The new Insurance (Prudential Supervision) Act comes into force in March 2012.  Under the new Act, insurers will need a licence from the Reserve Bank to continue in the insurance business.  The licensing application involves satisfying the Reserve Bank that the insurer has the appropriate risk management, governance and capital necessary to continue in the business.  Insurers will also require a rating from an approved rating agency.

The Bank decides whether or not licences are granted.  It is entitled to satisfy itself that the insurer can comply with its obligations under the Act.  The Bank may also impose conditions on licences, including a required solvency margin and authorisation only to conduct certain types of insurance business.

The other striking feature of the Act is the Bank’s extensive power to monitor and supervise insurers.  It is entitled to change licence conditions and investigate insurers if there is a possibility that they cannot comply with their new obligations.  It can also become involved in the management of distressed insurers and apply for their liquidation.

The new regime is a quantum leap from the light regulation currently in place.  It is reminiscent of the new regime for deposit takers introduced in response to the finance company crisis in 2008.  In the space of 3 years, the bank has transformed itself from spectator to referee.

As with the finance company regime, compliance obligations are onerous and costly, favouring the large over the small.  Small insurers need to give serious consideration to continuing in business or winding down to avoid the need for a licence and the costs of compliance.  We have advised a number of small insurers on their options.  In our experience, every situation is different.  For some, compliance with a new Act is achievable, particularly with the relief available through exemptions.  For others, a managed wind-down or sale of the insurance book is a better option.

Whatever the solution, the important thing is that time is running out.  A provisional licence or a suitable form of exit is required by March 2012.