moment. Tightening legislation, regulating an important sector of the financial industry, and providing certainty are the three reasons why Labour is supporting this bill.
This bill will provide confidence for all New Zealanders that their Parliament is working together to further protect their rights and their money. We all know that New Zealanders have lost a significant amount of money during this economic recession—New Zealanders who have worked incredibly hard, saved hard, dreamt and aspired, and who should be allowed to live and retire with dignity. Those dreams have been taken away. There was an expectation that the courts would punish accordingly those who had perpetrated those crimes, but there was also an expectation that Parliament would put laws in place that would mitigate the risks of this type of financial destruction from ever happening again.
Within the New Zealand financial industry the insurance sector was not generally in distress as were other parts of the industry. It was unlike that of the US, where one of the world’s largest insurers, AIA Insurance, went bankrupt, with dire consequences for the US’s financial system. The global financial crisis did, however, demonstrate the vulnerability of the sector as a whole.
Parliament has already legislated in several areas to tighten or to make laws in areas where there was a real deficiency in the financial sector. This bill is just another step in ensuring that hard-working Kiwis can have confidence in the sector as a whole. That is what I mean when I say that this bill is another step in achieving clear, robust laws and regulations across the financial sector. Not only is that sensible but it is absolutely necessary in this day and age. It is why we worked together across parties on this legislation. For once National has put together a piece of financial legislation that benefits all New Zealanders.
The compliance costs for the industry are not high. The Finance and Expenditure Committee worked hard to ensure that this bill would not provide any level of competitive advantage to overseas firms operating in the New Zealand market. Having said that, I tell members that the committee’s main objective was to ensure that the regulations and rules governing the industry provided the level of security, transparency, and accountability that New Zealanders now expect from any sector in the financial services market.
The second reason why I support this bill is that it provides a much higher level of security to New Zealanders with exposure to the insurance industry. Currently New Zealand does not have the framework for prudential regulation and supervision of insurers. Current insurance legislation is outdated, and is inconsistent in its application across the diversity of the New Zealand insurance market. This bill requires most insurers to have a current financial strength rating that is given by a rating agency approved by the Reserve Bank.
There has been extensive consultation within the industry about the provisions of this bill. The select committee considered 57 submissions and heard 31 oral submissions from a range of industry and interested participants. A draft version of the bill was released for consultation well over a year ago. The draft bill reflected policy approvals by Cabinet in December 2007 and in August 2008—a Labour Cabinet. Prior to that, proposals originated with the Review of Financial Products and Providers work stream. A discussion document was released by the Ministry of Economic Development in September 2006, and a further consultation paper was released by the Reserve Bank in May 2008. This bill had its genesis in the previous Labour Government.
We have ended up with a bill that requires all insurers operating in the New Zealand market to be licensed and supervised by the Reserve Bank, and to comply with minimum prudential requirements. The Reserve Bank will have the powers to act in respect of insurers that are in distress or in other difficulties.
Having said that, I tell the House that, in the end, the new regime has been designed around the self-managing approach—for example, insurers are expected to devise and adhere to their own fit and proper risk management policies, subject to bank oversight. The costs to the Reserve Bank associated with the insurance proposals are estimated to be in the range of $2.5 million to $4 million per annum, on an ongoing basis once the prudential regulation proposals for insurance have been fully implemented.
The third reason why I support this bill is that it tidies up legislation where existed an unacceptable level of uncertainty—that is, uncertainty for the industry itself and uncertainty for ordinary New Zealanders. Taking away that uncertainty is paramount in order for the New Zealand public to have confidence in this sector of the financial industry. The compliance costs for the industry are not high, and the committee worked hard to ensure that compliance costs were kept to a minimum.
The main areas covered by this bill are as follows. First there is the licensing of insurers, which 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, an insurer is able to be monitored against those standards. That reduces the need for consumers to make complex inquiries regarding an insurer’s financial strength and other indicators. That is a very important piece of the legislation, because in the past ordinary, hard-working New Zealanders have actually not had the financial ability to wade through complex prospectuses and financial statements to determine for themselves whether an insurance company or any sort of organisation was in fact meeting the requirements necessary for sound investment. This licensing arrangement, monitored by the Reserve Bank, actually puts that in place, therefore protecting New Zealanders to a large extent.
Insurers covered by the new regime will need to be licensed before the bill comes into force. The bill will come into effect 18 months after it has received the Royal assent. After that date it will be an offence to carry on, or hold out to carry on, insurance business in New Zealand without a licence. That is why I say that a high level of certainty has been granted to the New Zealand public as a result of this bill.
There are other important parts in this bill, as well. Under fit and proper risk management requirements, for example, insurers will be required to consider the qualifications, background, and experience of key personnel. That lines up with another bill we passed in this House that regulated the financial services sector. There are to be statutory funds and separation for life insurance and similar long-term insurance funds. Capital advocacy, insolvency standards, and appropriate financial regulatory reporting, are again most important to all New Zealanders, to ensure that they can have confidence in this sector. There will be insurer credit ratings, as I have talked about before, and a supervision framework, including effective distress management provisions.
As I outlined, there are three reasons why I support this bill and why Labour supports this bill. It is another step in achieving clear, robust laws and regulations across the financial sector. We do not want to see ever again the carnage wrought by this last financial recession. Secondly, this bill will provide a much higher level of security for New Zealanders with exposure and investment in the insurance industry. Finally, the third reason it is important is that it tidies up legislation in a sector where there was an unacceptable level of uncertainty for both the sector itself and for New Zealanders. As a result of this, I commend this bill to the House. Thank you.
PESETA SAM LOTU-IIGA (National—Maungakiekie) Link to this
I also rise to support the Insurance (Prudential Supervision) Bill. As has been acknowledged across the House, the bill was required to consolidate the industry and bring it under prudential supervision. The bill is part of a suite of reforms that this National Government has put in place to return confidence and trust to our capital markets, and to return confidence and trust to our businesses, and to our export businesses in particular.
This bill replaces outdated and disjointed legislation. It fills some of the gaps that currently exist in the prudential regulation of this industry, and it removes some of the inconsistencies in the legislation for the insurance sector. In a light-handed way it provides for the delivery of regulation so that we do not mire the industry in a compliance mentality. The bill focuses on licensing and prudential regulation, as many speakers have already alluded to. It provides for all insurers to be licensed and supervised by the Reserve Bank and to comply with its prudential regulations. The Reserve Bank will act as both the regulator and the supervisor.
As I have already stated, this bill is part of a suite of measures to promote a sound and efficient insurance industry and to promote confidence. This year we have already provided legislation for financial service providers and financial advisers. We are reforming securities trustees legislation. The Financial Markets Authority legislation will be in the House later this year. It is part of a comprehensive review of securities markets—the Securities Act, in particular—that will come into this House early next year.
The bill covers a number of categories of insurers—life, non-life, and medical. It did present some issues, particularly amongst non-resident insurers and foreign insurance companies, that we had to deal with in terms of providing a level playing field for our local insurers, which some speakers have already alluded to. In considering those matters, I thank the officials, some of whom are here, for the work that they did on what is a reasonably complex area of the law, and for helping of the Finance and Expenditure Committee assess some of those complex issues. We heard about 31 submissions orally, and 57 were submitted in written form. I commend the industry for bringing a lot of those submissions and a lot of the issues contained in the initial bill to our committee. The nature of its submissions was quite comprehensive.
So what does the bill do? I will touch briefly on a couple of issues, because we will be dealing with specific clauses in the Committee stage. One submission was to put certain categories of provider outside the scope of the bill. We have already heard about discretionary mutuals, trade associations, and union groups, which provide limited coverage that is incidental to their primary purpose, and that is really important. We had similar carve outs in the financial service providers legislation, which we dealt with last month. Similarly, it was important to recognise that we do not want to over-regulate those enterprises and organisations that do not properly fit within the category of insurance companies. We also dealt with the smaller type of insurance company. We limited the exemptions in that regard because we wanted to manage some of the compliance costs that these types of businesses experience.
There are a whole host of other recommendations in the select committee’s report back to the House. One of them was that the Reserve Bank publish a list of approved overseas regulators for assessing home and host regulatory recognition treatment of branches of overseas insurers. That provision was particularly important, too.
This bill has received widespread support across this House. It is a bill that was started under the last Labour Government, but the National Government is happy to take it on, implement it, and enact it. I commend the bill to the House.
CHRIS TREMAIN (Senior Whip—National) Link to this
I raise a point of order, Mr Speaker. Before we vote on this legislation I seek your advice. Given recent announcements regarding expulsions from the Labour caucus, I want to be clear about the numbers with which the Labour Party will be voting on this legislation.
The ASSISTANT SPEAKER (Hon Rick Barker) Link to this
That is not a point of order. The matter of how people cast their votes is entirely in the hands of the whip, as the member well knows. The member is responsible for making sure that he has sufficient people in the House, and votes accordingly. This is a matter of trust, and by asking this question the member is doubting the trustworthiness of other whips. I do not think that fits very well with the kawa of this place. It has always been taken that when the whips speak, they speak with honour. I will not have anybody breach that.