Ancient life insurance law long overdue for an update

By PAULA OLIVER

The country's archaic life insurance law is finally getting a long-awaited review - but questions are being raised over who is doing it and how long it will take.

By international standards, life insurance companies in New Zealand operate in an environment of virtually no regulation.

The act that governs how they do business is almost a century old and, among its out-of-date yet strangely quaint requirements, is disclosure of any assets held in India, and colonial government or railway shares.

Because the local life insurance industry manages assets totalling more than $7 billion, many observers and the industry itself say an overhaul of the law is long overdue.

For years they have tried to convince successive Governments to take a look at the issue and now Commerce Minister Lianne Dalziel has given them their wish.

The Law Commission will conduct the review of the "ancient" Life Insurance Act 1908.

In making her announcement, Dalziel said the present law did not give consumers enough information or protection and it did not match international standards of rigorous controls around insurers.

The Law Commission has been given until the end of October next year to report back to the Government.

Vance Arkinstall, chief executive of the Investment Savings and Insurance Association (ISI), is happy the review is going ahead.

But he would have liked it to move a little quicker.

"I have some concern about the speed of the process. We would have liked greater priority," he said.

The fact that the International Monetary Fund is reviewing New Zealand's financial systems this year is being seen by some cynics as the reason the review is finally going ahead.

The IMF is sure to give insurance a black mark, they say.

Questions are also being raised over whether the commission is the correct body to conduct the review.

Simon McArley, a partner at legal firm Kensington Swan, says two levels of issues need to be addressed.

First, there are the legal nuts and bolts changes to ensure that the reporting requirements are more relevant.

But, secondly, there is the wider question of how much regulation there should be around life insurance companies - which he says is a policy question rather than a legal one.

"I wouldn't have thought it was purely a legal issue. There are some legal issues in there, relating to what the status is of various funds held by life insurance companies. But there are policy questions, too."

McArley suggested that the Ministry of Economic Development might be a more appropriate review body.

National MP Richard Worth is scathing about the Law Commission's involvement.

"Less than one third of the commission's work is translated into legislation. They do the work with intellectual rigour and it's not translated into legislation."

Worth also thinks the review is going to take too long and plans to put forward a member's bill to fast-track a law change.

Whatever the review body, everybody is in agreement that the law is in desperate need of freshening up.

"It's old, tired and needs redoing," McArley says.

Back in 1997, the Securities Commission released a discussion paper on the topic, but its hard work did not reap any results.

The lengthy paper, still available on the commission's website, apparently fell into a bureaucratic black hole. It raised issues about a lack of statutory capital adequacy or solvency requirements, said there were no rules on keeping policyholders' funds apart from other assets, and questioned how little protection policyholders had if a company failed.

It also noted that it was difficult for a policyholder to get out of a deal with an insurer, and that life policy surrender values were low and not controlled.

McArley was involved in making a Law Society submission on the 1997 discussion paper.

Since then Australia has seen its greatest corporate collapse - that of insurance group HIH in March 2001 with debts of up to A$5.3 billion ($5.9 billion).

McArley refers to the collapse when discussing the question of how much regulation there should be for New Zealand life insurance companies.

"The question is, should we have something? The HIH experience would tend to suggest yes, it's a good idea. Here's the chance to do something before it actually goes wrong - rather than after."

Australian insurers operate in a far more complex regulatory environment, in many ways at the other end of the scale to New Zealand.

McArley notes that the flavour of law reform at the moment is to "do whatever Australia has done", but he doesn't think New Zealand should go down that road. He pointed out that the web of regulation across the Tasman did not stop the HIH debacle.

"I don't think building a bureaucracy of commissioners is the way to go."

The insurance industry agrees. The ISI's Arkinstall says the solution is simple - bring life insurers and directors under the Companies Act.

There must be recognition that the business is long-tailed, and there should be an extra requirement of an actuarial review each year.

Arkinstall says life insurers are not transparent enough under the present law. It is hard to understand the outdated returns and schedules they make, and policyholders have a right to know what's going on.

One of the biggest problems with the law is that it was written when life insurers were mutuals, and now they had to juggle the rights of shareholders with policyholders.

How heavy-handed the regulatory regime should be is bound to generate debate later in the review process.

McArley, who will work on a submission again for the Law Society, says independent trustees and actuaries and supervisors are among the options being looked at.

"There is a general view that something is needed."

He is not convinced that simply putting the life insurers under the Companies Act and requiring extra actuarial disclosure is the way to go.

"While it's technically pure, it runs the risk of the problem of all disclosure regimes - people just don't understand the disclosure. You're really reliant on the media or analysts to pick it up."

It had to be remembered that life insurers were not like other companies. McArley used the example of a consumer giving a garage door retailer a 30 per cent deposit.

If the door hadn't arrived in two months, the buyer could chase it up.

But a policyholder could pay a life insurer money for 30 or 40 years, then die, and only hope some money would be paid out. It would be unlikely that the directors the person paid the money to would still be in their seats.

In the absence of any real regulation, ISI members have voluntarily adopted claims paying ratings from international rating agencies.

That gives policyholders a little more information, but they could get a lot more when the commission's review is over.

As well as that review, the industry's accounting procedures are being looked at by a working group managing the transition into New Zealand law of international financial reporting standards.

Working group chairman Mark Hucklesby says he hopes the review will match his own group's work.