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Proposed new rules for life companies unveiled

Overseas-owned insurers operating in New Zealand may be required to set up locally incorporated firms under proposed new rules.

Wednesday, May 28th 2008, 5:26AM

by Rob Hosking

The Reserve Bank yesterday released a consultation document on prudential regulation of the insurance sector.

The government decided in principle late last year to a set of rules, which include licensing and mandatory rating of insurers, as well as bringing the industry under the Reserve Bank's prudential oversight.

Issues include separation of insurance business lines from other areas of a business, treatment of branches of overseas insurers' operations in New Zealand, management of a 'distressed' insurer, connected party exposures and non-insurance activities.

On the first, the government puts up four options but recommends the fourth one, which would require insurers to set up a statutory fund for their life business. This is acknowledged to be a costly option, but it brings New Zealand into line with international best practice and some allowance for "grandparenting" is made. There would be restrictions on what could be done with the statutory fund.

This is broadly in line with what the Australian regulatory regime does.

The option of requiring health insurance to have a similar statutory fund is also canvassed but no preference given. Feedback though is sought.

The toughest rules are proposed for foreign-owned insurance firms – which is most of the big ones in New Zealand. A combination of two options is put up as the preferred approach: mandatory financial strength ratings which include any home country policy-holder the company may have, as well as any other provisions which might disadvantage New Zealand policyholders. If unsatisfactory, the Reserve Bank would require the insurer to incorporate in New Zealand.

This approach would be in line with a tougher approach, for tax and prudential reasons, the government took several years ago with overseas-owned banks, requiring them to incorporate within New Zealand.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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