Actuaries Institute President Jefferson Gibbs was joined by Ross Simmonds, John Smeed and Shami Shearer to compare key aspects of the Australian financial system with what’s occurring across the ditch.
Speaking on Thursday 13 May, Ross began the session by introducing recent activity by New Zealand’s equivalent to Australian Prudential Regulation Authority (APRA) – the Reserve Bank (RBNZ), who like APRA regulates banks, insurers and non-bank deposit takers to promote the maintenance of a sound and efficient financial system. To provide an insight into the regulatory developments occurring in New Zealand, Ross broke down the developments into three key areas:
- Appointed Actuaries Thematic Review
- Review of Insurance Solvency Standards Review
- Review of Insurance Prudential Supervision Act 2010
Ross advised a precursor to these reviews was the Trowbridge and Scholtens review into the RBNZ supervision of CBL Insurance, which was placed into liquidation in November 2018.
One of the implied findings from the 2019-2020 Appointed Actuaries Thematic Review (AATR), was that not all appointed actuaries were meeting the professional standards surrounding FCRs, particularly in relation to operational risks and premium adequacy. As the AATR included an in-depth review of 15 insurances across the industry, Ross highlighted, “that it is concerning as we want our (New Zealand) members to meet industry standards, but what is more concerning is that we only discovered these deficiencies after the review – it should have been noticed early.”
Discussing the deficiencies in meeting professional standards, Ross noted that the review highlighted preparedness of the actuarial role in crisis – for example, COVID-19.
Ross continued his discussion of the AATR by revealing that there is a desire from the Reserve Banks who expected Appointed Actuaries to err on the ‘side of caution’ if they believe it is likely a license insurance will fail to meet the solvency margin test.
As the findings of the AATR are available, Ross highlights that the findings have flowed onto other reviews like the Insurance Solvency Standards Review (ISSR) and the Review of Insurance Prudential Supervision Act 2010 (RIPSA).
Speaking on the ISSR, Ross highlighted how the Reserve Bank has sought feedback regarding the structure of standards, and it is expected that the Reserve Bank will move towards a ladder of intervention approach to regulatory intervention in the solvency standards.
Lastly, Ross commented on the RIPSA by advising that the review has recently recommenced having been deferred in 2016 due to other priorities for the RBNZ. Feedback has been sought on the scope of the Act and treatment of overseas insurers. Future feedback will be sought on a range of topics including statutory funds, solvency buffers, governance, the Appointed Actuary, disclosures, supervisory processes, technical amendments, regulatory tools and distress management.
Concluding his discussion on regulatory developments in New Zealand, Ross notes that the Reserve Bank of New Zealand is likely to evolve from their current light-touch approach to more active supervisory role.
In agreeance with Ross’ observation, Shami discussed that this observation can be linked to an increase interest already seen from the RBNZ. Partly driven by heightened risk in the market through COVID and the economic environment, the Reserve Bank has been looking more closely into the individual risk profiles of insurance companies and requiring additional capital holdings or business plans to address specific risks. ‘The industry wants clarity on actuarial responsibilities but what the regulation requires and what the Reserve Bank of New Zealand expects is challenging where there is a gap – if actuarial advice is not mandated the responsibility falls on actuaries to persuade insurers of its value.’
‘Like Australia, New Zealand is focused on Climate Change,’ Shami stated as she begins her discussion of the role of climate change in New Zealand insurance policies. Through the use of IPCC scenarios, Shami reveals that research indicates that New Zealand will experience warmer days, more storms and natural disasters, more droughts and wild-fire risks and risk of erosion along their coastal lines.
Shami mentioned the climate related increase in flood risk from storm surges and compared this to the insurers’ response to the increased claims risk following the Christchurch earthquakes. Insurers managed their reputational risk by offering renewals of home insurance to existing customers but no cover for new homeowners on sale of the property. Compared to Australia where climate disclosures have been market driven, in New Zealand there has been more of a regulatory push for mandatory climate disclosure of financial institutes. In addition, the NZ Government has committed to a goal of Net Zero carbon by 2050 – a goal which Shami advised is associated with both transition risk and opportunities like new technologies, investments and new products.
Discussing affordability and other issues emerging in New Zealand, John Smeed commented initially on Earthquake cover, particularly in Wellington and other earthquake-prone regions of New Zealand. Following the Canterbury earthquakes, and then again following the Kaikoura quakes that caused damage to Wellington, insurers stopped quoting for new policies. Some insurers still don’t offer cover in these areas.
Others have moved to introduce a much greater level of risk rating with substantial increases in prices resulting. Exacerbating customer’s views on affordability has been the cost of strengthening a building’s earthquake resilience in accordance with building standards. Building standards are designed to save lives not minimise damage and as a result, there is often limited impact on insurance premiums following the improvements.
John reflected on the climate impacts on home insurance affordability mentioned by Shami and the disconnect between the insurer’s short-term legal commitment and the long-term risk for homeowners, banks that lend to them, and local councils.
As yet, there has been little price signalling by the insurers but NZ has already seen examples of council-driven managed retreat from flood risk.
Turning to health insurance, John commented on the difference in the regulation of the health insurance sector with pricing that increases every year of age. With the issue of affordability arising for the older ages, John predicted that with continuing medical cost inflation, affordability will continue to be an issue for older customers in the New Zealand market.
Concluding the discussion, John highlighted that while disability cover has been a concern in Australia for affordability and sustainability of the product, New Zealand has yet to see significant issues. The panel also reflected on the interaction between the ACC scheme and NZ’s disability income market and experience.
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