Box B: Insurer solvency
This box considers regulatory solvency returns that were provided to the Reserve Bank by licensed New Zealand insurers as at their financial year-end during 2015.1 In 2015, 62 licensed New Zealand insurers were subject to the Reserve Bank’s solvency standards.2 The aggregate solvency position of these insurers relative to their requirements is set out in figure B1.
Figure B1: Effective solvency requirement
Note: Solvency margin is adjusted for licence conditions.
An insurer’s capital level for solvency purposes is based on its net asset position, i.e., the value of its assets minus the value of its liabilities. This amounted to nearly $7 billion for insurers subject to the Reserve Bank’s solvency requirements, at financial year-end 2015. However, capital instruments must be permanent, loss-absorbing, not impose unavoidable costs, and rank behind policyholders and other creditors on wind up. Therefore, instruments that do not meet these criteria are treated as nonqualifying capital instruments (NQCI) and are excluded when calculating insurers’ solvency capital. These amounted to $0.5 million in 2015.
Other deductions to net assets are made when calculating solvency capital, to reflect insurers’ outstanding commitments (such as unpaid dividends) or low quality assets. About half of insurers had low deductions (2 percent or less of net assets) but some insurers had deductions as high as 69 percent of net assets. The largest components were deferred tax assets ($600 million) and goodwill and other intangible assets ($600 million).
The Reserve Bank imposes risk-based requirements that allowable capital must exceed. These vary in accordance with the financial risks insurers face, and are also subject to floors (these floors are effective for 18 insurers).3 In aggregate, at financial year-end 2015, insurers subject to the Reserve Bank’s solvency standards were required to have $3.1 billion of capital to cover these risk charges. The most significant components related to insurance and asset risks.
Some insurers are also required by the Reserve Bank to hold additional capital as a condition of their licence, if they have significant risks that are not appropriately addressed in the solvency standards. As a result of these licence conditions, insurers were required to hold $585 million on top of the aggregate risk charges.
Overall, insurers had a solvency margin of $1.8 billion at financial yearend 2015.
Reported solvency ratios
There was considerable variation in solvency ratios reported at financial year-end 2015. The median Solvency Ratio Adjusted (SRA) was 171 percent, with upper and lower quartiles of 307 percent and 133 percent, respectively.4 A distribution of SRAs across insurers is shown in figure B2. The proportion of insurers with low SRAs has increased recently.
Figure B2: Distribution of insurers’ SRAs
Note: ‘Designated insurers’ are licensed insurers who require a greater intensity of supervision, e.g., due to their size. ‘Portfolio managed insurers’ are all other licensed insurers, who are supervised on a portfolio basis.
Home jurisdiction solvency requirements
Under the Insurance (Prudential Supervision) Act 2010, licensed New Zealand insurers are authorised to be subject to home supervisor solvency requirements in nine approved home jurisdictions. This means that the prudential requirements in the approved jurisdictions are broadly equivalent to New Zealand’s for the relevant insurers. The jurisdictions include: Australia (20 insurers); three EU countries (seven insurers); three US states (three insurers) and two Asian countries (four insurers).
Solvency requirements are calculated using a wide range of methods across these jurisdictions, which makes comparisons difficult. There is also considerable variation in reported solvency ratios. For the 19 New Zealand licensed insurers that are subject to Australian solvency requirements, the median legal-entity solvency ratio is 184 percent with upper and lower quartiles of 242 percent and 118 percent respectively.
1 The analysis has identified some data issues that are relevant generally to insurers as well as some issues that are specific to some individual insurers. The Reserve Bank is providing feedback to insurers as appropriate.
2 A further 34 were subject to solvency requirements in their home jurisdiction.
3 The floors are: $1 million for captive insurers, $3 million for non-life and $5 million for life insurers.
4 The Solvency Ratio Adjusted (SRA) is the ratio of an insurer’s actual solvency capital to its minimum solvency capital plus its licence condition solvency margin.