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Lessons to be learned: CBL failure puts heat on NZ regulator

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Fallout from the CBL Insurance failure will be felt across the New Zealand industry, with an independent review revealing a cautious regulatory approach failed to quickly get to the bottom of the company’s problems.

Review recommendations add weight to the case for stronger supervision and point to insurers being kept on a tighter rein in future, and not receiving the benefit of the doubt when issues loom.

“The CBL case clarifies, perhaps in a dramatic way, the potential consequences of inadequacies in prudential regulation and supervision,” the report on the Reserve Bank of New Zealand’s (RBNZ) handling of the insurer says.

RBNZ supervision centres on the three pillars of self-discipline, market discipline and regulatory discipline. But the review, commissioned by the central bank, indicates too much respect was given to self-discipline in the CBL case, even when alarm bells were clanging.

The report, compiled by Australian actuary and leading regulatory expert John Trowbridge and senior lawyer Mary Scholtens, picks up on matters also highlighted in an International Monetary Fund assessment, which in 2017 called for more resources for oversight of insurers and other regulated businesses.

The RBNZ had plenty on its mind at the time questions were emerging around CBL.

It was dealing with Canterbury earthquake impacts, and a small team was still getting to grips with a new regulatory regime and had limited insurance experience, while CBL’s activities were mostly offshore and seen as low risk for the financial sector. AM Best, the international specialist insurance ratings agency, continued to give CBL high ratings through to 2017.

Nevertheless, review recommendations for the regulator to “act with tenacity and persistence”, be “decisive and firm” in gaining information from insurers and to take “firm action” once a decision is made suggest tip-toeing around issues won’t be the future procedure.

The report and the IMF review show New Zealand regulators will be taking their cue from tougher approaches in other countries.

The industry acknowledged the country had one of the least regulated insurance markets in the world before introduction of the Insurance (Prudential Supervision) Act 2010. Its previously light-touch regulatory system had resulted in New Zealand earning an international reputation as a haven for dubious and dodgy insurance operations.

While major changes were rolled out in 2010, it still aimed for a relatively light-touch regime that retained a strong self-regulatory role. Concerns raised overseas were a key trigger for the RBNZ to finally weigh in more strongly with CBL.

According to the recent review, the CBL case reveals an over-reliance on the advice of company-appointed actuaries, shows solvency and capital requirements are too narrow and too rigid, and shows governance requirements are insufficient in holding an insurer’s board, management and appointed actuary to account.

A number of changes to insurance regulation are already under way.

The RBNZ said in its May financial stability report that findings from the CBL review will feed into a review of its regulation and supervision of insurers. That includes solvency standards and potential changes in line with the buffer approach taken by the Australian Prudential Regulation Authority.

RBNZ is also holding a thematic review of the appointed actuary regime and is expected to produce a report in the first quarter of next year.

Insurance Council of New Zealand CEO Tim Grafton says the challenge is ensuring various reforms achieve desired results without becoming too heavy-handed.

“They will have a consultation process and hopefully we can land in a sweet spot that balances those interests,” he told

CBL continues to argue the RBNZ over-reached in acting against the insurer and that it effectively destroyed a company that “on anyone’s watch was commercially viable”.

The independent review says the central bank, after its early caution, has responded firmly and decisively in the past two years and acted properly within its powers, leading to CBL’s liquidation last year.

The pendulum is swinging away from self-regulation and light-touch approaches, and insurers will need to adapt to the new environment.

“In our view, there is a need for the [RBNZ] to have the power to enforce good governance and effective risk management if, for any particular insurer, they are found wanting,” the report says.