The Reserve Bank of New Zealand (RBNZ) should have acted more forcefully after early signs of trouble at failed insurer CBL instead of giving the company “the benefit of the doubt”, an independent report released today says.

“The CBL case clarifies, perhaps in a dramatic way, the potential consequences of inadequacies in prudential regulation and supervision,” it says.

The report, commissioned last year by the RBNZ in its role as the prudential regulator, recommends a strengthened regulatory oversight of insurers and greater supervisory resourcing to improve processes in future.

“The early doubts about CBL should have been taken up with a greater sense of urgency and acted upon as early and as decisively as possible,” the report says.

“If it had acted more forcefully, CBL’s solvency may well have been found to be inadequate in 2014 or 2015. If that had been the case, the scope and complexity of the CBL liquidation would have been much reduced.”

CBL Insurance Ltd was placed into interim liquidation by the New Zealand High Court in February last year on the application of the RBNZ and went into full liquidation in November.

The report by actuary and former Australian Prudential Regulation Authority member John Trowbridge and QC Mary Scholtens, says the claims under-reserving that was eventually recognised by CBL’s appointed actuary in 2018 was suspected by the RBNZ as early as 2013, and pursued to various degrees over the next few years.

But the RBNZ was operating at the time with limited resources in both scale and insurance experience following the introduction of a new licensing regime in 2013.

“There were some 100 companies to license in a limited timeframe, supervisory staff were unaccustomed to their roles and the demands of the Canterbury earthquakes were a critical industry risk and user of resources in this period,” the report says.

The RBNZ was also faced with internal legal advice that the opinion of CBL’s appointed actuary “could not be easily circumvented”.

The report finds that RBNZ tackled some issues and concentrated on seeing a better balance sheet during the time of CBL Corporation’s initial public offering.

“We also observe, however, that throughout this period the [regulator] appeared to overlook the potential consequences if CBL, as well as expanding as it intended, were to write future business at a loss,” it says. “That was the likely situation if the claims reserves were materially understated.”

The review notes that CBL’s business was almost entirely offshore and its impact on the New Zealand insurance sector and the economy was seen as low, and the resources to be allocated to it needed to be balanced against other priorities.

It found the bank acted firmly and decisively from 2017 when alarms were raised over Gibraltar-based Elite Insurance, which wrote most of CBL’s European business.

The report also recommends the RBNZ should make full use of the powers available to it when in doubt about a company’s financial soundness and that it should strengthen the obligations of insurers through greater scrutiny and accountability of boards, management and appointed actuaries.

Increased resources for the supervisory and the policy team are proposed and it also recommends modifying the solvency standard and, if necessary, seeking to modify the Insurance (Prudential Supervision) Act 2010 to strengthen the capital management and solvency framework for licensed insurers.

Peter Harris, the former MD of CBL parent company CBL Corporation, says in a statement that some of the criticisms of the company are based on “undefended and unproven allegations” and are completely rejected.

“There is a dearth of robust analysis in the report to justify the RBNZ using its unimpeachable position as statutory regulator of the insurance industry to take such a radical step – to effectively destroy a company that, on anyone’s watch was commercially viable,” he said.

RBNZ Deputy Governor Geoff Bascand says the failure of CBL Insurance is a significant regulatory event for New Zealand’s financial sector, and the cirumstances surrounding it and how the bank performed are a matter of interest for policyholders, the insurance industry and the broader public.

The approach to prudential supervision is being updated to promote financial stability, he says.

“We are reviewing key regulatory requirements to boost the resilience of our banking and insurance sectors, and we are intensifying our supervision of financial institutions. In short, we are recalibrating the rules and our enforcement of them,” he said.