The Insurance Companies' Deposits Act 1953 (Deposits Act) and Insurance Companies (Ratings & Inspections) Act 1994 (Ratings Act) potentially apply to organisations conducting general insurance in New Zealand.
The Ratings Act required the Minister in charge to review it after 2 years and consider the need to continue with the Deposits Act. In 1998 Coopers & Lybrand (as they were then called) completed this review. In November of last year, the Ministry of Economic Development released a discussion paper based on the Coopers & Lybrand findings. In the last 2 months, the Ministry of Economic Development has presented an internal report to its Minister. The matter now rests with the Minister.
The discussion paper gives a clear indication of proposed changes to the Ratings Act and the Deposits Act.
Ratings ActThe rationale for this Act is to give consumers an independent expert assessment of the claims-paying ability of an insurer, so they can make informed decisions when choosing their insurer. The current Act sets up 3 categories of insurers:
General property and/or natural disaster insurers who must have a current rating from an approved agency.Exempt insurers, namely captives and life insurers.Other insurers outside these 2 categories who can choose not to have a current rating. These are principally insurers offering accident, health, income, mortgage and consumer credit insurance.The discussion paper proposes the following changes to the Ratings Act:
Extend the requirement for a rating to insurers incorporated in New Zealand, but only offering insurance overseas. This is to stop New Zealand being a soft touch as a base for insurers operating outside New Zealand.The Rating is to be described as 'financial strength' instead of 'claims paying ability'. This is a change in terminology based on the words the agencies now use in their ratings.Extending the time to register a rating with the Registrar from 5 working days to 10 working days. This is to overcome practical delays in receiving the actual rating certificate from the rating agency.Requiring the description or meaning of the rating to be disclosed also, eg what 'superior' or 'marginal' mean. This is to perhaps help overcome the problem of 2 approved rating agencies with 2 different scales. Comparisons between the ratings will be easier.Shifting the power to approve rating agencies from the Insurance Council to the Registrar of Companies.Requiring the full report prepared by the rating agencies to be registered also so that it is publicly available. Previously, only the rating certificate was publicly available.The exemption from the requirement of brokers to disclose the rating of overseas insurers increases from 2 or more overseas insurers for a risk, to 4-6 overseas insurers for a risk.It is disappointing to see no proposed change to the requirement to disclose the date of the rating. For many insurers, the rating remains the same for many years. However, the date changes each year because of the requirement under the Ratings Act for it to be renewed annually. This can lead to unnecessary printing costs for insurers. Expensive brochures or proposals need to be changed simply because the date changes each year. A requirement under the Act to always disclose the current rating would overcome this problem.
Deposits ActThis Act is considerably out of date. Its purpose was to protect policy holders by obliging insurers to lodge a deposit for the policy holders' benefit in case of insolvency. But the maximum deposit is $500,000 (and in some cases is as low as $10,000), and would be grossly inadequate in the event of the insolvency of a major insurer.
The Act also requires the filing of financial statements within 9 months of the end of each financial year. This generous timeframe can mean the information is well out of date. The financial statements are different to those required under the Financial Reporting Act 1993 and the relevant accounting standard, FRS35.
The proposed changes to the Deposits Act are:
Insurers are no longer required to lodge a deposit, and existing deposits are to be refunded. However, brokers who arrange insurance with overseas insurers are required to maintain a deposit of $500,000 as an incentive for them to deal only with reputable insurers overseas.All insurers incorporated or carrying on business in New Zealand (except captives, reinsurers and life insurers) are required to file annual audited accounts which comply with the relevant financial reporting standard for them.The Registrar of Companies is to maintain a register of insurers.This last requirement signals for the first time in New Zealand a process whereby insurers are registered with an authority. The discussion paper says:
'This would allow the Registrar to compile a register of insurers and facilitate the task of enforcing the statutes in respect of insurers.'Perhaps the days of New Zealand being known as the 'wild west' of the insurance world are coming to an end.
This is a general summary only and should not be taken as a substitute for specific advice.
For further information contact Crossley Gates
crossley.gates@phillipsfox.com
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Phillips Fox