Significant earthquakes in Christchurch have brought the need for stability in the New Zealand insurance market into sharp focus. The ability of insurance companies to meet claims as they fall due has tremendous potential impact in such circumstances and the need for insurers to hold sufficient capital and other resources for those purposes is more visible in such difficult times. Whether in terms of meeting household claims or those for large businesses, insurance companies have a crucial role to play in rebuilding the lives, communities and economies of those affected. Given the significant potential impact of financial weakness in the insurance sector, regulation of insurers’ financial strength helps to maintain confidence in the sector (a key objective of our prudential role). The Reserve Bank seeks to ensure financial strength by applying solvency standards to insurers carrying on business in New Zealand and these differ depending on the type of insurer. The key components in assessing the financial stability of an insurer are its solvency, capital adequacy and liquidity. Solvency is a measure of whether an insurer can cover its liabilities. It is important to note here that solvency issues are more likely to arise in relation to unexpected aspects of claims. In principle, the ‘expected’ aspects of claims are accounted for in the pricing of the premium for the policy. Capital adequacy is a measure of whether or not an insurer has adequate capital backing (including reinsurance arrangements) to support the assessed risks to which the insurer is exposed. Liquidity is a measure of the insurer’s ability to meet its current day-to-day financial obligations. For an insurer this usually means having enough cash readily available to pay current and near-term claims. For example, life insurance liabilities, which tend to be longer-term than those of non-life insurance, give rise to different capital and liquidity requirements. Claims on life insurance are less frequent and tend to occur much further out into the future than claims on property and motor vehicle insurance that are usually more frequent and over a shorter time horizon. The overall purpose of solvency standards is to require the insurer to hold enough capital so that, to the required level of probability, the insurer can continue to meet its obligations to its policyholders as they fall due. As insurance is a risk business, the solvency standards require levels of capital that cover not only business as usual claims but also make appropriate provision for unforeseen or catastrophic losses. Insurer solvency is therefore important at the level of each individual insurer. A stable insurance industry provides confidence for a stable financial environment at both the private and commercial levels, and this stability contributes to the stability, as perceived domestically and internationally, of New Zealand as a place to do business.