Suggested changes to the Insurance Companies (Ratings and Inspections) Act would require almost all non-life insurers to get, and make public, independent ratings of their financial strength.
Insurers would have to explain the meaning of the rating to the public. Also responsibility for selecting ratings agencies would move from the Insurance Council to the Registrar of Companies.
The act would also be extended to cover insurers incorporated in New Zealand, but carrying on insurance business elsewhere.
Under the proposals all insurers, except life insurers and captive insurers, would require a rating that reflects their financial strength, rather than just their claims paying ability.
Currently, there are about 33 unrated insurers offering health, liability, income, mortgage and consumer credit insurance. Included in this group are some that are vulnerable to insolvency, creating a real risk for policyholders, the ministry says.
Extending the Ratings Act to insurers incorporated in New Zealand but operating outside the country would discourage overseas operators from using this country’s liberal regulatory regime to avoid stricter rules in their own country, the ministry says.
Insurers would have to make publicly available the entire ratings report, rather than just the rating.
Bonds unshackled
Changes are also proposed for the Insurance Companies’ Deposits Act. Insurers would be required to file standardised accounts, but would no longer have to make security deposits of up to $500,000 with the Public Trust.
The ministry says the act, passed 50 years ago, no longer fulfills its original purpose of providing a pool of funds for policyholders should an insurer go bust. The act’s financial reporting requirements are also outdated and inadequate.
About 139 deposits are held under the act, totally about $56 million.
However, the ministry says the amounts held are too small to realistically cover policyholder losses during an insolvency. The are also too small to prevent unreliable or undercapitalised insurers setting up in business.
It suggests returning the money to insurers, and says they should instead be required to file financial statements that comply with relevant accounting standards – usually Financial Reporting Standard 35. Insurers' accounts would then be prepared in a standardised way, helping comparisons between different insurers.
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