Reserve Bank finalises principles for the review of insurance solvency standards

The Reserve Bank of New Zealand (Reserve Bank) has published submissions from the consultation on its review of insurance solvency standards. The consultation focused on setting the principles for the review and setting a timeline to implement the resulting solvency standards. Consultation on the structure and IFRS 17 closed in February 2021. The Reserve Bank is currently reviewing the submissions and preparing a response.

Links to the feedback statement are available here.

Who needs to read it? Why?

Insurers and the wider insurance industry should note the finalised principles of the review as they will shape how the Reserve Bank approaches setting new solvency standards.

What does it cover?

In general, submissions were positive of the principles of the review and the review itself. However most principles have been amended to reflect points made in the submissions. Submissions highlighted the importance for the Reserve Bank to tailor international standards to the New Zealand insurance market. In particular, submitters encouraged the Reserve Bank to shift away from viewing solvency standards as protecting an insurer’s ability to account for risks impacting the insurer’s balance sheet to protecting the insurer’s ability to meet its obligations to policyholders.

The revised principles for the review of solvency standards are:

  • To take a substance over form approach and tailor the solvency requirements to New Zealand.
  • To have regard to international comparability, particularly LAGIC, Solvency II, the ICS and the ICPs, with the caveat that principle number 1 will take precedence.
  • Capital must be of sufficient quality to enable insurers to meet obligations to policyholders in a range of adverse scenarios.
  • The quantum of capital requirements should be set in relation to material risks that may impact the insurer’s ability to meet its obligations to policyholders.
  • Insurers should be subject to consistent methods and consistent assumptions in determining capital requirements.
  • Capital requirements of New Zealand insurers should reflect a risk-based approach, taking into account the risks that are specific to New Zealand, the nature of the New Zealand market, and 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.
  • The Reserve Bank will have regard to how the solvency requirements work together with other regulatory measures to meet the principles and purposes of the Insurance (Prudential Supervision) Act 2010.

The Reserve Bank’s timeline for the review will remain unchanged, despite some of its resources being diverted towards responding to the economic consequences of the COVID-19 pandemic. Interim standards are due to be published in quarter three of 2021, with final standards to be published in quarter three of 2023.

Our view

While the principles remain close in substance to those suggested in the consultation, the finalised principles reflect a commitment of the Reserve Bank to tailor the solvency standards to meet the needs of the New Zealand insurance industry. However, it will remain important for the Reserve Bank to design solvency standards which are compatible with those in overseas jurisdictions, recognising the reliance of the New Zealand insurance market on its relationships with international entities for funding and investment.

We also welcome the Reserve Bank’s focal shift towards setting solvency standards for insurers that balance the need to ensure insurers meet their obligations to policyholders while reducing unnecessary compliance costs.

What next?

If you have any questions in relation to solvency standards for insurers or are considering how the Reserve Bank’s review may affect your business, please contact one of our experts.

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