Reserve Bank of New Zealand Insurance Industry Update December 2022

Ref #X943377 v1.13 Ngā Karere Inehua - Insurance Industry Newsletter #3 Tēnā koutou katoa, I’m pleased to share the third and final instalment of our Ngā Karere Inehua – Insurance Industry Update for the year. We have enjoyed reinstating these newsletters and hope you have found them informative and interesting. This update provides a brief summary of all the key projects, initiatives and changes within RBNZ and the insurance sector. It is one element of our commitment to be open, timely and relevant in our communication with you. In an ever-changing environment like the one we work in today, it made me reflect on the evolving role of the Reserve Bank of New Zealand – Te Pūtea Matua. Back in the 1990s we were world famous for two things. First, being the first central bank to formally target inflation and this becoming global standard best practice. Second, having a uniquely ‘light touch’ approach to the prudential supervision of banks, with a focus on disclosure, capital requirements and market discipline, and absence of deposit protection – putting the incentives squarely on bank boards, management and depositors. On the latter, as a young graduate in the Financial Markets Department at the time, I recall that the equivalent of the Financial Stability Group was just a small handful of people (less than a dozen), all seemingly over 40 years old (which seemed ancient at the time), and were isolated and hidden away behind vault-like access control. However, over the course of the past 25 years, the world has evolved a lot. Our world of central banking and financial stability has evolved too. Lessons have been learnt from experience both domestically and internationally, especially from the Global Financial Crisis. In particular, a key part of this evolution has been growing expectations on central banks and prudential regulators to take a wider view of the financial system, recognising its interconnectedness with the rest of society. As part of that transformation we took on the role as prudential regulator of the insurers and this is now central to what we do. Businesses, households and communities rely on a well-functioning financial system to live their lives and engage in society, and we are at the heart of this. In September, I delivered a speech on Our Transformation as a Prudential Regulator. If you would like to read it, you can find it on our website. As the year comes to a close, we want to extend our thanks to everyone we have worked with. We appreciate your time, insights, collaboration and we look forward to continuing to build our relationships with you in the New Year. We would like to remind you that the

CHOOSE A CLASSIFICATION ENDORSEMENT ENDORSEMENT CHOOSE A CLASSIFICATION Reserve Bank, on a best endeavours basis, is to observe a ’no-fly zone’ over the summer holidays. Specifically, for the period 19 December 2022 until 20 January 2023 (inclusive), engagement with the sector will be limited, where possible, to enable staff (both at regulated entities and the regulators) to take a break and recharge for 2023. During this time, we will seek to minimise industry-wide engagements such as:  Releasing new consultations;  Consultation deadlines falling during, or immediately after, this period; and  External engagements such as workshops or forums. We will of course engage with you and the sector should a significant unforeseen event occur. Engagement with individual entities on specific issues will continue if it’s required. If you find these updates valuable, or have any other suggestions on how you’d like to engage with us, we’d like to hear from you. Please contact your RBNZ supervisor or send an email to rbnz-info@rbnz.govt.nz. Kia kaha Kia māia Kia manawanui Kia ora koutou katoa! Christian Hawkesby Deputy Governor and General Manager for Financial Stability Update on Insurance (Prudential Supervision) Act 2010 We are continuing to work on our review of the Insurance (Prudential Supervision) Act (IPSA) 2010, which is the legislation that underpins our prudential regulation of insurers. As part of this review, we recently published a consultation paper on Governance, Supervisory Processes and Disclosure. We will hold a webinar on 27 January to outline the content of the consultation and give you an opportunity to comment or ask questions. The consultation is open until 21 February 2022 and we welcome your input. Please send submissions to ipsareview@rbnz.govt.nz. The Governance consultation is the last of four consultations issued since 2020, which have been working through the policy content of the IPSA legislation by topic. We are planning one final ‘omnibus’ consultation in mid-2023 before we seek Cabinet approval to begin drafting an amendment bill. The omnibus consultation will set out a full set of Reserve Bank proposals for amending IPSA, drawing on the four topic-specific consultation papers

CHOOSE A CLASSIFICATION ENDORSEMENT ENDORSEMENT CHOOSE A CLASSIFICATION published so far and the feedback we have received. We do not expect new legislation to be in force before 2026. Life Insurance Industry Stress Test 2022 We successfully completed our first general insurance industry stress test in 2021.1 Building on this exercise we have partnered with the five largest New Zealand incorporated life insurers to design and run our first Life Insurance Industry Stress Test (LIIST) in 2022. LIIST 2022 is intended to assess the resilience of life insurers’ capital, and their ability to call upon mitigating actions, to an economic downturn during a period of rising inflation and interest rates and additional insurance stresses linked to long COVID and a new epidemic/pandemic. We expect to publish a report on the results at an aggregate level by the second quarter of 2023. The report will most likely be in the form of a Reserve Bank Bulletin article. We are also looking at publishing the scenario description, instructions and the data collection template to provide greater transparency of the stress testing process.

Going forward we intend to run general insurance and life insurance industry stress tests in alternate years. The next stress test is pencilled in for the general insurance industry and is expected to commence during the second half of 2023. Currently participants for our stress tests have been chosen with a Financial Stability lens, but we will also look at the appropriateness of rolling out the test more widely in the future. Annual Insurance Questionnaire As part of our routine supervision each year we review all insurers’ compliance with the requirements of the Insurance (Prudential Supervision) Act 2010 (IPSA). In order to support the review process, and make it more streamlined, earlier this year we rolled out an ’Annual Insurance Questionnaire’ to our smaller insurers. This questionnaire provides insurers with a self-service interface to enable them to confirm that the information RBNZ holds on record is still valid. The questionnaire was designed to reduce the number of manual compliance checks for insurers and the Reserve Bank to complete, and to reduce the need for ad hoc information requests to firms. As with any new process there were a few teething problems but overall we found the questionnaire worked well and it both reduced the number of manual checks required by the Supervision team and helped surface a number of instances of non￾compliance. Of these a theme emerged around failure to notify the Reserve Bank of changes in Directors and Relevant Officers (CEO, CFO, Appointed Actuary) within 20 days of appointment, as required by s.37 of IPSA. We have communicated bilaterally with individual firms but we would like to take the opportunity to strongly encourage firms’ legal/compliance and regulatory affairs teams to re-familiarise themselves with the legal requirements in this space.

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1 rbnz.govt.nz/hub/news/2021/10/inaugural-insurance-stress-test-highlights-reliance-on-reinsurance

CHOOSE A CLASSIFICATION ENDORSEMENT ENDORSEMENT CHOOSE A CLASSIFICATION Following the successful roll-out to smaller firms, in 2023 we intend to extend the questionnaire to all licenced insurers. We hope you find this initiative useful and we welcome any feedback. Council of Financial Regulators Insurance Forum The Reserve Bank continues to work closely with our partners in the Council of Financial Regulators (CoFR). The CoFR Insurance Forum has continued to meet regularly to provide an opportunity for government agencies, regulators and insurance industry representatives to discuss upcoming regulatory initiatives and the challenges facing the sector. At the last meeting in November, the group discussed climate change disclosures, the key issues in the regulatory pipeline and the risks facing the industry, including continuing supply chain issues, particularly in the motor vehicle sector. The group also noted that cost of living pressures may affect some customers’ ability to maintain their premiums. The CoFR Regulatory Initiatives Calendar is published every quarter and sets out the consultations and other engagements affecting the whole of the financial services sector, including insurance. The next issue is due for release on 15 December, and will be in a revised format, based on consultation with industry users. If you want to keep up to date with announcements from the Council of Financial Regulators, you can subscribe for email updates on the CoFR website at www.cofr.govt.nz What’s in store for 2023  The Interim Solvency Standard 2023 has been issued by the Reserve Bank and will come into force from 1 January 2023. It will apply to individual insurers following their 2023 balance dates. We are working on further guidance to assist insurers in implementing the standard, and to help users of solvency information understand the new measures. The implementation of the Reserve Bank’s ISS and IFRS 17 reporting requirements for insurers is effected through conditions of licence and statutory notices. We are updating these on a rolling basis over the coming months, beginning with insurers with December and February balance dates. Further information is available on our website Insurance data upgrade - Reserve Bank of New Zealand - Te Pūtea Matua (rbnz.govt.nz)  On 27 January 2023, we will be hosting a webinar on our Insurance (Prudential Supervision) Act 2010 (IPSA) governance and supervisory processes consultation.  This consultation will be followed by an ‘omnibus’ consultation later in 2023, which will set out all of our proposed changes to IPSA.

CHOOSE A CLASSIFICATION ENDORSEMENT ENDORSEMENT CHOOSE A CLASSIFICATION For your information  We regularly consult about regulations that affect banks, insurers, non-bank deposit takers, and payment systems. Public and industry responses help us make informed decisions and develop effective regulations for a stable and efficient financial system. For more information on our consultations, please click here.  For all information on upcoming Financial Stability Reports, please click here.  For all information on upcoming Monetary Policy Statements, please click here.

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