COMPLIANCE NEWS - INSURERS
JULY issue | 2018
This month we look at the Reserve Bank of New Zealand’s review on its current and future workflow, and our breakdown on the Issues Paper released by the Ministry of Business, Innovation and Employment on the Insurance Contract Law Review. We also provide our general update on relevant legislation.
THE RBNZ CLARIFIES ITS WORK PROGRAMME AND PRIORITIES
The Reserve Bank of New Zealand (RBNZ) has been busy progressing the review of the Reserve Bank Act, as well as the Conduct Culture Review. The Conduct Culture Review came about as a result of the Australian Royal Commission’s inquiry on misconduct within the banking, superannuation, and financial services industries.
The RBNZ has recently reviewed its work programme. In addition to the two initiatives above, the RBNZ will continue to progress policy work which is:
The RBNZ’s review of its work programme has meant that the above initiatives take priority over other initiatives. The RBNZ has indicated the reviews of the Insurance (Prudential Supervision) Act 2010 and the bank liquidity policy will be deferred. The RBNZ will maintain a watching brief on emerging issues like ‘fintech’ developments, however the RBNZ cannot justify a heavy policy investment on emerging issues.
In terms of timeframes, the RBNZ expects to report on the banking industry’s conduct by the end of October 2018. The RBNZ will then report on insurers’ conduct shortly after. The RBNZ intends to incorporate new insurance accounting standards into the solvency framework by hosting an industry forum sometime in the second half of 2018.
We will update you if the RBNZ notifies any changes to its priorities.
REVIEW OF INSURANCE CONTRACT LAW
In May the Ministry of Business, Innovation and Employment (MBIE) released its Issues Paper with respect to the Review of Insurance Contract Law (the Review). Submissions on the questions set out in the Issues Paper are due by 5pm 13 July 2018. The Review is wide-ranging, but excludes matters such as the prudential regulation of insurers, issues around the Earthquake Commission and regulation of advisers; these matters are being dealt with in separate reviews. Specific areas of issue that have been identified by MBIE include:
Issues Paper is one of the first steps in the process of the Review, with an Options Paper due late 2018 and recommendations to the Minister to be provided in March 2019.
Reform of Disclosure Obligations and Remedies
Of particular interest is the indicated reforms around disclosure obligations and remedies. The current “one-size-fits-all” remedy of avoidance has been widely criticised. Reforms to bring about more guidance to insureds around disclosure, and more proportionate remedies have already taken place in the UK and Australia.
MBIE has expressed concern around the burden placed on insureds to identify and disclose matters that are “material” to cover, where “material” is judged from the perspective of an insurer. Currently there are some common law softeners to the obligation on the part of the insured – such the law of waiver where the insurer has asked limited questions or where the insurer could be said to be “on notice” that further information existed without taking steps to extract this further information.
Perhaps the most extreme reform has taken place in the United Kingdom in relation to consumer disclosure obligations. The test is simply whether the consumer took reasonable care not to make a misrepresentation in answering the insurer’s questions. It is on the insurer to ask the right questions.
In Australia the duty of disclosure is dealt with under the Insurance Contracts Act 1984. The insured is required to disclose what the insured knew, or a reasonable person in the circumstances would have known, to be relevant to the decision of the insurer. This varies from our current test which looks not at the knowledge of a “reasonable insured” but that of a “prudent insurer”.
In terms of businesses, the United Kingdom reforms frame the duty of the insured as a duty to make “fair presentation” of the risk to the insurer. In our view, this represents the least extreme change in disclosure duties. In contrast to Australian reforms, the test of materiality which falls within the scope of “fair presentation” still requires insureds to predict what an insurer would find relevant. However, there has been some codification of the law around waiver which provides that an insured has discharged its duty by putting the insurer “on notice” of additional information. This varies from the common law of waiver in that the question of whether an insurer has been put “on notice” forms part of the test around disclosure, rather than a defence to be raised by the insured.
Remedies for Non-Disclosure
In both Australia and the United Kingdom, there has been a movement away from avoidance as the only remedy for non-disclosure to remedies which allow for a more proportionate response.
In the case of non-fraudulent, or “innocent” non-disclosure, there is likely to be a change to put the insurer in the position it would have been had the disclosure been made. In the United Kingdom, avoidance (with return of premiums) is available only where the insurer would not have entered into the contract at all. Where different terms would have been applied, these are read into the existing contact. Where higher premiums would have been charged then the claim is adjusted proportionately.
The United Kingdom approach to cases where a higher premium would have been charged is arguably still weighted in favour of the insurer. The “proportionality” calculation is based on a reduction of the entire claim rather than a deduction for the increased premiums that would have been payable.
Likelihood of Reforms
In our view, there is a high likelihood that some of the reforms seen overseas will be adopted in New Zealand. There seems to be a clear indication from MBIE that similar reforms should be expected in New Zealand, in particular:
We would encourage insurers to consider and comment on the potential reforms. Please contact Laura Tidey if you have any questions on the Review. She will be happy to assist in preparing submissions for MBIE.
Review of the Insurance (Prudential Supervision) Act 2010
Further to our comments made in our April Issue, no new information has been made on the review of the Insurance (Prudential Supervision) Act 2010. As noted above, work on the Insurance (Prudential Supervision) Act 2010 (IPSA) is deferred until the Reserve Bank of New Zealand has completed other initiatives which take priority over the review of the IPSA. We will update you as new information comes to hand.
Financial Services Legislation Amendment Bill
The Financial Services Legislation Amendment Bill (Bill) is an omnibus Bill which makes amendments to the Financial Markets Conduct Act 2013 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008. A number of regulations will need to be made to support the measures in the Bill.
Submissions on the Minister of Commerce and Consumer Affairs’ (Minister)’s Discussion Paper on disclosure requirements for those providing advice in the new regime closed on 25 May 2018. The Minister has not provided any feedback on the submissions received. Submissions on the Minister’s Discussion Paper on addressing the misuse of the Financial Service Providers Register closed on 15 May 2018. The Minister has not provided any feedback on the submissions received.
We will keep you updated as new information comes to hand.
Fair Insurance Code
The Insurance Council of New Zealand (ICNZ) is in the process of reviewing the Fair Insurance Code and the submissions received from the public. The ICNZ expects the new Fair Insurance Code will be introduced in 2019. We will update you as new information comes to hand.
Earthquake Commission Act 1993
The Earthquake Commission Amendment Bill (Bill) is currently before the Select Committee. The Bill makes changes to the Earthquake Commission Scheme to simplify and speed up the claims process. Parliament is currently reviewing the submissions received from the public. Any amendments to the Earthquake Commission Act 1993 are expected to come into force on 1 July 2019 after the completion of an independent inquiry of the Earthquake Commission.
We will update you when new information comes to hand after the submissions have been reviewed.
The Privacy Bill is currently before the Select Committee. Parliament is currently reviewing the submissions received from the public. We will update you when new information comes to hand after the submissions have been reviewed.
Disclaimer: The information contained in this newsletter is provided for informational purposes only, and should not be construed as legal advice on any matter.