RBNZ announcement today puts a whole raft of changes on hold for a period. Are the FMA and Minister considering something similar for the wider financial services sector?

The RBNZ announcement is available at https://www.rbnz.govt.nz/news/2020/03/regulatory-relief-to-provide-headroom-for-customer-focus-and-risk-management

For the second time in six months the RBNZ has shown it has plenty of teeth. It has already insisted that AMP provide an additional $400m to support the balance sheet of AMP Life, and has again insisted that it will not approve of Resolution Life’s application to buy AMP Life for AU$3 billion if the policyholders’ rights and obligations would not be protected. Click here to read more. This is solid evidence that media reports that alleging that the RB has inadequate tools to police the deal are wrong. 

29 Nov 2019 – RBNZ & FMA announced that the Council of Financial Regulators had set its priorities for the 2020 year, incorporating:

• Climate change
• Financial inclusion and consumer engagement
• Conduct and governance
• FinTech
• Residential Property Insurance
• Credit Unions
• Review of the Regulatory System Charter

Climate change earns its place at the top of the list mainly due to the risks general insurers and banks face. For general insurers the risks are more obvious: losses due to extreme weather conditions are already a factor considered by most. That they are increasing now means that regulators are seeking those risks to be quantified and stated as a starting point for assessing systemic risk and portfolio issues.

Then exclude the points on residential property insurance and credit unions and you have a good guide to the issues that may inspire thematic reviews, or inform things like the development of license conditions for FAPs.

Consumer engagement is particularly relevant to advice process, but will also turn up as a strong theme in conduct of financial institutions. A more engaged and informed customer is more likely to make better use of their product, complain when things go wrong, and understand disclosures.

The New Zealand Herald coverage of RBNZ research and recent media releases reminds me of one of my favourite jokes about economists:

Three economists are taking a day off at the archery range. Being largely desk-based folks they aren't very good, but they're having fun. One draws their longbow shakily, aims, shoots, and misses the target by a metre to the left. The next draws their bow with effort, aims to the right, shoots, and misses the target by a metre to the right...
...the third economist then shouts "bulls-eye". 

So when a report worries about both high levels of profitability (applicable to some companies) and lower solvency margin (applicable to different companies) and the media reports about both talking about 'the industry' it is this use of an 'average' that is confusing for readers. How can the sector make too much money and run down solvency capital? It doesn't. Some companies have low margin businesses and tend to have falling margins of capital above minimums and others have big margins and have stable or rising levels of capital. The story is different for each company.  

The question of insurer efficiency, and in aggregate insurance industry efficiency, is an important one. It is complicated too. Unpacking it is hard and unlikely to be done in consumer-focused articles. Take just one issue: underwriting information. Major gains in insurer efficiency could be made is access to medical information, much like banking information, could be made more available at the discretion of each customer. If permission were granted to access ministry of health databases the results could make underwriting so much easier, and therefore quicker, and cheaper. It could be convenient, fast, and accurate. Usually we only get one, or sometimes two, of those three. But when the question of enhanced access to medical information is raised, even if that were controlled by the customer, the reaction from media is usually negative. So we are stuck with memory-test questionnaires that place disclosure burdens most heavily on the customer. 

Some RBNZ resources on IFRS17 see page 23 of the RBNZ Statement of Intent and Reserve Bank Governor, Adrian Orr's recent speech.

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. 

Click on the image below to be taken to the FSC YouTube channel

The FMA-RBNZ update on the review of conduct in the life insurance sector requires further discussion and commentary - but for now it obviously deserves at least this link to the full media release. 

Areas of particular note include: 

• The treatment of existing customers - references to 75,000 issues must relate to them. 
• Sales incentives and commissions - in particular the comment in this review about high up-front commissions.

Legal and regulatory uncertainty is headwind, as are concerns about what levels of commissions are likely to be acceptable.That explains, if not excuses, some insurers' challenges in responding to these issues. I will write more for subscribers to the quarterly life and health sector review. 

Release from AMP, 15 July 2019:

AMP Limited today advises that the transaction for the sale of AMP Life to Resolution Life is highly unlikely to proceed on the current terms.

This is due to the challenges in meeting the condition precedent for Reserve Bank of New Zealand (RBNZ) approval.

The failure to meet this condition precedent is exceptionally disappointing as the sale of AMP Life is a foundational element of AMP’s strategy.

Capital position and interim dividend expectations

While the 1H 19 accounts are yet to be finalised, AMP expects to report a Level 3 eligible capital surplus above minimum regulatory requirements and in line with Board limits for target capital surplus.

Given the uncertainty around the AMP Life transaction, the AMP Board expects to continue its prudent approach to capital management and anticipates that an interim dividend will not be paid for 1H 19.

Click here to read the full press release: Download 15 July - AMP Life sale and interim dividend update

The release is comprehensive and well worth a read. Probably AMP and Resolution made what was a reasonable assumption at the time that the exemptions AMP enjoyed would be extended to Resolution. The tougher line being held by RB is also logical, given the increased scrutiny being placed on the sector and recent events. I expect that some sort of accommodation, perhaps to share the costs of the requirements of the RB, can be struck with Resolution Life. The whole situation speaks loudly of regulators and being more prepared to exercise their supervisory powers. 

Susan Edmunds story on this, at goodreturns.co.nz 

Tamsyn Parker has a story on this too, at NZHerald.co.nz 

RBNZ has warned that rising insurance premiums could hit property values in their latest Financial Stability Report. RBNZ Governor Adrian Orr said, our financial system is resilient to current risks – but risks remain elevated. In the case of the risks associated with climate change, like average world temperatures, they are slowly rising. Insurance premiums could play a valuable role as a price signal in making the risks, and their costs, real to more people. Click here to view the report. 

Image from the RBNZ report.