Making the Reserve Bank of New Zealand (RBNZ) the prudential supervisor of the general insurance industry is a mistake, according to former bank governor Don Brash.
He said that when an insurance company starts getting into trouble and only the Reserve Bank is aware of that, “the bank is in an almost impossible position, according to an article in ShareChat where investors could share information and news on New Zealand and overseas shares.
Mr Brash said, “If it discloses its concern to the market, the insurance company is almost certainly in potential jeopardy. If it fails to indicate concern, and worse still, if it forbids the insurance company concerned from making others aware of the bank’s concern, the bank is blamed for not disclosing that concern.”
For instance, the RBNZ initially forbade CBL from telling New Zealand Stock Exchange about the central bank’s concerns about the credit surety and financial risk insurer, which went into liquidation last year.
Instead of the current prudential supervision, Mr Brash suggested reverting to the model in the early 1990s when all insurers were obliged to disclose a rating from a specialist insurance rating company, either A M Best or Standard & Poor’s.
“That provided a strong incentive for insurance companies to strengthen their claims-paying rating, knowing that by doing so they were enabled to charge slightly higher premiums,” he said.
“Of course, no system will prevent the failure of all insurance companies. AMI collapsed following the 2011 Christchurch earthquake and, though it had been expanding its business at least in part by under-cutting other insurance companies and was rated below many of those other companies, the then government undermined the system by paying out in full under all the insurance policies which the company had written,” Mr Brash said.
“CBL itself had a relatively strong rating prior to the Reserve Bank effectively closing its doors. But the benefit of a system which creates a strong incentive on insurance companies to strengthen their own claims-paying ability is surely to be preferred to one where insurance companies have an incentive only to meet the minimum standards imposed by the Reserve Bank,” he added.