New regulatory initiatives
On 10 June 2013 the Reserve Bank released a consultation paper (PDF 243KB) on the treatment of guarantees and off-balance sheet exposures for solvency capital purposes. The first part of the paper sets out a proposed framework for the treatment of guarantees of licensed insurers’ assets. The proposal is to allow for partial recognition of guarantees of shorter maturity than the underlying asset and to provide a limit on the extent to which the Asset Risk Capital Charge can be reduced through the use of guarantees. Part two proposes changes to the text of the Solvency Standards regarding off-balance sheet exposures; these changes are in the main aimed at providing clarification as to the intended application of the Standards. Consequential to these changes, amendments are proposed to the Asset Concentration Capital Charge, the Interest Rate Capital Charge and the Foreign Currency Risk Capital Charge. The Reserve Bank invites interested parties to provide feedback on all elements of the consultation paper by 9 August 2013.
Insurance solvency standards: the quality of capital and regulatory treatment of financial reinsurance
On 7 December 2012 the Reserve Bank released a consultation paper (289KB) on the quality of capital, the treatment of financial reinsurance arrangements for solvency capital purposes and some minor revisions clarifying the interpretation and drafting of the existing solvency standards. The first part of the paper sets out the Reserve Bank’s criteria for and approach to determining the quality of insurance capital. Part two explains the Reserve Bank’s preliminary assessment of the potential risks to its solvency standards from financial reinsurance or limited risk transfer agreements. The risks are mainly around the potential difficulty of establishing the amount of risk transfer contained in a financial reinsurance agreement, and the treatment of any financial benefits received by the insurer. Under the current solvency standards, these may have the potential to artificially boost an insurer’s solvency position. The paper discusses two possible policy options for mitigating these risks: one is to disallow any solvency capital benefit from financial reinsurance agreements, the other is to cap the amount of solvency benefit that can be obtained. Part three contains some minor clarifications and revisions to the existing solvency standards. The Reserve Bank invites interested parties to provide feedback on all elements of the consultation paper by 28 February 2013.
Following the earlier communication relating to Solvency Returns, the Bank has received feedback on some aspects of the initial return, which is required to be submitted by 31 March 2012.
We required that the return be signed out by two directors (or the New Zealand Chief Executive Officer in the case of an overseas insurer). We also specified that this return be calculated for the year-end or half-year balance date falling between 1 July 2011 and 31 December 2011.
Some insurers have expressed the view that the requirement for director sign-off is unduly onerous for this first return, when insurers may have been working on the basis that this would not be needed as early as 31 March. Similarly, if the required balance date is a half-year one, some insurers’ half-year accounts are not prepared in such a way as to be suitable for supporting the preparation of a Solvency Return. To get 2011 half-year accounts into a suitable form might involve considerable cost.
The Bank has some sympathy for these views, and in response to the feedback, has amended the requirements as follows:
Our strong preference is to get insurers’ Boards involved in solvency monitoring at an early stage. However, if an insurer believes that this is not practical for the initial 31 March return, we are prepared to accept sign-off from the CEO instead.
Similarly, we have a strong preference for the 31 March return to be based on reasonably up-to-date information. However, if the balance date in the second half of 2011 is a half-year date for a given insurer, and the half-year accounts are not in an appropriate format for use in the Solvency Return, then we can accept the return based on the year-end balance date in the first half of 2011. If this option is chosen, the signatories to the 31 March return (CEO or Directors) will need to supply the Bank with either a statement that the solvency margin would not have materially changed in the six months following the balance date used, or an estimate of what the solvency margin would be at that date, if materially different to the figure supplied.
As part of the licensing process a Solvency Return (XLS 334KB) is provided for completion by insurers. All insurers are required to complete this return, except those whose business will run-off before 7 September 2013. New Zealand branches of overseas insurers are requested to prepare this first return using New Zealand solvency standards on a one-off basis (supplemented by separate evidence of the compliance of the company as a whole with the home country’s solvency/capital adequacy regime).
Timing: Please complete the first return by 31 March 2012. The return, together with the supporting information, should be signed out by two directors (or the New Zealand Chief Executive Officer in the case of an overseas insurer) and delivered using the secure facility on our website (refer to the ‘Instructions’ page within the return). Subsequent returns should be submitted half-yearly.
Balance date: Use the insurer’s latest year-end or half-year balance date between 1 July 2011 and 31 December 2011.
Format of Solvency Return: The return requests the key balances within the solvency calculation and provides space for explanations and summary workings to support the key balances. Comments are welcome on any aspect of the return including this flexible format (as distinct from a more prescriptive template). The format of the ongoing return will be refined going forward.
Supporting information: We are seeking sufficient supporting information, but without too much detail. Please send us the financial statements used, together with any summary information which will assist the Bank in understanding the key balances. This first return does not need to be audited.
Further instructions are included throughout the return.
In February 2012 the Reserve Bank released a consultation draft of the Solvency Standard for Non-life Insurance Business in Run-off.
Following consultation the Bank has issued the Solvency Standard for Non-life Insurance Business in Run-off (PDF 247KB). This Standard was notified in the New Zealand Gazette on Thursday, 12 April 2012.
The solvency standards are located on the `Regulation’ page.