This article was originally published in Thomson Reuters Regulatory Intelligence

Market overview

New Zealand's insurance sector comprises both private and government-owned insurers. In the private sector, about 59% of business is general insurance, followed by 28% life insurance and 13% health insurance. The government-owned insurers include:

The Accident Compensation Corporation, a compulsory accident insurer which provides no-fault personal injury cover for everyonein New Zealand. Under the accident compensation scheme, individuals forgo the right to sue for compensatory damages following injury, in exchange for comprehensive accident insurance cover and some financial compensation.
The Earthquake Commission, which provides natural disaster insurance for residential homes and some areas of residential land caused by earthquake, landslip, volcanic activity, tsunami and hydrothermal activity. It also provides cover for storm or flood damage for residential land.

Earlier this year, the government, Business New Zealand and the New Zealand Council of Trade Unions announced a proposal to introduce an income insurance scheme. The proposed scheme has been designed to give financial support to New Zealanders who lose their job through no fault of their own. The Accident Compensation Corporation has obtained funding to undertake preliminary work to establish the systems and operational processes for the new scheme.

Since October 2020, the Reserve Bank has been undertaking a review of the key statute which governs insurers in New Zealand, the Insurance (Prudential Supervision) Act 2010. This includes reviewing the scope of the legislation, its applicability to overseas insurers, statutory funds, and the solvency regime. These matters are going through a public consultation process. While the Reserve Bank has issued some feedback statements in respect of some issues, it intends to produce an omnibus document setting out its in-principle decisions on all of the issues raised once consultation has been completed.

Global association

The Reserve Bank of New Zealand is a member of the International Association of Insurance Supervisors (IAIS), a cooperative organisation of insurance regulators and supervisors from over 200 jurisdictions. The IAIS promotes effective and globally-consistent supervision of the insurance industry by:

issuing global insurance principles, standards, and guidance papers; and
providing training and support on issues related to insurance supervision; and
organising meetings and seminars for insurance supervisors.

The IAIS has a forward-looking role in identifying key trends and developments that could impact the business of insurance. The IAIS is currently focussed on the following emerging issues: Technological innovation (including digital), cyber risk, climate risk, conduct and culture, financial inclusion and sustainable economic development, diversity and equity.

Domestic regulation

Regulatory framework

In New Zealand, insurers and insurance are comprehensively regulated via a twin peaks model, with separate entities governing prudential and conduct regulation.

Financial service providers (including licensed insurers and brokers) must be registered on the Financial Service Providers Register. The Register records the financial services that each entity is registered and licenced to provide, along with the dispute resolution scheme to which that entity belongs.

Prudential regulation

Insurers (and reinsurers) are subject to prudential regulation by the Reserve Bank in accordance with the Insurance (Prudential Supervision) Act 2010. A licence must be obtained from the Reserve Bank to allow insurance business to be carried on in New Zealand.

To obtain a licence, an insurer must prove it has appropriate governance and ownership arrangements in place, as well as a risk management programme. In addition, the insurer must hold a compliant financial strength rating, meet the required solvency standards, be able to carry on its business in a prudent manner, and comply with anti-money laundering legislation. The insurer must also assess the fitness and propriety of all directors and senior managers, including the appointed actuary. If the insurer is incorporated or based overseas, the Reserve Bank will take into account the law and regulatory requirements in that insurer's home jurisdiction.

It is an offence to carry on insurance business in New Zealand without holding a licence. There are also restrictions on the use of the word "insurance" and other associated words in the business names or titles of those not carrying out insurance business in New Zealand.

Conduct regulation

The Financial Markets Authority is authorised under the Financial Markets Conduct Act 2013 to govern the conduct of anyone who gives financial advice. This usually includes insurance brokers but it may also apply to insurers if they provide financial advice as part of their business model. Under the Act, a person providing financial advice must obtain a licence from the Financial Markets Authority or be engaged by a licensed financial advice provider. The Act imposes certain duties on persons providing financial advice, including the duty to prioritise the client's interests and if the financial advice is being provided to a retail client, the duty to comply with the Code of Professional Conduct for Financial Advice Services.

There is also industry self-regulation in place via the Insurance Council of New Zealand. This is a membership-based body which aims to provide consistent insurance practice in New Zealand. Most major insurers in New Zealand are members. The Council has a Fair Insurance Code which requires its members to act in an ethical manner and maintain financially sound business.

The Government has recently introduced a regime governing the conduct of financial institutions, including insurers. The regime is planned to come into force in early 2025. The purpose of the regime is to ensure that financial institutions treat consumers fairly by requiring those institutions to establish, implement, maintain, and comply with effective fair conduct programmes. Under the regime, insurers will need to be licensed in respect of their general conduct towards consumers. The licensing regime will be monitored and enforced by the Financial Markets Authority.

Key rules and requirements

We summarise below the key requirements for senior management of insurers, as well as some legislation which has recently been introduced regarding whistle-blowing. Other key legislation affecting the insurance industry is discussed further below under the Product Specific Legislation section.

Senior management requirements

The Insurance (Prudential Supervision) Act requires insurers to apply a "fit and proper" policy for its directors and relevant officers.

Pursuant to the Act, the Reserve Bank has issued a fit and proper standard which outlines various considerations that an insurer must take into account when appointing an individual to a senior management position. These include:

whether the person has the qualifications and experience reasonably expected for the position;
whether the person has been involved in the management of an entity that has been put into liquidation, receivership, or any other insolvency procedure;
whether the person has been found in any criminal or civil proceedings to have committed serious wrongdoing.

The Reserve Bank has the authority to remove a chief executive officer, a chief financial officer or an appointed actuary of an insurer if there are reasonable grounds to believe that the office-holder is not a fit and proper person to hold that position.

The Reserve Bank may also apply to the courts to prohibit a person from participating in an insurance business if the person has committed serious wrongdoing.

Whistle-blowing rules

The government has created avenues by which employees or people associated with an organisation can report serious wrongdoing committed by that organisation. The Protected Disclosures (Protection of Whistleblowers) Act 2022 empowers employees and people associated with a company to complain directly to any relevant authority.

The Act protects a whistleblower who reports acts, omissions or conduct by an organisation that constitutes serious wrongdoing, including:

an offence;
a serious risk to public health or public safety;
a serious risk to the environment;
corruption; or
grossly negligent behaviour.

Whistleblowers are generally entitled to full confidentiality unless there is a serious risk to public health or the law requires disclosure of certain identifiable information about the whistleblower. The appropriate body for the reporting of serious wrongdoing in the insurance sector, is the Reserve Bank. The Reserve Bank then allocates the information to other government departments for further investigation if necessary.

Capital Reserve Requirements

The Reserve Bank issues solvency standards under section 55 of the Insurance (Prudential Supervision) Act. One or more of the standards may apply to a licensed insurer under the licensed insurer's conditions of licence. The Reserve Bank may exempt overseas insurers from compliance with a solvency standard or part of a solvency standard.

Solvency standards set out a common method for insurers to measure their risks and ensure they have at least a minimum level of available capital to absorb losses before policyholders are affected. When determining the solvency standards, the Reserve Bank takes into account risks including insurance risk, asset classification, market risk, credit risk and operational risk.

Different solvency standards apply depending on the type of insurance business. The minimum capital amounts are set out in the table below, although these usually only apply to insurers at the smaller end of the market. This is because the risk-based capital requirement of the solvency standards will generally drive a minimum solvency capital requirement well in excess of the stated minimum amounts:

In October 2022, the Reserve Bank released a new interim solvency standard which will come into force on 1 January 2023. This standard is intended to replace the five solvency standards set out above. It is designed to streamline solvency calculations and facilitate sound solvency management once NZ IFRS 17 (the new accounting standard for insurance contracts) becomes mandatory. This document also contains new requirements regarding the quality of reinsurance, which come into force from 1 January 2024. [1]

Bank applies an extremely high catastrophe risk charge on New Zealand licensed insurers. Most insurers globally have to hold sufficient capital reserves or reinsurance to cover their liabilities for a 1-in-200 or 1-in-250 year catastrophe event. By contrast, New Zealand insurers have to hold sufficient capital reserves or reinsurance to cover their liabilities for a 1-in-1000 year catastrophe event.

This means insurers cannot use their capital as freely in New Zealand as those overseas. This prevents domestic insurers from investing as much capital in the market, which can yield higher returns on investment and lower the cost of premiums charged.

Product specific legislation

The primary statutes governing the conduct of New Zealand insurers and brokers, and interpretation of insurance contracts are:

Life Insurance Act 1908

This provides for the assignment of life insurance policies and also contains provisions relating to life insurance policies taken out by or for the benefit of minors.

Marine Insurance Act 1908

This is virtually identical to the UK's Marine Insurance Act 1906 and the other Commonwealth marine insurance statutes.

Law Reform Act 1936

A key provision in this Act is section 9, which provides that where a person is insured against liability to pay any damages or compensation, the amount of their liability forms a statutory charge on all insurance money that becomes payable in respect of that liability, even though such liability has not at that point been established. Every charge against an insured person in such circumstances is enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured.

Insurance Law Reform Act 1977

Includes provisions limiting an insurer's ability to avoid a policy because of misstatements by the insured, or to decline a claim in reliance on certain types of exclusions or because of non-compliance with time limits for making a claim.

Insurance Law Reform Act 1985

Abolished the common law requirement for an insurable interest in policies of life insurance, restricts the application of 'average' clauses in policies for dwellings, and allows purchasers of land and fixtures to have the benefit of the vendor's insurance during the period between the contract of sale and settlement.

Consumer Guarantees Act 1993

This sets minimum guarantees for products and services, for the protection of consumers. The term "services" is defined as including a contract of insurance, including life assurance and life reassurance.

Earthquake Commission Act 1993

Sets out the functions of the Earthquake Commission and state insurance of residential property against natural disaster.

Insurance Intermediaries Act 1994

Places obligations on brokers and insurance intermediaries including in relation to premiums and handling of broking client account money.

Fair Trading Act 1986

Prohibits unfair contract terms in standard form consumer contracts, including consumer insurance contracts.

Accident Compensation Act 2001

Governs the accident compensation regime.

Insurance (Prudential Supervision) Act 2010

Provides for the prudential regulation and licensing of insurers by the Reserve Bank.

Financial Markets Conduct Act 2013

Governs how financial advice products (including contracts of insurance) are created, promoted and sold, and the ongoing responsibilities of those who offer, deal and trade them. It places particular obligations on financial advice providers, including insurance brokers.

Draft Insurance Contracts Bill

In 2019, the Government introduced a draft Insurance Contracts Bill to reform New Zealand's insurance contract law. The Bill has passed the public consultation phase and is set to be finalised and presented to Parliament by mid-2023. In essence, the Bill attempts to:

amalgamate all the various pieces of legislation and common law principles into one statute;
provide better protection to consumers by shifting the onus onto insurers to ask the right questions when processing new insurance policies;
require insurance policies to be written clearly, so that consumers can easily understand them;
have rules in place to make sure action against a consumer who did not disclose a fact is proportionate; and
extend powers to the Financial Markets Authority to monitor and enforce compliance with new requirements.

Tax and company law requirements

Insurers and brokers must also comply with tax and company law requirements, as set out in the Goods and Services Tax Act 1985, the Companies Act 1993, the Income Tax Act 1994, the Tax Administration Act 1994, the Taxation Review Authorities Act 1994 and the Financial Reporting Act 2013.

Investment management and markets

There are no express limitations on insurers as to what types of assets they can invest in, except in respect of life insurers. Section 99 of the Insurance (Prudential Supervision) Act sets out the requirements for life insurers, including a prohibition on investment of assets of a statutory fund in an associated person that is not a subsidiary of the life insurer without the Reserve Bank's approval. An insurer's investment decisions may affect its compliance with the applicable solvency standards.

Enforcement and investigation

Regulatory investigation

The Reserve Bank has supervisory and enforcement powers in respect of insurers. Under the Insurance (Prudential Supervision) Act, it is empowered to take appropriate action in respect of licensed insurers and other persons that have failed, are failing, or are likely to fail to comply with the Act or the regulations or are otherwise in financial or other difficulties. The Financial Markets Authority has wide-ranging powers to monitor compliance, investigate, and take enforcement action against conduct that may contravene the Financial Markets Conduct Act 2013. The Authority also oversees a range of financial markets legislation and has regulatory and enforcement powers in respect of a number of other statutes, including the Anti-Money Laundering and Counter Financing of Terrorism Act 2009 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

Complaints procedures

Financial service providers (including insurers and brokers) are required to have an internal dispute resolution process that must deal with any issues or complaints in the first instance. Each provider that provides financial services to retail clients must also be a member of an approved dispute resolution scheme. Such schemes are a form of consumer protection, so they can only consider complaints made by consumers or small organisations (19 or fewer full-time employees). The approved schemes for insurers and brokers are set out in the table below, along with the jurisdictional limit for any claims under that scheme:

Where possible, the schemes will attempt to resolve any complaint by agreement using negotiation, conciliation or mediation. If a complaint is resolved by agreement, that agreement is binding on both parties. If the scheme makes a determination following investigation of the complaint, that decision is only binding if the complainant accepts the decision.

Alternative dispute resolution

Alternative dispute resolution is common in New Zealand. Insurers generally prefer to use negotiation and mediation, rather than arbitration.

Arbitration clauses in insurance contracts entered into by policyholders who are not in trade are not binding, although the parties may agree to submit a dispute to arbitration after a dispute has arisen.[2]

This includes clauses that:

require disputes arising out of in or in relation to a contract to be referred to arbitration;
make arbitration a condition precedent to the bringing of other claims or actions; or
limit the right to bring other actions because of an arbitration or arbitration award.

Court proceedings

Disputes may also be referred to the courts. The District Court hears claims up to the value of NZ$350,000. Any claim in excess of that amount must be heard in the High Court.

At both levels of jurisdiction, but particularly In the District Court, parties are encouraged to attempt to resolve disputes by agreement using a judicial settlement conference or other alternative dispute resolution measures. At a judicial settlement conference, a judge will assist the parties to achieve a settlement. The judge does not make any rulings or orders, their role being similar in this context to that of a mediator or referee.

In 2019, the Canterbury Earthquakes Insurance Tribunal was established to provide homeowners with a fair, speedy and flexible means of resolving insurance disputes arising from the 2010/2011 Canterbury earthquakes. The Tribunal can only consider claims for physical loss of or damage to residential buildings or property arising from those earthquakes.

Insolvency and policyholder protection

New Zealand has several measures in place to improve policyholder security. The Insurance (Prudential Supervision) Act sets out particular rules including that insurers must publish their financial strength rating and comply with the prescribed solvency standards. In addition, life insurance policies are currently protected by statutory funds.

The Reserve Bank recently carried out a review of policyholder security measures, which included considering whether legislation should be introduced to set minimum termination values, whether non-life insurance policies should also be protected by statutory funds, and whether there should be a policy guarantee scheme. While the Reserve Bank has published a preliminary response to stakeholder feedback on these issues,[3] it hasn't yet decided whether it will pursue any of those suggestions.

Data protection

The Privacy Act 2020 governs the protection of personal information. One of the purposes of the Act is to give effect to internationally recognised privacy obligations and standards in relation to the privacy of personal information, including the OECD Guidelines and the International Covenant on Civil and Political Rights.

The Act outlines 13 information privacy principles including provisions relating to the collection, sources, storage and security of personal information. In addition, individuals have the right to know what information an organisation holds about them, and the right to ask for correction of information.

Separately, the government has published guidelines in relation to data protection, including ethics, governance, management, data standards, stewardship, storage and open data.

Corporate governance

Before granting a licence to an insurer, the Reserve Bank must be satisfied that the insurer meets certain corporate governance requirements. The Reserve Bank has published guidelines on the minimum requirements,[4] which include consideration of:

Ownership – The Reserve Bank may take into account factors including integrity (in personal behaviour and business conduct), soundness of judgment, financial soundness and strength, nature and scope of business.

Governance structure – It is important that governance is kept separate from the insurer's ownership: responsibilities should be allocated through a formal charter. There should also be processes in place to provide the governing body with information which enables it to identify, monitor, and manage risks. Governance arrangements should be disclosed to shareholders or member policyholders, and other stakeholders, and in the insurer's annual report.

Composition – It is expected that a licensed insurer will have a minimum of two directors, but the number of directors and size of the governing body should reflect the size and nature of the business. There are various expectations regarding independence, conflicts of interest, performance assessments, and residence in New Zealand.

Independence – Directors should be free from any associations that could materially interfere with the exercise of independent judgment. There are particular criteria for assessing independence, including any financial or other obligation the director may have to the licensed insurer or its directors, the director's employment history, remuneration and shareholding.

Qualifications and experience – the directors must meet the requirements of the Reserve Bank's fit and proper standard for licensed insurers, including having appropriate qualifications and experience. It is expected that the governing body will have a full range of skills, knowledge, and experience to run the licensed insurer and its operations, and avoid a concentration of particular skills and experience. In addition, directors should regularly undertake relevant training.

Committees – there should be a separate audit committee and, depending on the size and type of the insurer's business, the governing body should establish other committees dedicated to remuneration, compliance, risk and director appointments.

Where an applicant insurer is an overseas entity, the Reserve Bank must also be satisfied that the corporate governance standards applying to the applicant in the applicant's home jurisdiction are appropriate, and at least as satisfactory as the New Zealand governance requirements.

Further general guidance on good corporate governance in New Zealand can be found in the Financial Markets Authority's corporate governance handbook. The New Zealand Stock Exchange has also published a corporate governance code dated December 10, 2020 which applies to NZX-listed issues.

Financial crime prevention

New Zealand has been a member of the Financial Action Task Force since 1991 (FATF). The FATF is an independent intergovernmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. New Zealand is also a member of the Asia/Pacific Group on Money Laundering (APG).

New Zealand overhauled its regulatory regime for combatting money laundering and terrorist financing with the introduction of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. Licensed insurers, financial advice providers, and client money or property service providers are all subject to AML/CFT obligations under the Act. As with the other regulatory regimes, insurers are supervised by the Reserve Bank and financial advice / client money or property service providers are supervised by the Financial Markets Authority. The main obligations are to:

Assess the money laundering and terrorism financing risk for the business.

Design, implement and maintain an AML/CFT compliance programme that sets out the business' procedures, policies and controls
for detecting, managing and mitigating such risks of money laundering, and the financing of terrorism that the business mightreasonably expect to face.
Submit an annual report on the business' risk assessment and compliance programme.

The FATF and the APG have conducted several reviews of New Zealand's regime.[5]

In April 2021, they published a report which found that:

New Zealand's AML/CFT system is effective in many respects. Particularly strong results were noted as being achieved in relation to the confiscation of proceeds of crime. New Zealand also has a good understanding of its money laundering and terrorist financing risks, uses financial intelligence, investigates and prosecutes money laundering and terrorist financing activity effectively, and co-operates with its international partners well. However, major improvements would be needed to strengthen supervision and implementation of preventative measures, to improve the transparency of legal persons and arrangements, and to ensure the effective implementation of targeted financial sanctions.
New Zealand covers financial institutions, designated non-financial businesses and professions and most virtual asset service providers as reporting entities under the Act. While this is was felt to represent significant progress, further work would be needed to fully embed AML/CFT measures among designated non-financial businesses and professions, and a number of preventive measures would need reform to meet the FATF Standards. Improvement of the technical framework in relation to targeted financial sanctions, beneficial ownership of legal persons and arrangements and the powers and responsibilities of supervisors was needed.

[1] These requirements come into force a year earlier for life insurance business (i.e. from January 1, 2023).

[2] Insurance Law Reform Act 1977, s 8.

[3] Reserve Bank feedback statement for consultation on policyholder security dated May 24, 2022.

[4] Reserve Bank of New Zealand, Governance Guidelines for Licensed insurers dated June 2011.

[5] Mutual Evaluation of New Zealand dated October 16, 2009, Mutual Evaluation of New Zealand: 2nd Follow-Up Report dated October 21, 2013, Mutual Evaluation Report New Zealand dated April 29, 2021, Follow-Up Report New Zealand dated May 31, 2022. These are all published on the FATF website

This country guide was kindly provided by Pauline Davies, partner, Hannah Piggin, senior solicitor, Kaartik Achari, solicitor at Fee Langstone. The views expressed are the authors' own.

Resources

Thomson Reuters Regulatory Intelligence: New Zealand Insurance Update

Fee Langstone