IPSA consultation 2 – Policyholder Security
Hot on the heels of its recent Interim Solvency Standard Consultation, the Reserve Bank of New Zealand (RBNZ) has approached the insurance industry seeking views on the second of five consultations on the Insurance Prudential Supervision Act 2010 (IPSA). IPSA is a significant piece of New Zealand's insurance regulation intended to ensure that New Zealand's insurers are well managed and remain solvent.
The first consultation, in late 2020, covered the scope of IPSA and the treatment of overseas insurers. Further consultations will cover distress management, enforcement regimes, the role of key Officers, supervisory processes, disclosure requirements and changes to regulatory mechanisms. It is anticipated that the remaining consultations will be undertaken by the end of 2022, with legislative changes applying from 2023 or 2024.
The second consultation, meanwhile, focused on policyholder security. It examined:
- Financial strength disclosures
Ways to improve clarity for policyholders around the use of rating agency assessments of financial strength
- Solvency standards
Including alternative measures of solvency to aid clarity for policyholders
- Minimum termination values
Introducing the concept of minimum termination values for policyholders
- Statutory funds
As currently applied to life insurers and under consideration for general and health insurers
- Policyholder guarantee scheme
The possible introduction of a funded protection scheme
Would policyholder security improve?
Consideration of these topics is timely. The recent Financial Markets Authority (FMA) reviews of insurer conduct and culture have identified the need for insurers to have a relentless focus on improving outcomes for policyholders. But will FMA’s suggested approaches produce the outcomes RBNZ is hoping for? And are the suggestions ultimately in the best interest of policyholders?
A policyholder guarantee scheme is good in concept. In the event of an insurer failure, policyholders’ claims are, at least partially, covered by the assets held within the guarantee scheme. However, such schemes can result in insurers who do a better job of managing risk cross-subsidising those insurers who do not. Furthermore, the safety net needs to be funded, and the solution will likely mean a levy on insurers, similar in concept to ACC and EQC levies. Levies will be passed on to policyholders through increased premiums. It is important that any levy, designed to provide an additional safety net, does not reduce affordability or access to insurance protection. And it is crucial that any guarantee scheme does not reduce the quality of risk management practice by insurers.
The second consultation also addressed the possibility of introducing minimum termination values, which would direct insurers regarding the minimum amount to pay back to the policyholder were the policy term cut short. These provisions would be of limited value for contemporary insurance products whose yearly renewable design means policyholders are only due the return of unexpired premiums. For traditional products, like participating business, such restrictions would limit insurers’ abilities to reduce surrender values in times of stress. Insurers might also feel the need to alter investment strategy and reduce bonus rates, which would impact the amounts policyholders receive upon maturity or claim.
This consultation also explored the application of statutory funds. Statutory funds, currently only applicable to life insurers, were devised in an era where the design of the insurance products meant that insurance premiums were received and invested for the long term. That created large pools of assets for insurers. The statutory fund regime aimed to ensure that those assets would be available for policyholders in the event of an insolvency event. However, the design of most modern yearly renewable products across life, health and general insurance does not result in such large pools of assets. Therefore, statutory funds, while still providing real value for the older participating and unit linked product policyholders, are now less relevant in protecting the interests of policyholders with modern products.
There is no panacea for ensuring policyholder protection. However, the IPSA consultation is the perfect opportunity for RBNZ and the industry to engage in detailed dialogue on a number of complex topics, and work to achieve the best possible outcomes for policyholders.