The Reserve Bank (RBNZ) is now consulting on the second phase of its Insurance (Prudential Supervision) Act 2010 (IPSA) review and on its review of insurer solvency standards.
We take you through the proposals on offer in the consultation papers put out this week.
Scope of IPSA
The Option One paper is wide-reaching, covering a broad range of issues on which the RBNZ seeks the industry’ views.
- Definitions and scope – currently every person who carries on insurance in New Zealand must have a licence and adhere to IPSA. The RBNZ wants input on whether the definition of ‘contracts of insurance’ and ‘carrying on business in New Zealand’ are still appropriate.
- Branches of overseas insurers – should branches of overseas insurers continue to be exempt from certain aspects of IPSA where their home regulation is satisfactory? Or should they be required to hold assets in New Zealand, or to set up a New Zealand-based company, to ensure the availability of capital in insolvency?
- Overseas reinsurance – are the current regulatory settings (under which reinsurance is simply one type of insurance contract) appropriate, given the importance of accessing overseas markets, or should the regulation of inwards reinsurance be tightened, either through extending IPSA’s coverage or enhanced requirements on insurers to manage reinsurance contract risk?
- Group supervision – an insurer’s relationships with its other group companies can alter the risks to which the insurer is exposed. Should the RBNZ be given more powers to take a ‘whole of group’ approach to supervision or continue its focus on individual entities, but pay more attention to group level interactions?
- Outsourcing – should there be additional requirements on how insurance companies manage their outsourcing relationships. For example, should there be risk-based rules covering outsourcing and risk management, or also covering contingency plans to enable business continuity where an insurance company’s business partners can no longer fulfil their contracts?
The RBNZ is seeking comments on the options proposed in relation to each of the above, and also welcomes general comments.
Insurer Solvency Standard Review
The review into the adequacy of insurer solvency standards is necessary ahead of the advent of IFRS 17 and is consistent with RBNZ’s broader focus on the resilience of the financial institutions under its remit.
In October, the RBNZ consulted on eight principles that it applied in the Bank Capital Review and will also apply to this exercise.
The review will be conducted in two phases over a three year timeframe: first, structural changes and issues requiring immediate attention, then the individual components of the solvency standards.
Interim standards will be introduced following completion of the first phase, followed by the final standard on completion of the second stage.
Offered for consultation now is the broad approach the RBNZ should take to the design of a new Solvency Standard, including:
- Purpose and principles – the purpose statement the RBNZ is proposing would read: “The purpose of solvency capital is to ensure that, in adversity, an insurer’s obligations to policyholders will continue to be met as they fall due”.
- Application of Solvency Standards – should a total balance sheet approach be adopted for solvency calculations, and should there be a single solvency framework covering all sectors?
- New accounting rules – to what extent should the RBNZ ask insurance companies to alter their accounts when calculating how much solvency capital to hold in light of changes coming from IFRS 17?
- Ladder of intervention framework – the current rules set a single amount of solvency capital. The consultation suggests two control levels consistent with the ladder of intervention framework suggested by Insurance Core Principle 17 (Capital Adequacy) by the International Association of Insurance Supervisors. These are:
- a prescribed capital requirement (“PCR”) – this is the highest solvency control level. Above this level, the supervisor does not intervene on capital adequacy grounds, and
- a minimum capital requirement (“MCR”) – this sets the minimum solvency level, below which insurers could not operate effectively. It acts as an ultimate safety net for policyholders. If the insurer breaches the MCR and has not taken timely corrective action to strengthen its capital resources, the supervisor would invoke its most stringent powers. The supervisor’s actions increase in intensity as the insurer’s capital position approaches the MCR.
- Solvency calculations – what is the appropriate analysis to determine how much capital an insurer needs? Is it enough to look at the capital held by the insurance company as a whole? And, if so, how can the RBNZ ensure there is enough capital to cover particular businesses (such as life insurance)? Also, to what extent should insurers be able to set off losses in one area of the business against profits in another.
We encourage licensed insurers and others involved in the insurance sector to engage in all aspects of the consultation process to ensure that the regulatory regime is fit for purpose.
If you would like more information on either of the consultations or on the implications for your business, please get in touch with one of our contacts.
The RBNZ is hosting a webinar on Monday 14 December to discuss the consultations. Email [email protected] if you wish to participate.
If you would like assistance with the preparation of your submissions, please contact us.
Non-technical summary: Review of the Insurance (Prudential Supervision) Act 2010 Options Paper 1: Scope of the Act and Overseas Insurers Consultation
Consultation paper: Review of the Insurance (Prudential Supervision) Act 2010 Options Paper 1: Scope of the Act and Overseas Insurers
Non-technical summary: Review of Insurance Solvency Standards: Structure and IFRS 17
Consultation paper: Review of Insurance Solvency Standards: Structure and IFRS 17
RBNZ relaunches Insurance Act review – October 2020
Speech: Promoting the Soundness and Efficiency of our Insurance Sector: Recommencing the IPSA and Solvency Standard Review – September 2020
Our commentary: RBNZ thematic review of Appointed Actuaries