Prudential regulation ensures that insurers can afford to pay claims. The Reserve Bank governs prudential regulation in New Zealand. Under the Insurance (Prudential Supervision) Act 2010 they have the power to

• license insurers conducting business in New Zealand
• require insurers to meet certain conditions in obtaining or holding a licence
• collect information from insurers to supervise their business and investigate when necessary
• set solvency standards that dictate what an insurer can do with its capital
• obtain a financial strength rating from a rating agency and disclose it to policyholders
• maintain fit and proper policies and risk management programs, and
• intervene in an insurer’s business if the insurer becomes in distress.

One unique aspect of New Zealand’s prudential regulatory regime is that the Reserve Bank applies an extremely high catastrophe risk charge to New Zealand licensed insurers. Most insurers globally have to hold sufficient capital reserves or reinsurance to cover their liabilities for a 1-in-200 or -250 year catastrophe event. New Zealand insurers have to hold sufficient capital reserves or reinsurance to cover their liabilities for a 1-in-1000 year catastrophe event.

This means insurers cannot use their capital as freely in New Zealand as those overseas can. This prevents domestic insurers from investing as much capital in the market —which can yield higher returns on investment and lower the cost of premiums charged.