*Securities CommissionDiscussion paper
PART III - PUBLIC POLICY DISCUSSION


  1. QUESTIONS FOR CONSIDERATION


 

 

 
12.1

Life insurance is an important and complex industry. Contracts of life insurance range from the equivalent of short-term debt securities to whole of life policies which could last for 70 - 80 years. Many life insurance contracts lack portability, and can only be realised prior to maturity at considerable cost to the policyholder. Some life insurance policies give rise to benefits which are in the nature of annuities, on which beneficiaries may be dependent for their livelihood.
 

12.2 All life insurance contracts are subject to the Life Act. Many life insurance policies are subject to securities law. Some aspects of life insurance companies' business are monitored by government agencies. There are special provisions which provide for the judicial management of failed life insurance companies.
 
12.3 We think it most likely there will continue to be Government or Crown Agency involvement in the regulation of the life insurance industry, including of the disclosures to be made to policyholders and prospective policyholders, for the foreseeable future. Similarly, the life insurance industry, the actuarial profession, the accounting profession and securities market practitioners generally, all have and will continue to have important roles to play.
 
12.4 Responses to the questions we set out in this section of the paper should aid the process of deciding what these respective roles should be.
 

The questions
 

1. Do you consider changes should be made to the existing regulatory regime for life insurance companies or products? Why?
2. Do the particular characteristics of the life insurance industry warrant or justify any different treatment for securities issued by companies operating in that industry compared to other issuers of securities? If so, what are the characteristics which give rise to the need for differential treatment?
 
3.

What are your views on the relevance and weighting (if any) which should be given to each of the following elements in an overall scheme of regulation of the life insurance industry:

  1. Company law containing provisions about the duties and responsibilities of directors of life companies, the rights of shareholders and the rights of policyholders and other creditors;

  2. Provisions in the law for adequate and timely disclosure of relevant information to prospective and existing policyholders concerning a company's financial position, performance, cash flows and solvency and of the practices it will follow in relation to the allocation of profits and the imposition of fees and charges;

  3. Some form of prudential supervision of life insurance companies, which might include a statutory framework for prescribing levels of capital adequacy and solvency for life insurers and for constraining large and related party exposures;

  4. A trust deed entered into between a trustee corporation and the life company which might include negative pledge provisions monitored by the trustee and relating to maintenance of adequate capital and solvency, constraints on large and related party exposures and clauses requiring consultation with the trustee in certain events such as takeovers or other major transactions?

What other options exist and what are your views on them?

Additional comments on reasons for the relative emphasis given to each element would be helpful.
 

4.

With respect to the statutory duties of directors of life companies:

  1. Should the directors of life companies be subject to an additional specific duty to recognise or give priority to the interests of policyholders? In what respects?

  2. Should life companies which are wholly owned subsidiaries of other companies be permitted to include in their constitutions clauses which enable them to act in the best interests of the parent company even if it is not in the best interests of the life company? Should the existence of such clauses be disclosed in prospectuses or investment statements for life insurance policies? Should the inclusion of such clauses in a life company's constitution require the approval of policyholders before they can be made?

 
5.

With respect to takeovers of life insurance companies, or changes of ownership of portfolios of life insurance business:

  1. Are the existing provisions of the Companies Act and the Listing Rules of the New Zealand Stock Exchange in relation to changes of life insurance company or portfolio ownership adequate in relation to the interests of policyholders? If not, if what way should these provisions be changed?

  2. Are the existing "financial assistance" provisions of the Companies Act adequate in relation to the interests of policyholders where a life company is acquired by another company?

  3. Should policyholders have the right to be consulted by the life company concerning major transactions undertaken which might affect them, either directly or through reference to a trustee or statutory supervisor or otherwise?

  4. Should the directors of life insurance companies be required to obtain independent actuarial advice on the effect on policyholders of prospective change of ownership or other major transactions?
6.

With respect to the rules of law regulating disclosure of information to prospective and existing policyholders:

  1. Is the existing disclosure framework adequate? If not, in what respects is it deficient?

  2. Are the disclosures of a life company's financial position and performance adequate without the promulgation of a New Zealand financial reporting standard for life insurance business?

  3. Does the proposed financial reporting standard as set out in ED-79 provide for the appropriate amount of information including information about a life company's exposure concentrations, liquidity, risk profile and solvency?

7.

With respect to the role of the Government or Crown Agency in the regulation of the life insurance industry:

  1. Should the Government sector's direct role be limited to that of review and last-resort intervention; or

  2. Should the Government establish a form of prudential supervision of the industry, including a framework for the monitoring and/or constraint of significant risk factors of life company operations such as capital adequacy, solvency, large and related party exposures; or

  3. Should the Government encourage greater self-regulation of the industry; or

  4. Should the Government's current role be reduced?

 
8.

With respect to the determination of returns on policies:

  1. What freedom do life companies currently have to determine policy returns? How does the position differ for various classes of policy? Is this position satisfactory?

  2. Should rules of law be introduced to provide for minimum surrender values for any policies?

  3. Should rules of law be introduced which regulate the manner of distribution of annual profits between shareholders and participating policyholders? If so, what form might such regulation take?

  4. Are there adequate requirements for disclosure of the basis on which returns to policyholders are calculated?
9. Should life insurance companies be required to appoint a trustee under a trust deed to represent the interests of policyholders and to monitor the activities of the life companies on policyholders' behalf?
10.

With respect to the separation of life insurance assets:

  1. Are the current provisions of the Life Act covering the separation of life insurance business adequate? Do they require clarification?

  2. Should life companies be free to pledge their life insurance assets to external parties in priority to, or in competition with, the claims of policyholders? In what circumstances, if any, should such pledging of assets be constrained? If there are some circumstances where the pledging of life insurance assets to third parties should be constrained how should such constraint be achieved?

  3. Should New Zealand introduce a form of statutory fund for the conduct of life insurance business along the lines of the current provisions in Australia?

  4. Should there be restrictions placed on the types of business which can be undertaken by companies conducting life insurance business?

11. With respect to the position and role of actuaries:

  1. Should actuaries have explicit responsibilities towards the policyholders? If so, what should those responsibilities be?
  2. Should New Zealand introduce an appointed actuary scheme along the lines of those already in place in Australia and the United Kingdom, with defined responsibilities, qualifications, access to information, and protection in relation to disclosures made to the authorities?
  3. Are there adequate disclosures in a company's prospectus and financial statements concerning the relationship between the company and the actuary responsible for preparing the valuation of the company's assets and liabilities, including disclosure of any pecuniary interest the actuary may have in the company?
  4. If actuaries are required to assume greater responsibilities should their liabilities be restricted in any way? If so, how?
12. Should a compulsory rating requirement for life insurance company's claims paying ability be introduced? Should policyholders have any specific rights in the event that a company's rating deteriorated? Would such a rating requirement be an alternative to, or a supplement to, existing or more extensive regulation of the life insurance industry in New Zealand?
 
Invitation
 

12.5

 The Commission welcomes observations on the questions raised in this paper. We also welcome comment on any other matters covered in the paper. All comments should be forwarded to the Commission by 31 March 1998 at the addresses below.
  E H Abernethy

E H Abernethy
Chairman Securities Commission
12th Floor
Reserve Bank Building
2 The Terrace
WELLINGTON

8 December 1997

Addresses for comments

Postal: P O Box 1179, Wellington
Telephone: (04) 472 9830
Facsimile: (04) 472 8076
Email: seccom@seccom.govt.nz

 

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