Consultation

A draft law would let the government cut the value of insurance policies, with no vote in Parliament and no compensation promised

Source: RBNZ, Exposure draft of the Insurance (Prudential Supervision) Amendment Bill

The power sits in Schedule 2 of the Reserve Bank's draft insurance law, and it only bites if your insurer is being rescued from failure. The same draft brings the first fines the Reserve Bank could seek without a criminal case, capped at $2,500,000 each time a rule is broken. Comments close 28 August.

By Henry Smith · Regulation · 2026-04-15

What this means for you Insurers would face court-ordered fines of up to $2,500,000 per breach from late 2028 at the earliest, instead of criminal charges that are almost never brought. Life policyholders keep their place near the front of the queue if an insurer fails, while health policyholders stay at the back with ordinary creditors. The draft also creates a power to cut the value of insurance contracts during a rescue.

Written by Henry Smith · Reviewed by Smiths Insurance & KiwiSaver, licensed Financial Advice Provider (FSP712931)

Deep inside a 121-page draft law is a power to cut the value of insurance policies. If the Reserve Bank were rescuing an insurer that had failed or was close to it, the Governor-General, acting on the government's advice, could sign off a reduction in what those policies are worth. No vote in Parliament is required. And we could find nothing in the draft that promises the policyholder compensation for what is taken off (RBNZ exposure draft, Schedule 2, clause 55, April 2026).

This is the Reserve Bank's own proposal, published on 15 April 2026 and open for public comment until 5pm on 28 August 2026 (RBNZ). It is not law yet.

What does this mean if you hold a policy?

Nothing at your next renewal, and nothing for years: the Reserve Bank does not expect any of the new rules to start before late 2028. The write-down power lives inside a rescue, and rescues happen only when an insurer is failing.

What it changes is who carries the loss when one does. The rescue process, a resolution regime copied from the rules for banks, replaces the old emergency takeover. Its first stated purpose is to protect policyholders' interests, and the Reserve Bank could step in where a failure would cause significant harm to a significant number of them (RBNZ consultation paper).

Then comes Schedule 2 of the draft itself. The Reserve Bank's own costs of running the rescue get paid ahead of all other claims (clause 51). The Reserve Bank can decide what every insurance contract is worth (clause 54). Clause 55 is the haircut.

So the honest read for a policyholder is this. In a rescue, the cover you bought is a number the government can reset, and the draft as written does not say you are paid the difference.

Where would you stand if your insurer failed?

That depends on what you bought, and the draft does not change it.

Some countries put policyholders at the front of the creditor queue by law. New Zealand never has. The idea appears in the draft only in an old section that makes an overseas insurer warn you that its home country prefers its own policyholders. There is no New Zealand version.

Life insurance is the better place to be. A life insurer has to keep a statutory fund, a walled-off pot of assets that can only back its life policies. If the insurer is wound up, that pot pays life claims before the fund's other creditors get anything, once the liquidator has taken its costs (New Zealand Legislation, IPSA s 116). The protection stops at the edge of the pot. If the pot is short, so are you.

Health insurance, and general cover like house and car, has no pot. Your claim is an ordinary debt, ranked alongside every supplier and contractor the company owes (New Zealand Legislation, Companies Act ss 312 and 313). If the money runs short, everyone in that group takes the same cents in the dollar, behind secured lenders and a short list of favoured claims.

So what does that ranking mean in practice? Take the worst case first, a wind-up rather than a rescue. A liquidator is there to turn what is left into cash and pay it out in the legal order, not to run an insurance book, so the cover itself does not carry on. What you hold is a place in that queue rather than a policy that will pay your next claim, and a claim already made and still unpaid is one more ordinary debt in it. A rescue is the opposite case, which is why the distinction matters: the same Schedule 2 lets the Reserve Bank sell or transfer a failing insurer's business, policies included, to another insurer or to a company it forms for the purpose (clauses 25 and 26). That is how cover carries on under a new name instead of stopping.

Replacing cover you have lost is where the damage actually sits, and it is not money. A new policy is a new contract, underwritten at the age you are and on the health you have on the day you apply, so anything diagnosed since you first took the old cover is a pre-existing condition to the new insurer, and health insurers commonly exclude or load those. Someone fifteen years into a policy is not buying back what they had. On all of that the draft is silent. It is a law about the insurer, not about the policyholder's next policy: nothing in it gives you a right to carry your cover to another company, and no compensation scheme stands behind insurance policies in New Zealand. Bank depositors got one in the Deposit Takers Act 2023, cited below. Policyholders have no equivalent, and this draft does not create one.

Is $2,500,000 a big fine, or a rounding error?

The same draft hands the Reserve Bank a weapon it has never had. Today its only way to punish an insurer that breaks the rules about holding enough money to pay claims is a criminal prosecution, and the bar is so high it almost never happens. The draft adds a civil pecuniary penalty, a fine ordered by a court with no criminal conviction attached, capped at $2,500,000 each time a rule is broken and $300,000 for an individual (RBNZ exposure draft, new section 137K).

The plain answer is that it is a serious number for a small insurer and a soft one for a large insurer, because the cap is flat. It never grows with the firm.

Parliament has already put on the record what it thinks a fair fine for a large financial institution looks like. For a bank, the same regulator can seek the greater of $5,000,000 and 0.1% of total assets (New Zealand Legislation, DTA s 158), which is to say one thousandth of the balance sheet. Measure an insurer the same way and $2,500,000 is one thousandth of $2.5 billion. For any insurer larger than that, the ceiling is proportionally lighter than a bank's, and it gets lighter every year the insurer grows. The insurer clause is the bank clause with the starting number halved, the individual figure cut, and the size-scaling deleted.

Put a real insurer beside it. When Dai-ichi Life bought Partners Life in 2022, an insurer its announcement called New Zealand's second largest by the premiums on its books, it published three years of the parent company's accounts: total assets of $1,322 million and premium income of $370 million in the year to 31 March 2022 (Dai-ichi Life Holdings, 12 August 2022). Against a balance sheet that size, the most a court could fine the company for breaking a solvency rule is 0.19% of it, about one five-hundredth, or roughly 0.7% of a single year's premium income. Run the bank formula over the same insurer and the answer is $5,000,000, because a tenth of a percent of $1,322 million lands below the bank's $5,000,000 floor. That is exactly twice the insurer cap, at a company that was already that size four years ago.

Conduct is policed harder than solvency. The Financial Markets Authority, which polices how insurers treat customers, can already seek the greatest of what the customer paid, three times the firm's gain, or $5,000,000 (New Zealand Legislation, FMCA ss 449 and 490). The regulator watching how a policy was sold to you can go after at least twice as much as the regulator watching whether the insurer survives to pay your claim.

Chart: QuoteHub comparison of the maximum fines, taken from the four laws cited in the table below.

Who is being fined, and under which law	Who brings it	Most a company can be fined	Most a person can be fined
An insurer today, criminal charge only	Reserve Bank	$1,000,000 (New Zealand Legislation)	$200,000 or 3 months' imprisonment (same source)
An insurer under the draft, court fine, no conviction	Reserve Bank	$2,500,000 (RBNZ exposure draft, s 137K)	$300,000 (same source)
Any financial firm treating customers badly, FMCA and its CoFI conduct duties	Financial Markets Authority	Greatest of what the customer paid, 3x the gain, $5,000,000 (New Zealand Legislation, s 490)	$1,000,000 (same source)
A bank or other deposit taker, Deposit Takers Act 2023	Reserve Bank	Greater of $5,000,000 and 0.1% of total assets (New Zealand Legislation, s 158)	$1,000,000 (same source)

Criminal penalties rise too. Trading as an insurer here without a licence would take the maximum company fine from $1,000,000 to $2,500,000, and the longest prison term for an individual from 3 months to 18 (RBNZ exposure draft, clause 10).

What can you do about it?

Two things, neither of them urgent.

You can check your insurer's financial strength rating, the grade an outside agency gives it for its ability to pay claims. Every licensed insurer publishes one, and it is the nearest thing to a public read on whether a rescue would ever touch you. Our financial strength tool puts them side by side.

You can also write to the Reserve Bank before 5pm on 28 August 2026, at [email protected] (RBNZ). Question 14 of the consultation paper asks whether the rescue rules need adjusting for life insurers' walled-off funds, which is the exact point where the power to cut policy values meets a life policyholder's place in the queue.

For policyholders as a group, the trade in this draft is plain enough. A regulator with a fine it can actually use tends to step in earlier, and earlier intervention is what keeps an insurer standing long enough to pay claims. But the fine is half a bank's and never grows, and the same draft that promises to protect policyholders in a rescue is the one that lets their policies be written down.

What couldn't we pin down?

This is a draft, not a bill before Parliament. The section explaining the government's thinking is still marked "[To come]", clause numbers can move, and late 2028 is an expectation rather than a rule. The deadline has already shifted once, from 7 July 2026, and we found no separately dated notice of the change beyond the consultation page itself (RBNZ).

We searched the draft for compensation wording attached to the clause 55 write-down power and found none. Proving an absence is harder than proving a figure, and a safeguard could still be added at this stage.

We compared maximum fines only. A ceiling says nothing about what a court would order, or how often either regulator goes to court. We did not read the Cabinet papers or the regulatory impact statement, so we cannot say why insurers were left off the size-scaling clause, only that they were. The Partners Life figures are the parent company's consolidated accounts to 31 March 2022, the last set printed in that acquisition announcement, so they are a check on scale rather than a current balance sheet for the licensed insurer a fine would land on. All laws were read in their current versions on legislation.govt.nz, and the Reserve Bank documents on the consultation site.

What this means for your cover

What a policy pays, how to size it, and how a rule change reaches an existing policy. Life insurance in New Zealand

Sources

Every source below was read and checked on 21 August 2026.

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