New solvency standards for insurers will be issued by the RBNZ at the end of next year with a final standard to be announced in late 2023, according to a new paper released by the bank.
The RBNZ says best practice regulatory stewardship will include monitoring and reviewing existing regulations to ensure they are “…robust and fit-for-purpose”.
Its Review of Solvency Standards, says the bank, is designed to help it fulfil its regulatory stewardship responsibility, by monitoring and reviewing New Zealand’s system for measuring and reporting on insurance capital.
The bank has several solvency standards, but the principal ones are the Solvency Standard for Life Insurance Business 2014 and the Solvency Standard for Non-Life Insurance Business 2014.
The proposed principles have been adapted from those used in the Bank Capital Review…
“As with the recently completed Bank Capital Review, we have decided that a set of principles should be established at the outset to guide the Solvency Standards Review,” says the bank,” says the bank.
“The proposed principles have been adapted from those used in the Bank Capital Review, as we wish to have broad consistency of approach between the two sectors.”
The eight principals are:
- We will have regard to international comparability, particularly LAGIC (Australia), Solvency II (Europe), International Capital Standard (IAIS) and the Insurance Core Principles (IAIS), with the caveat that principle number 2 will take precedence
- We take a substance over form approach and tailor our requirements to New Zealand. This principle will take precedence over international comparability
- Capital must readily absorb losses before losses are imposed on policyholders
- Capital requirements should be set in relation to risks that may impact insurer balance sheets
- Insurers should be subject to a single method of determining capital requirements and the use of judgment should be limited to the extent possible
- Capital requirements of New Zealand insurers should be conservative relative to those of international peers, reflecting the Reserve Bank’s regulatory approach
- The solvency framework should be practical to administer and minimise unnecessary complexity and compliance costs
- The solvency framework should be transparent to enable effective market discipline
An RBNZ Bulletin released in December 2011 (following the Christchurch earthquakes) pulled the issue of solvency for insurers into sharp focus.
Richard Dean, Manager, Insurance Oversight at the RBNZ, said in his 2011 report that the purpose of solvency standards is to require the insurer to hold enough capital so it can 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,” he wrote.
“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.”
The RBNZ is looking for feedback on its eight principles and implementation timeline via insurancesolvency@rbnz.govt.nz by 12 November 2020.
See our story: RBNZ Insurance Review To Be Relaunched.