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information-asymmetries between an insurance provider and their customer, and the risks of providing poor or outdated information run in both directions.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.