The Reserve Bank of New Zealand (RBNZ) has flagged a tougher approach to compliance breaches and warned government support is not guaranteed for insurers that fail.

The bank, which is the prudential regulator for insurers. says it will target larger insurers under its new regulatory regime.

Some 96 insurers were fully licensed by the RBNZ last September under the Insurance (Prudential Supervision) Act (IPSA), introduced in 2010.

“It is important to note that IPSA is not a zero-failure regime,” Manager Insurance Oversight Policy Richard Dean told the Finity Consulting Director Forum in Auckland last week.

“Our legislation does not require us to ensure there will be no insurer failure or no losses to policyholders. Should insurers get into difficulty, there is no guarantee that government support will be forthcoming.”

Now the three-year licensing process is over, breaches are being dealt with more stringently, Mr Dean says. Some will be referred to a specialist enforcement team at the bank.

“If a breach is serious, or if it is minor but part of an emerging pattern of non-compliance, then insurers should assume that our enforcement powers will be used forcefully.”

He says strong, independent boards and governance are critical.

“Responsibility and accountability for prudently running an insurance business rests primarily with the insurer’s board and senior management.”

Under the bank’s governance guideline at least half the board must be independent, plus the chairman, audit committee chairman and audit committee.

A separate audit committee must be established to review an insurer’s financial reporting, internal audits and risk-management framework.

“We expect other committees to be established by larger, more complex or specialised insurers,” Mr Dean said.

“In particular, for larger and more sophisticated insurers, we would expect risk governance to be separately overseen by a risk committee, comprising mainly independent directors.”

The Insurance Council of New Zealand says it has heard no adverse reactions to Mr Dean’s comments, and insurers will comply with whatever the regulator requires.

“I think it’s important to stress that independence of directors is one thing – the quality and experience they bring is another, arguably more important, set of factors to bear in mind,” council CEO Tim Grafton told insuranceNEWS.com.au.

Mr Dean says the RBNZ is developing a tool to assess an insurer’s probability of failure and the damage it could do to the economy.

“The likely outcome is the Reserve Bank will concentrate its resources on high-impact insurers.”

Under RBNZ solvency standards property insurers must hold enough capital or reinsurance to cope with a one-in-1000-year earthquake.

“This reflects that post-catastrophe is the very time when we need the insurance sector to be resilient and able to meet all claims,” Mr Dean said. “This capital or reinsurance requirement is more conservative than overseas equivalents, but we make no apology for that.”

However, solvency exemptions have been granted to 30 overseas insurers.

All insurers are expected to inform the RBNZ of compliance breaches. “We are likely to require additional reporting of financial and prudential information by way of regular information return to the bank,” Mr Dean said.

“This is currently being scoped and we anticipate sharing our proposals with the industry some time around the middle of this year.”

The bank’s insurance supervision team will interact with high-impact insurers’ management, and boards “can expect the bank’s governors to seek engagement with them reasonably frequently”.