Yesterday, the Reserve Bank of New Zealand (RBNZ) issued its Interim Solvency Standard, which has been developed over the past two years through consultation with the insurance industry and other interested parties. The purpose is to help licensed insurers meet their obligations to policyholders when positions of adversity arise.
Who needs to read it? Why?
Insurers and the wider insurance industry should note the requirements of the Interim Solvency Standard 2023 (Solvency Standard) as it is now part of the expectations the RBNZ has of participants in the industry. Solvency standards are a vital piece of secondary legislation that are empowered by the Insurance (Prudential Supervision) Act 2010 (IPSA), and that help facilitate continued sound solvency management.
What does it cover?
The review of existing solvency standards began halfway through 2020, with part of the intention being to address the new accounting standards for insurance contracts introduced by NZ IFRS 17. This Solvency Standard comes into force on 1 January 2023 and will apply to:
- every licensed insurer that carries on insurance business in New Zealand, and that is required by a condition of licence to maintain a solvency margin in accordance with the Solvency Standard; and
- each statutory fund of every licensed insurer that carries on insurance business in New Zealand, and for which the licensed insurer is required by a condition of licence to maintain a solvency margin in accordance with the Solvency Standard.
Exemptions have been issued under IPSA to exempt overseas licensed insurers from compliance from part or all of the Solvency Standard. Where a licensed insurer or a statutory fund to which this Solvency Standard applies holds investments in prudentially regulated insurance subsidiaries, either in New Zealand or overseas, this standard must be applied to the solvency entity both on:
- a solo basis, with all investments in all subsidiaries being treated according to the appropriate class of asset under this standard; and
- a group basis, with prudentially regulated insurance subsidiaries being consolidated into the parent solvency entity, and investments in other subsidiaries being treated according to the appropriate class of asset under this standard.
Regulatory capital is an important part of the regulatory framework for licensed insurers, alongside matters such as risk management programmes, board oversight and RBNZ supervisory activity. In this respect, the Solvency Standard further supports the purposes of IPSA, which are to promote the maintenance of a sound and efficient insurance sector and to promote public confidence in the insurance sector. RBNZ has recommended that insurers start using the Solvency Standard in their projections now.
In this Solvency Standard RBNZ uses a combination of measures to increase the likelihood that licensed insurers will, when faced with financial adversity, be able to meet their obligations to policyholders. With the exception of seismic risk, the Solvency Standard aims to broadly calibrate ‘adversity’ as an event expected to happen once in every 200 years. Adversity in respect of seismic risk is defined as an event expected to happen once in every 1,000 years. Failed entities are expected to retain sufficient assets such that their business can be resolved with minimal detriment to consumers.
Along with the Solvency Standard, RBNZ released a Regulatory Impact Statement. This statement lays out how the impacts of the new Solvency Standard will be monitored through the solvency returns RBNZ receives from insurers, and any lessons factored into a second stage of the Solvency Standards Review.
The Solvency Standard encourages a sustainable growth of the economy through promoting a sound insurance sector and securing its role as a driver of economic activity. Generally, it sets a low appetite for the failure of insurers. We recommend that those covered by the Solvency Standard follow the RBNZ’s call to start now in getting to grips with the new requirements.
A Final Solvency Standard will be consulted on in a second stage of the review of the Solvency Standards. If you have any questions in relation to the Interim Solvency Standard, please contact one of our experts.
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