The Reserve Bank has been pushed back quite strongly by the insurance industry on suggestions to develop a policyholder guarantee scheme.
Last year the central bank said he planned to introduce a system of reimbursement of claims in the event of default by an insurance company.
The concept would effectively insure policyholders against the risk of bankruptcy of their insurer.
The proposal was included in the latest RBNZ-led consultation on policyholder security rules in New Zealand insurance law as part of a staged review of the Insurance (Prudential Supervision) Act 2010 (IPSA). In total, the RBNZ received 19 detailed submissions (primarily from insurers and industry bodies) and 19 abbreviated submissions through an online survey (primarily from individuals). He also conducted focus groups to investigate the public’s understanding of insurer bankruptcy risk and public attitudes toward the trade-off between financial security and the cost of insurance.
The RBNZ intends to publish “principle” policy decisions on all issues raised in the review for further feedback in 2023 before moving on to legislative drafting and implementation.
On the subject of a policyholder guarantee scheme, the insurance industry and insurers were “universally opposed”.
“They felt that a system should not be necessary if other regulatory frameworks were correct; would risk moral hazard; would increase costs for policyholders (in a market that was already showing signs of underinsurance); and would be a ineffective means of providing protection,” the RBNZ said. said in its summary of submissions.
He said he was “still considering” whether or not to continue work on a policyholder guarantee scheme.
“We note that participants in our focus groups were more enthusiastic about the introduction of a program than industry, but participants also had reservations.
“If we went further with the concept, it would require considerable additional analytical work and further consultation,” the RBNZ said.
He said most industry stakeholders felt that current policyholder protection was good, although one stakeholder suggested that more attention could be given to risk management regulation and resolution planning.
“Our focus group study suggested that most policyholders failed to consider the risk of insurance failure (hence, in part, limited engagement with insurers’ financial information). Reserve Bank was a prudential regulator Opinions were divided on whether the Reserve Bank’s risk appetite was appropriate,” the RBNZ said.
When informed of the possibility of insurer default and the Reserve Bank’s risk appetite, most (but not all) policyholders in the focus groups expressed some willingness to pay a little more to procure “fully guaranteed insurance”, as long as any increase in costs did not increase profits for insurers, the RBNZ said.
RBNZ Deputy Governor Christian Hawkesby said the central bank’s regulation of insurers was designed to reduce the risk of insurers going bankrupt.
“Regulations require insurers to monitor the risks they have taken and encourage them to maintain appropriate reserves to deal with adverse events. However, we do not operate a zero default and some risk of default regime insurer remains.
“Insurers are required to publish information that helps consumers assess their financial strength (and therefore the risk of failure). Comments from the consultation confirmed our view that the financial information insurers are required to disclose is broadly appropriate. However, it is possible to think of ways to present this information in a way that makes it easier for consumers to understand,” said Hawkesby.