Securities Commission - Discussion on Life Insurance and Law Practices


	PART II - LIFE INDUSTRY LAW AND PRACTICES Main Contents Glossary Part I - Background Part II - Life Industry Law and Practices Part III - Public Policy Discussion Appendices	CONCLUSIONS CONCERNING LIFE INDUSTRY LAW AND PRACTICES

10.1
In this paper we have set out some of our experiences during the administration of the provisions of section 7A of the Securities Act.

10.2

We have observed that:

there are no specific statutory duties imposed on the directors of life insurance companies other than those imposed on directors in favour of creditors generally;

there are general disclosure obligations in the Life Act, the FRA and the Securities Act designed to provide financial information about the issuers of life insurance policies to prospective policyholders, but these are dependent for their effectiveness on the approval of the proposed new financial reporting standard;

the new prospectus and investment statement requirements will oblige life insurance companies to disclose such matters as product risk, details of the fees and charges and methods of determining returns and surrender values for each type of policy;

there is limited official monitoring of the activities of life insurance companies through review of statutory returns carried out be the Ministry of Commerce and the Government Actuary;

there are minimal barriers to entry into the New Zealand life insurance market;

there is no requirement that the board or management of a life insurance company have to be "fit and proper" persons to be engaged in life insurance business;

there are no prescribed standards for solvency or capital adequacy;

there is no actuarial standard relating to solvency developed by the actuarial profession;

there are no constraints of related party exposures or concentration of risks which can be undertaken by New Zealand life insurance companies:

related party exposures appear to be facilitated by the provisions of the Companies Act 1993 which allow subsidiary companies to act in the best interests of their parent companies in certain circumstances;

the existing statutory rules about the segregation of policyholders' funds from other assets of life insurers are unclear;

there are no effective rules of law as to the division of profits between shareholders and with-profits policyholders;

life insurance companies are able to pledge, and some have pledged, their life insurance assets to third parties with claims which rank in priority to, or in competition with, the claims of policyholders;

there are no effective rules of law as to minimum surrender values of life insurance policies;

there are no minimum qualification or experience criteria for actuaries who make financial condition reports on companies;

there is no requirement which would prevent an actuary with demonstrable conflicts of interest (managing director of the company) from giving the statutory report to the company on its financial condition and there is no explicit requirement for disclosure of details about any conflicts of interest the actuary may have;

there is no requirement in the law for policyholders to be consulted on major transactions, including changes of business ownership, which could materially affect them;

life insurance companies do not have to appoint trustees or statutory supervisors pursuant to trust deeds or participation deeds;

there has been no financial reporting standard for life insurance financial reporting, although this problem is being addressed through a draft new financial reporting standard, but the evaluation of that standard has been seriously delayed.

10.3
We have noted that Australia and the United Kingdom are examples of regulatory regimes for life insurance which are considerably more extensive than that existing in New Zealand. This is not an argument that such regulatory approaches should necessarily be followed in New Zealand. They are examples, however, of how the various issues have been addressed elsewhere.

10.4
We believe on the basis of our experience that there are a number of questions relating to the operation of life insurance companies, and the laws which govern those operations, which need to be addressed. We believe there is an urgent need to review the provisions of the Life Act.

10.5
In the final Part of our paper we provide further analysis and comment and we set out questions which we believe are relevant. We welcome responses to the questions we have identified. Once these responses have been analysed we will report as appropriate to the Minister of Commerce.

Main Contents
Glossary
Part I - Background
Part II - Life Industry Law and Practices
Part III - Public Policy Discussion
Appendices
INDEX || BACK || FORWARD

10.1	In this paper we have set out some of our experiences during the administration of the provisions of section 7A of the Securities Act.
10.2	We have observed that: there are no specific statutory duties imposed on the directors of life insurance companies other than those imposed on directors in favour of creditors generally; there are general disclosure obligations in the Life Act, the FRA and the Securities Act designed to provide financial information about the issuers of life insurance policies to prospective policyholders, but these are dependent for their effectiveness on the approval of the proposed new financial reporting standard; the new prospectus and investment statement requirements will oblige life insurance companies to disclose such matters as product risk, details of the fees and charges and methods of determining returns and surrender values for each type of policy; there is limited official monitoring of the activities of life insurance companies through review of statutory returns carried out be the Ministry of Commerce and the Government Actuary; there are minimal barriers to entry into the New Zealand life insurance market; there is no requirement that the board or management of a life insurance company have to be "fit and proper" persons to be engaged in life insurance business; there are no prescribed standards for solvency or capital adequacy; there is no actuarial standard relating to solvency developed by the actuarial profession; there are no constraints of related party exposures or concentration of risks which can be undertaken by New Zealand life insurance companies: related party exposures appear to be facilitated by the provisions of the Companies Act 1993 which allow subsidiary companies to act in the best interests of their parent companies in certain circumstances; the existing statutory rules about the segregation of policyholders' funds from other assets of life insurers are unclear; there are no effective rules of law as to the division of profits between shareholders and with-profits policyholders; life insurance companies are able to pledge, and some have pledged, their life insurance assets to third parties with claims which rank in priority to, or in competition with, the claims of policyholders; there are no effective rules of law as to minimum surrender values of life insurance policies; there are no minimum qualification or experience criteria for actuaries who make financial condition reports on companies; there is no requirement which would prevent an actuary with demonstrable conflicts of interest (managing director of the company) from giving the statutory report to the company on its financial condition and there is no explicit requirement for disclosure of details about any conflicts of interest the actuary may have; there is no requirement in the law for policyholders to be consulted on major transactions, including changes of business ownership, which could materially affect them; life insurance companies do not have to appoint trustees or statutory supervisors pursuant to trust deeds or participation deeds; there has been no financial reporting standard for life insurance financial reporting, although this problem is being addressed through a draft new financial reporting standard, but the evaluation of that standard has been seriously delayed.
10.3	We have noted that Australia and the United Kingdom are examples of regulatory regimes for life insurance which are considerably more extensive than that existing in New Zealand. This is not an argument that such regulatory approaches should necessarily be followed in New Zealand. They are examples, however, of how the various issues have been addressed elsewhere.
10.4	We believe on the basis of our experience that there are a number of questions relating to the operation of life insurance companies, and the laws which govern those operations, which need to be addressed. We believe there is an urgent need to review the provisions of the Life Act.
10.5	In the final Part of our paper we provide further analysis and comment and we set out questions which we believe are relevant. We welcome responses to the questions we have identified. Once these responses have been analysed we will report as appropriate to the Minister of Commerce.