Insurance Alert – April 2017

Home Insights Insurance Alert – April 2017

Contributed by:

Contributed by: Tom Hunt, Marika Eastwick-Field, Emmeline Rushbrook and Michael Taylor

Published on:

Published on: April 09, 2017


Insurance technology news updates

Thought leadership on the impact of blockchain technology

KMPG New Zealand has addressed the impact that blockchain technology may have on the insurance industry in its General Insurance Update (see link to the paper here). The report predicts that with the emergence of blockchain, faster and cheaper insurance will be available to New Zealanders. Deloitte has expressed similar views (see link here). 

Greater efficiencies are predicted in areas including claims handling, customer engagement and product development. For example, in terms of claims handling, a 'smart contract' flight insurance policy could automatically pay out when cancellations or delays are verified from flight data sources. Customer engagement could be simplified, for example, with customers storing and granting access to verified identity data on the blockchain. New products, which are based on defined rules and availability of reliable data sources, might be set up using smart contract technology.

Blockchain Insurance Industry Initiative

A number of global insurers have formed a consortium, Blockchain Insurance Industry Initiative (B3i), for the purposes of analysing possible ways that blockchain can improve the industry. Representatives of the insurers have explained that the benefits of the consortium include the ability to test in practice how the technology may be used at an inter-company level. The consortium, currently made up of 15 members, expects to share its first results in June this year, so watch this space. For further information, follow this link.

Blockchain NZ conference

For anyone who is interested in learning more, the Blockchain NZ conference is taking place in May this year, and will be attended by Russell McVeagh's insurance and technology law experts.

Chatbots and AI

Another interesting aspect of 'insurtech' is the rise of chatbots in the industry. A chatbot is a computer software program that is able to communicate with humans using artificial intelligence.

A number of chatbots are currently used by various insurers, primarily to answer customer queries. However, the expectation is that these chatbots will soon be used to emulate the insurance 'quote and buy' process. Microsoft has stated that it has pilots in process with many customers. Rather than filling out a form, consumers will 'chat' with the chatbot, and there will be no need to fill out forms, or call up a broker.

We are also seeing a rise in the use of telematics insurance policies, which offer incentives to customers based on data captured in respect of that customer's actions. Sompo Japan Nipponkoa Insurance has announced that this year it will introduce a motor vehicle policy that offers discounts based on driving data captured by a smartphone app. With the expansion of technology able to capture such data, and assess it efficiently, we expect to see more of these policies on the market.

Regulatory update

Review of the Insurance Prudential Supervision Act 2010

On 30 March 2017 the Reserve Bank of New Zealand (Reserve Bank) published an Issues Paper on the Review of the Insurance Prudential Supervision Act 2010 (IPSA). The Terms of Reference state that the review's objectives are to:

  • assess the performance of IPSA, in light of its purposes, to ensure that IPSA provides for a cost effective supervisory regime that promotes the soundness and efficiency of the insurance sector; and
  • assess the consistency of the regime with international guidance and other legislation administered by the Reserve Bank and consider if further alignment would be appropriate given the nature of the New Zealand insurance sector.

The review will be staggered over three phases:

  • Phase 1 will focus on the identification of potential issues for consideration during the review.
  • Phase 2 will involve policy analysis and options to address issues identified in Phase 1.
  • Phase 3 will involve the enactment of legislation and the transition to implement changes.

Submissions are currently being sought to assist in identifying issues as part of Phase 1 of the review. While the Issues Paper highlights a number of areas where potential issues may exist (discussed in Part 2), at this stage, the Reserve Bank has not identified any proposals as to how such issues may be addressed in the future. 

The Reserve Bank is also seeking general submissions on whether there are further issues that should be included in the Review; whether there are areas of legislation that are now redundant or could be drafter in a clearer manner; and having regard to the purpose of the legislation, whether there are any matters that unduly restrict competition or innovation within the New Zealand insurance market.

In addition to considering any issues arising from stakeholder submissions, the Reserve Bank will take into account the recommendations arising from the IMF Financial Sector Assessment Programme's recent review of New Zealand's regulatory and supervisory framework when determining what issues will be taken into Phase 2 of the review.

The deadline for making submissions is 30 June 2017. The Reserve Bank has also flagged that it may facilitate workshops and other forums over 2017 to discuss the ideas presented in the Issues Paper, subject to demand.

FAA Review next steps

Submissions closed last week on the Ministry of Business Innovation and Employment's (MBIE) consultation paper and draft bill regarding a new financial advice regime. Once MBIE has considered all submissions and made any necessary amendments to the draft exposure Bill, the Bill will be introduced into Parliament and the normal Parliamentary process will begin. The Bill proposes a complete overhaul of the existing financial advice regime and will have significant implications for the distribution channels used by insurance companies.

Separately, Cabinet has agreed that a Code Working Group be appointed prior to the introduction of the Bill to prepare a draft Code of Conduct. The Code will be a key part of the new regime as it will, amongst other things, set out the standards of competence, knowledge and skill that apply to all types of advice. MBIE's consultation paper highlighted that leaving the drafting of the Code until after the Bill was passed would delay the new regime coming into effect and create a longer period of uncertainty for the industry. The membership of the Code Working Group is to reflect the required composition of the Code Committee set out in the Bill. At this stage, it is planned that the Code will be approved by the Minister of Commerce and Consumer Affairs by 31 August 2018.

Case update

The High Court has recently provided guidance on what an insurer is required to do to replace a house to "the same condition and extent as when new". Tower Insurance had made an offer for the cost of replacing a large historic mansion destroyed in the 2011 Canterbury earthquake, using modern building materials and standards. This offer also took account of the fact that the house's size was mistakenly underestimated in the policy, resulting in the house being underinsured, and so the costings to rebuild were adjusted on a pro-rata basis.

Mr Myall, the policyholder, rejected the offer and claimed in the High Court that the requirement for the insurer to repair or replace the house "as when new" meant a requirement to allow for original building materials and specifications. He also objected to a pro rata reduction in cover as, he asserted, many of the rebuild costs remained fixed irrespective of size.

The High Court found that the requirement to adhere to the exact specifications of the original house was not absolute. The insurer was entitled to deviate from the original specifications where reasonable, having regard to building materials and practices in "common use" at the time of the replacement. The onus was on the insured party to demonstrate that the alternative, modern techniques and materials proposed by the insurer would not achieve the result and condition fundamental to the policy. The Court also held that Tower was entitled a pro rata reduction in cover to reflect the extent to which the property was under insured.

Myall v Tower Insurance Limited [2016] NZHC 251

News update

Possible takeover of Tower

Tower Limited is currently the subject of two competing takeover bids – one by Canadian company Fairfax Financial, and one by Australian entity Suncorp, through its New Zealand subsidiary, Vero.

At Tower's annual meeting on March 30th, Tower chairman Michael Stiassny indicated to shareholders that there is likely to be greater clarity on the takeover situation in the near future. He has also indicated that Tower is seeking an independent appraisal of the company's value.

IAG and Tower taking Earthquake Commission to High Court over land damage payments

IAG and Tower are seeking to clarify EQC's liability in respect of increased liquefaction vulnerability (ILV) payments. These payments cover the reduction in land value due to liquefaction risk caused by earthquakes.

The cost of damage to land is not (generally) covered by private insurers. However, insurers will sometimes pay for the costs of land remediation up front, and then recover these costs from EQC from the EQC payout.

IAG head of corporate affairs Craig Dowling said IAG and Tower are worried the payouts from EQC might not cover costs. The private insurers had identified that they were using a different method to EQC to calculate the payouts, on the basis of a number of ILV payment methodologies published by EQC. The private insurers are accordingly seeking clarification of the approach to be applied. For further information, see link here.

Southern Response to appeal against High Court decision allowing class action against it to proceed

A number of Southern Response policyholders filed an application last year to bring proceedings as a class action. The claim is in relation to Southern Response's claims management practices. Justice Gendall granted the group's application, although stated that he reached this conclusion "by a reasonably fine margin".

Southern Response has now filed an appeal against the High Court's decision. A spokesperson for Southern Response stated that it was concerned that the class action would delay settlement of individual claims. For further information, see link here.

This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

Talk to one of our experts:
Related Expertise