Legal and regulatory update for the life and health insurance sector

15 Sept 2020 – NZX provided an update on various Listing Rules class waivers granted in March 2020 in relation to Covid-19.

15 Sept 2020 - Minister for Climate Change, James Shaw, announced New Zealand will be the first country in the world to require the financial sector to report on climate risks. The new regime will be on a comply-or-explain basis, based on the Task Force on Climate-related Financial Disclosures (TCFD) framework. Businesses covered by the requirements will have to make annual disclosures, covering governance arrangements, risk management and strategies for mitigating any climate change impacts. If businesses are unable to disclose, they must explain why. If approved by Parliament, financial entities could be required to make disclosures in 2023 at the earliest. The new climate reporting requirements will apply to:

  • All registered banks, credit unions, and building societies with total assets of more than $1 billion
  • All managers of registered investment schemes with greater than $1 billion in total assets under management
  • All licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million
  • All equity and debt issuers listed on the NZX
  • Crown financial institutions with greater than $1 billion in total assets under management, such as ACC and the NZ Super Fund

https://www.beehive.govt.nz/release/new-zealand-first-world-require-climate-risk-reporting

 


Incentives for the right behaviour, and more daily news

Victoria University’s Economics of Disasters and Climate Change Chair Ilan Noy made a few suggestions when addressing Insurance Council members. To begin Noy pointed out that insurers could incentivize more clients to take out policies by introducing products that offer a greater scope of cover.

“Victoria University of Wellington’s Economics of Disasters and Climate Change Chair Ilan Noy said that, at the moment, insurance doesn’t realistically incentivise risk reduction as much as it needs to. He says part of this needs to happen through lobbying the government to make certain changes, but also potentially providing new products with an increased scope of cover.”

A common issue faced by clients during the lockdown was confusion over their cover limits. To minimize confusion, Noy encouraged insurers to either introduce new products or adjust current risk limits.

“Noy says insurance can also incentivise customers to directly reduce their own risk, and its other crucial role is improving and speeding up recovery from an event. He says a major problem during the COVID-19 pandemic has been confusion over limits of cover, and this may need to be remedied with new products or adjusted risk limits.” Click here to read more

The question of directly incentivising behaviour that reduces risk is always vexed. There are two main levers for providing feedback on risks that are controversial: the first is the willingness to offer cover or not, the second is the price for cover. These are strong, market-based, mechanisms which are employed all the time. A I know of a couple who first took proper control of their adult onset diabetes when they were deferred for cover by an insurer - it suddenly became real for them. I also know that insurers are routinely criticised for not offering cover to people they deem uninsurable as this is seen as 'unfair'. I also know that when insurers charge more for certain risks - for example, housing in coastal districts and earthquake zones - they are again criticsed heavily for a lack of 'fairness'. In a country where we have made desperately slow progress on climate change this price signal should be celebrated. 

The link between product design and incentives also reminded us to link to the question of IP pricing and product design - see below. 

Price is an incentive. In many activities, it is time to pay attention to it.

In other news:

Fidelity Life: two roles in the design team are being advertised  

FMA: Head of Banking/Insurance role being advertised

FMA: FMA publishes derivatives issuer Sector Risk Assessment

Should we be warning consumers about IP prices?


Finding the balance between marketing and compliance, and more daily news

With the regulatory changes set to be implemented in early 2021, Karty Mayne from Rosewill Consulting is warning advisers to take precautions with advertising as this is an area that causes issues with compliance. Karty has suggested that advisers pay attention to their online activity. David Greenslade, executive director of Strategi has echoed Karty’s point by saying that although advisers have room to be creative they must carefully review the material.

“Karty Mayne, compliance consultant at Rosewill Consulting says that marketing and adverts are the areas where advisers can often trip up when it comes to compliance, and so they should be taking extra care to review their online activity.

David Greenslade, executive director of Strategi Group says the new disclosure regime will allow advisers to get more “innovative” with how they convey information - but it will also mean that every piece of marketing material will need to be looked at, and potentially revised.”

Karty has suggested advisers can improve current practices by updating their websites and reviewing how social media platforms are used. Additionally, Karty has suggested advisers create a compliance procedure that is simple to follow. Chatswood offers a Digital Advice Strategy service as well as an Advice Process Management service that helps advisers achieve what Karty is suggesting. If you wish to find out more email your interest to Jerusalem.Hibru@chatswood.co.nz or Russell.Hutchinson@chatswood.co.nz

““It’s also a really good opportunity to have a look at modernising your website and how you communicate on social media, because the FMA will look at all of that,” she explained.

Karty Mayne says the easiest way to stay on top of compliance is to create a series of policies, and document their implementation as simply as possible. She noted that if not for COVID-19, we would all be operating within the new regime right now - and so she urges advisers to use this extra breathing space ‘wisely’ and not get left behind.” Click here to read more

In other news

BNZ: Darrin Bull has been appointed as Head of Product and Distribution at BNZ

Cigna: Cigna appoints chief risk officer

Quarters two and three will see clients at their “most demanding”

Climate change may soon render some beach houses uninsurable


RBNZ: Insurance sector must evolve in line with increased public expectations and changing risks

Adrian Orr, Governor from RBNZ delivered a speech at the Insurance Council of New Zealand Conference today about building confidence and reducing risks in the insurance sector. You can read his full speech here.

Here are some key points that I really enjoyed:

  • There are significant information-asymmetries between an insurance provider and their customer, and the risks of providing poor or outdated information run in both directions. ‘Who is good for what, and when?’.
  • ...often there is a long period of time after a customer-relationship has been established. In very difficult circumstances, a customer may find that they do not have the coverage they believed would be available to them. And, on the other side of the ledger, insurers rely on accurate information from customers about their own circumstances.
  • Orderly and well-articulated changes in insurance and pricing strategies are needed, so that all participants in the financial sector – and wider economy - can adapt their behaviour without creating unintended outcomes.
  • How a firm monitors and addresses conduct and culture issues will be a part of our ongoing ‘business as usual’ supervision with all insurers. We will also monitor insurers to make sure their planned actions are implemented effectively.
  • The public is demanding that both insurers and regulators play a part in providing greater confidence in the health and conduct of the sector. The Reserve Bank’s insurance agenda for the coming year (or years) is thus very full.

The section on three disciplines, which is too big to quote, is also well worth a look.

I liked the comment about changes in insurance and pricing strategies. I think that this is probably about the more visible marketplace - general insurance - and the role it has in affecting decisions that people make about where they live and the buildings in which they live, and also what buildings get built and where. But it could equally well apply to the marketplace for income protection too, which is in a product design and pricing crisis that has some similar features to insuring buildings in earthquake and flood prone areas. Both life and property insurers have efficiency challenges. The point about information asymmetries cannot be made strongly enough and needs to be remembered in the insurance contract law review process. It is a comfort to insurers (and should be to consumers as well, although they don't tend to be) that officials are signalling that they understand these fundamental concepts. 

 


APRA on general insurance: call for more expenditure on mitigation and resilience

The AFR reports that APRA is so concerned about the crisis in insurance coverage in northern parts of Australia that it wants a new approach to the market: 

"All levels of government must act to save swathes of northern Australia from becoming uninsurable as a result of a climate change-related increase in natural disasters, the prudential regulator has warned. The Australian Prudential Regulation Authority said action should include a major shift of emphasis from disaster recovery to disaster resiliance and mitigation, pointing out the vast majority of disaster funding goes to "clean-up and recovery", with only 3 per cent on prevention and mitigation."

The piece by James Fernyhough is well worth a read, and not just for general insurers. It is also indicative of a wider interest by regulators in spotting medium to longer term issues and creating impetus for solutions where competitive pressure makes it hard for individual participants to act. That sounds a lot like some of the problems the New Zealand life insurance industry is grappling with.