Solvency Standard for Non-life Insurance Business (October 2011, amended December 2014)

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Solvency Standard for
Non-life Insurance
Business
Insurance Policy
Prudential Supervision Department
October 2011 (incorporates amendments to December 2014) REVOKED

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1. Introduction
   1.1. Authority
2. This solvency standard is made under Section 55 of the Insurance
   (Prudential Supervision) Act 2010 (“the Act”).
3. Once approved by the Bank, this solvency standard becomes a regulation
   under the Act (refer Section 233(1)).
   1.2. Licensed insurer may be a non-life insurer and a life insurer, and may be
   subject to more than one solvency standard
4. A licensed insurer may be a non-life insurer as well as a life insurer. To the
   extent that the insurer carries on non-life insurance business in New Zealand it will be considered a non-life insurer, and, except as provided for in paragraph 5 below, all the provisions of this solvency standard will apply to that insurer in respect of the non-life insurance business. Similarly, to the extent that an insurer carries on insurance business in New Zealand that is life insurance business, or is otherwise not covered by this solvency standard, it will, except as provided for in paragraph 5 below, be subject to the requirements of the solvency standard appropriate to other business it carries on.
5. Except as provided for in paragraph 5 below, where a licensed insurer is
   subject to more than one solvency standard the requirements of each solvency standard will apply separately as appropriate to each class of business carried on by the licensed insurer, and the overall requirement on the licensed insurer will be the aggregate of the requirements of each solvency standard to which the licensed insurer is subject.
6. Where a licensed insurer is subject to more than one solvency standard
   the Minimum Capital Requirement applicable to the licensed insurer (refer paragraph 51 of this solvency standard) will be the higher, or highest, of the Minimum Capital Requirement (or in the case of a licensed insurer that is a life insurer, the Fixed Capital Requirement) amounts within the applicable solvency standards. The requirements shall not be cumulative.
   1.3. Application
7. This solvency standard applies (in accordance with this Section) to every
   licensed insurer that carries on non-life insurance business in New Zealand subject to:
   (a) an overseas insurer is not required to comply with this solvency standard or a part of this solvency standard to the extent it has been granted an exemption under section 59(1) of the Act; and REVOKED

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(b) for all other licensed insurers carrying on non-life insurance business in New Zealand, this solvency standard applies only if the licensed insurer is required by a condition of licence to maintain a Solvency Margin in accordance with this solvency standard.
7. Section 5 of this solvency standard applies to the actuary appointed by
the licensed insurer in accordance with Section 76 of the Act.
1.4. Previous Versions
8. None.
1.5. Effective Date
9. This solvency standard is effective from the date of commencement of
Subpart 2 of Part 2 of the Act.
1.6. Definitions
10. The Act means the Insurance (Prudential Supervision) Act 2010. Terms
defined in the Act have the same meaning in this solvency standard and are shown in bold type.
11. Actual Solvency Capital of a licensed insurer means the total of Capital
minus Deductions from Capital determined in accordance with paragraphs 37 and 38 of this solvency standard.
12. Appointed actuary means the actuary appointed by the licensed insurer
in accordance with Section 76 of the Act.
13. Collective investment vehicle means a managed investment fund
including but not limited to unit trusts and group investment funds.
14. Extreme Event means one or more events, including (but not limited to)
earthquake, flood or storm, that result in unexpected large or extreme losses as a result of claims on more than one insurance contract.
15. Extreme Event Exposure means the total of all insurance losses incurred
under any contract of insurance issued by the licensed insurer that arise as a result of an Extreme Event, calculated on the basis set out in paragraphs 68 - 73.
16. Financial Institution means a financial institution as defined in the Reserve
Bank of New Zealand Act 1989.
17. Local Authority has the same meaning as in Section 5(1) of the Local
Government Act 2002.
18. Material and materiality have the meaning set out in Appendix A.
19. Minimum Solvency Capital for a licensed insurer means the amount
determined in accordance with Section 3 of this solvency standard. REVOKED

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20. Net Outstanding Claims Liability means all unpaid claims and claims
handling expenses, net of reinsurance and other recoveries and excluding any Government charges imposed such as levies, duties and taxes, relating to claims incurred prior to the end of the reporting period, determined in accordance with NZ GAAP as it relates to insurance contracts.
21. Non-insurance Activity means any business activity undertaken for third
party customers that does not involve the bearing of risk under a contract of insurance. For example, Non-insurance Activity includes insurance broking, premium funding, claims management services and risk management or any other consultancy activities.
22. NZ GAAP means New Zealand Generally Accepted Accounting Practice.
For the purposes of this regulation, financial statements will be deemed to comply with NZ GAAP only if those statements comply with:
(a) applicable financial reporting standards; and (b) in relation to matters for which no provision is made in applicable financial reporting standards and that are not subject to any applicable rule of law, accounting policies that:
i. are appropriate to the circumstances of the reporting entity;
and
ii. have authoritative support within the accounting profession
in New Zealand.
23. Premium Liabilities means the present value of the expected future cash
flows relating to all future claims arising from the rights and obligations under the licensed insurer’s existing policies that have not yet expired during the assessment period. The assessment period is the period during which, in the opinion of the appointed actuary, premiums and benefits cannot in practice be adjusted to reflect adverse changes in risk. This period may be until expiry, or next policy renewal or some other date, and may differ from any period used for accounting purposes. (a) The value of the premium liabilities must include an amount in respect of the expenses that the licensed insurer expects to incur in administering and settling the relevant claims and allow for expected premium refunds; (b) In respect of premium liabilities for which reinsurance has not yet been purchased, allowance must be made for this reinsurance; (c) Premium liabilities are to be determined on a prospective basis, net of expected reinsurance recoveries and non-reinsurance recoveries; (d) The value of premium liabilities may exclude any Government charges imposed such as levies, duties and taxes; and REVOKED

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(e) Premium Liabilities are to include a risk margin intended to provide a 75% probability of sufficiency, and are to be assessed by the appointed actuary.
24. Solvency Margin is defined as the excess of Actual Solvency Capital over
Minimum Solvency Capital, expressed as a dollar amount.
25. Solvency Ratio is defined as the ratio of Actual Solvency Capital divided by
Minimum Solvency Capital, expressed as a ratio or a percentage.
26. Solvency Unexpired Risk means the difference between Premium
Liabilities (as defined above) and the amount of unearned premium in respect of the same assessment period, with a minimum of zero.
27. State-Owned Enterprise means an organisation named in Schedule 1 or
Schedule 2 of the State-Owned Enterprises Act 1986.
1.7. Requirements of the Act
28. Section 21(2)(b) of the Act allows the Bank to impose a condition of licence
that requires that a licensed insurer must, at all times, maintain a Solvency Margin as defined in the solvency standard. The Solvency Margin must always be a positive amount, and a licensed insurer must maintain Actual Solvency Capital in excess of the amount required to maintain this Solvency Margin.
29. Conditions of licence imposed under sections 21(2)(f) and (g) of the Act may
require attestation by a licensed insurer to the Bank relating to compliance with any conditions of licence, which includes any that may relate to a solvency standard.
30. Section 24 of the Act requires that, if a licensed insurer has reasonable
grounds to believe that a failure to maintain a solvency margin is likely to occur at any time within the next three years, the licensed insurer must report the likely failure to the Bank as soon as is reasonably practicable.
31. Section 76 of the Act requires each licensed insurer to appoint an actuary.
Section 77 requires the licensed insurer to have its appointed actuary
review certain items in the financial statements. Section 56(d) sets out requirements regarding the preparation of a Financial Condition Report.
32. Compliance with the solvency standard is a continuous obligation. As a
minimum a licensed insurer must undertake calculations as required in
Section 3 of this solvency standard and report as required under Section 4
of this solvency standard twice each year – as at its financial year end and as at six months after its financial year end – and report those calculations to the Bank. REVOKED

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1.8. Responsibility for solvency calculations
33. The appointed actuary of the licensed insurer is responsible to the board
of the licensed insurer for performing or reviewing all aspects of the Solvency Margin calculations to ensure the calculations are complete and accurate.
34. The board of the licensed insurer is responsible for ensuring that all
requirements of this solvency standard and the Act are satisfied.
1.9. Simplifying Assumptions or Methodologies contained in Solvency
Calculations
35. This solvency standard represents minimum requirements. Accordingly, if
any simplifying assumptions are made or simplifying methodologies are used in calculating the licensed insurer’s Solvency Margin, the appointed actuary must:
(a) ensure that such simplifying assumptions or methodologies result in a more prudent assessment of the licensed insurer’s Solvency Margin; (b) disclose such simplifying assumptions or methodologies in any associated reports; and (c) justify such simplifying assumptions or methodologies on the grounds of materiality or that they provide a more conservative outcome. REVOKED

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2. Actual Solvency Capital
36. Actual Solvency Capital is defined as the total of Capital (as per paragraph
37) minus Deductions from Capital (as per paragraph 38).

• see following pages
  REVOKED

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37. Capital is defined as the following items:
(a) issued and fully or partly paid-up ordinary shares, that have full voting rights, have no preferential or predetermined rights to distributions of capital or income and are not redeemable within the meaning of Section 68 of the Companies Act 1993. (Partly paid-up shares qualify as Capital only to the extent the shares have been paid); (b) fully paid-up perpetual non-cumulative preference shares may be included in Capital if they meet the following requirements:
i. the payment of dividends on shares is able to be withheld if the
financial condition of the licensed insurer would not support payment of those dividends; and
ii. dividends that are withheld in accordance with sub-paragraph (i)
are not cumulative; and
iii. the dividend rate for the shares must be set:
a. as a fixed percentage rate; or b. as a fixed margin above a benchmark floating rate (e.g. a bank bill rate); and
iv. the shares are not:
a. subject to any arrangement for resetting the dividend rate; or b. redeemable within the meaning of Section 68 of the Companies Act 1993; or
c. repayable or redeemable at the option of the holder.
Perpetual non-cumulative preference shares without full voting rights may not constitute more than 50% of Capital for a licensed insurer that is a mutual insurer and 25% for all other licensed insurers. (c) revenue and other reserves, including the following, but not including reserves that are held aside or otherwise committed on account of any assessed likelihood of loss:
i. capital redemption reserves;
ii. other reserves that are created or increased by appropriations of
retained earnings net of tax and dividends payable;
iii. any share premium reserves arising from the issue of ordinary
shares;
iv. each of the following types of reserves that are reflected in the
statement of financial position:
a. reserves arising from a revaluation of tangible fixed assets, including owner-occupied property; b. foreign currency translation reserves;
c. reserves arising from the revaluation of investments;
(d) retained earnings; and
(e) non-controlling interests.
REVOKED

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38. Deductions from Capital is defined as the sum of the value of the
following items:
(a) goodwill and other intangible assets as determined in accordance with Section
2.2 of this solvency standard;
(b) deferred tax assets;
(c) equity investments in, and subordinated loans to, related parties (but see paragraph 104; (d) equity investments in, and subordinated loans to, other financial institutions or holding companies of other financial institutions (whether held directly or indirectly) that are classified as Counterparty Grade 1 or 2 or 3 as per Table 4, to the extent that the total of such equity investments or subordinated loans exceeds 15% of Actual Solvency Capital, calculated excluding this clause; (e) equity investments in, and subordinated loans to other financial institutions or holding companies of other financial institutions (whether held directly or indirectly) that are classified as Counterparty Grade 4 or Counterparty Grade 5 as per Table 4; (f) unrealised gains and losses on liabilities designated at fair value through profit and loss that arise from changes in the licensed insurer’s own credit risk; (g) any fair value gain that relates to a financial instrument for which:
i. fair value is determined in whole or in part using a valuation technique
based on assumptions that are not supported by processes from observable current market transactions in the same instrument; or
ii. fair value is not based on observable market data; or
iii. fair value is based on prices in a market that is not active;
(h) any surplus, net of any associated deferred tax liabilities, in any defined benefit superannuation fund sponsored by the licensed insurer (or another group entity) as employer; (i) allowance for any dividend that has been declared or repayment of capital made prior to finalisation of the Solvency Margin calculations but which has not been reflected in the financial statements, (j) any deferred acquisition costs in excess of the amount determined in accordance with Section 2.5 of this solvency standard; and (k) any net assets of an overseas branch not freely available in all circumstances (refer paragraph 44 below). REVOKED

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2.1. General Provisions relating to Capital
39. The NZ GAAP financial statements to be used for the purpose of this
solvency standard are, in the first instance, the entity financial statements of the licensed insurer.
40. The Capital of a licensed insurer is intended to represent capital
instruments that are of a permanent nature and freely available to meet losses. If a capital instrument is not of a permanent nature and freely available to meet losses, then the appointed actuary must give advice to this effect to the licensed insurer, and subsequently also in the Financial Condition Report (refer section 5.3 of this solvency standard). If the appointed actuary recommends that part or all of the value of a capital instrument should be excluded from the Actual Solvency Capital, then the licensed insurer must follow that advice.
41. In the case of a licensed insurer that is a mutual insurer incorporated in
New Zealand, Capital may be referred to as ‘Reserves’ or ‘Members Funds’ or such other term by which it is described in the financial statements of the mutual insurer.
2.2. Intangible Asset Deductions
42. The Intangible Asset Deductions comprise the following amounts to the
extent that they form part of the assets of a licensed insurer as recognised and measured under NZ GAAP:
(a) goodwill measured in accordance with NZ GAAP, to the extent that this has not otherwise been deducted; (b) capitalised computer software costs to the extent that they exceed the known resale value of that software (if the resale value is not known then it should be taken as nil); and (c) any other asset defined as an intangible asset under NZ GAAP.
2.3. Solo and Group Solvency Reporting Requirements
43. Where a licensed insurer has a subsidiary or subsidiaries that are
themselves licensed insurers then the solvency standard must firstly be applied to, and reported on a solo basis for, each licensed insurer.
44. Where a licensed insurer has one or more overseas branches in a country
or countries in which all or a portion of the net assets of any such branch are not freely available outside the branch, then the portion of net assets which are not freely available outside the branch in all circumstances must be treated as a Deduction from Capital (refer to paragraph 38(k)).
45. In addition, where a licensed insurer has insurance subsidiaries, within or
outside New Zealand, that are themselves prudentially regulated as an insurer or a licensed insurer within or outside New Zealand, (or, in jurisdictions where licensing is not required, an insurer), such subsidiaries REVOKED

Ref #5951613 v1.3 must be consolidated with the licensed insurer. This consolidation will constitute the insurance group for the purpose of calculating and reporting group solvency in accordance with the requirements of this solvency standard.
46. Where a licensed insurer has subsidiaries that are non-insurance
subsidiaries (refer paragraph 21) then, for the purposes of calculating the solvency of the New Zealand solo licensed insurer and the insurance group, such non-insurance subsidiaries should be treated as related party equity investments, subordinated loans or other obligations in accordance with the provisions of this solvency standard.
2.4. Overseas Insurers
47. An overseas insurer that operates a branch in New Zealand, that has been
granted an exemption under Section 59 of the Act, will be required to calculate and report its solvency position calculated in accordance with the regulatory requirements of its home jurisdiction. In addition the Bank may, as a condition of the exemption, require the overseas insurer to report solvency in respect of the New Zealand branch of the overseas insurer (as if it were a New Zealand incorporated body), prepared in accordance with the requirements of this solvency standard. Within this calculation all or
part of the Capital of the branch may be reported as ‘Head Office Balance’
or similar.
48. An overseas insurer that operates a branch in New Zealand, that has not
been granted an exemption under Section 59 of the Act, will be required to calculate and report its solvency position in accordance with the requirements of this solvency standard.
2.5. Deferred Acquisition Costs
49. The amount of deferred acquisition costs that may be included in Actual
Solvency Capital is limited to the amount that can be supported after applying a Liability Adequacy Test which:
(a) incorporates a risk margin to achieve a probability of sufficiency of at least 75%; and (b) does not defer acquisition costs beyond the current insurance contract period; and (c) is otherwise in accordance with NZ IFRS 4. REVOKED

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3. Minimum Solvency Capital
50. The Minimum Solvency Capital is the sum of all components of the:

• Insurance risk capital charge (refer Section 3.1 below);
• Catastrophe risk capital charge (refer Section 3.2 below);
• Asset risk capital charge (refer Section 3.3 below);
• Foreign currency risk capital charge (refer paragraph 97 below);
• Interest rate capital charge (refer paragraphs 98-102 below); and
• Reinsurance recovery risk capital charge (refer Section 3.4 below).

51. The Minimum Solvency Capital applicable to the licensed insurer for the
    purposes of this solvency standard will be subject to a minimum required amount of $3 million. If the Minimum Solvency Capital calculated as per the previous paragraph is less than $3 million then the licensed insurer must increase its Minimum Solvency Capital to this amount.
    3.1. Insurance Risk Capital Charge
52. The Insurance Risk Capital Charge is the total of the Underwriting Risk
    Capital Charge and the Run-off Risk Capital Charge.
    Concept
53. The Underwriting Risk Capital Charge is intended to reflect the risk to the
    licensed insurer of writing unprofitable insurance business. To some extent this charge is also intended to reflect the exposure of the licensed insurer to operational risk, although it is not a substitute for adequate management of operational risk.
54. The Run-off Risk Capital Charge is intended to reflect the risk to the
    licensed insurer of inadequate provision being made for outstanding claim liabilities, and includes any adjustment to the valuation of liabilities to bring them to a common basis. Calculation
55. The Underwriting Risk Capital Charge is determined by multiplying the
    Premium Liabilities of the licensed insurer at the calculation date by the Underwriting Risk Capital Factors in Table 1, and then adding the Premium Liabilities Adjustment (if any). The calculation is to be made by class of insurance business and summed across all classes. REVOKED

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56. The Run-off Risk Capital Charge is determined by multiplying the Net
Outstanding Claims Liability of the licensed insurer at the calculation date by the Run-off Risk Capital Factors in Table 1 and then adding the Outstanding Claim Liability Adjustment (if any). The calculation is to be made by class of insurance business and summed across all classes.
Table 1 – Insurance Risk Capital Factors
Class of Insurance
Business
Underwriting Risk Capital
Factor
Run-off Risk Capital
Factor
Domestic property 14% 9%
Private motor 14% 9%
Commercial property 16% 11%
Commercial motor 14% 9%
Liability classes 22% 15%
Marine 16% 11%
Health and Personal
Accident
16% 11%
Travel 14% 9%
Other 16% 11%
Premium Liabilities Adjustment
57. The Premium Liabilities Adjustment is required if the licensed insurer’s
unearned premium liability plus unexpired risk liability is less than the Premium Liabilities (as determined in accordance with this solvency standard). The Premium Liabilities Adjustment is equal to the difference between the Solvency Unexpired Risk and the unexpired risk liability in the licensed insurer’s financial statements, with a minimum of zero. Outstanding Claim Liability Adjustment
58. The Outstanding Claim Liability Adjustment is required if the licensed
insurer has established its Net Outstanding Claims Liability with a risk margin different to that required to achieve a 75% probability of sufficiency provision.
59. Section 5.1 of this solvency standard specifies that the appointed actuary
must assess the provision for outstanding claims and the corresponding recovery asset.
60. If, in the opinion of the appointed actuary, the licensed insurer’s Net
Outstanding Claims Liability is less than the 75% POS provision, then the Run-off Risk Capital Factors in Table 1 must be applied to the 75% POS provision rather than the amount in the licensed insurer’s financial statements and the Outstanding Claim Liability Adjustment is an addition to the risk charge equal to the 75% POS provision less the licensed insurer’s provision after adjustment for tax. REVOKED

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61. If, in the opinion of the appointed actuary, the licensed insurer’s net
outstanding claims liability is greater than the 75% POS provision, then the licensed insurer may apply the Run-off Risk Capital Factors in Table 1 to the 75% POS provision rather the amount in the licensed insurer’s financial statements and adopt an Outstanding Claim Liability Adjustment (being a deduction from the risk charge) equal to the licensed insurer’s provision less the 75% POS provision after adjustment for tax. Insurance Business with Long Term Risk Characteristics
62. Most non-life insurance comprises short term contracts (up to one year) with
no long term guarantees or contractual commitments. There can, however, be products that have features like guaranteed renewability, return of premiums and other features that create longer term commitments and risks for the licensed insurer. There are also products such as single premium consumer credit and lenders mortgage insurance that cover risks over a period much longer than one year and thus create long term risk for the licensed insurer.
63. If a licensed insurer issues a material volume of contracts with features
that may produce significant risk for the licensed insurer for more than one year, then the licensed insurer must seek and adopt the advice of its appointed actuary on:
(a) an appropriate basis for setting provisions for unexpired risk (including unearned premiums) and outstanding claims; and (b) whether an additional capital charge is appropriate in light of the risks to the licensed insurer and, if so, what is a suitable basis for calculating that capital charge.
64. The appointed actuary must, in giving the relevant advice, consider the
significance of the risks and the materiality of the business, and may judge that no adjustments are needed.
65. The appointed actuary must consider whether the life insurance solvency
standard(s) in force from time to time provide(s) additional guidance as to the appropriate treatment of contracts with long term risk and, if appropriate, seek to achieve reasonable consistency with the life insurance solvency standard(s).
3.2. Catastrophe Risk Capital Charge
Concept
66. The Catastrophe Risk Capital Charge for non-life insurers is intended to
protect the licensed insurer’s solvency position from the potential exposure of the licensed insurer to Extreme Event(s).
67. It is expected that a licensed insurer will have sufficient Actual Solvency
Capital and catastrophe reinsurance to cover its Extreme Event Exposure REVOKED

Ref #5951613 v1.3 and still meet the solvency requirements of the Act and any other Solvency Margin requirements applicable to the licensed insurer issued by the Bank. Calculation
68. The calculation by the licensed insurer of its Extreme Event Exposure
must include all exposures under any contract of insurance issued by the licensed insurer that could arise as a result of an Extreme Event.
69. The licensed insurer’s Extreme Event Exposure for the purposes of
calculating the Catastrophe Risk Capital Charge is the greater of the following:
(a) The projected insurance losses incurred by the licensed insurer in respect of a major earthquake event affecting Wellington (defined as everywhere within a 50 kilometre radius from the Beehive), calibrated to a minimum loss return period as detailed in paragraph 70; or (b) The projected insurance losses incurred by the licensed insurer in respect of a major earthquake affecting any place other than Wellington (refer paragraph 69(a)), calibrated to a minimum loss return period as detailed in paragraph 70; or (c) The projected insurance losses incurred by the licensed insurer in respect of non-earthquake Extreme Event occurring anywhere within New Zealand or elsewhere, calibrated to a minimum loss return period of 1 in 250 years.
70. Subject to the provisions of paragraph 71, the projected insurance losses
referred to in paragraph 69(a) and (b) shall be as follows:
(a) For financial reporting periods commencing at any time before 7 September 2015: the greater of the maximum amount of catastrophe reinsurance (expressed in New Zealand dollars) held by the licensed insurer before the date of granting a full licence under sub￾part 1 of Part 2 of the Act, or an amount equivalent to the licensed insurer’s calculation of a 1 in 500 years loss return period; (b) For financial reporting periods commencing on or after 8 September 2015: the greater of the maximum amount of catastrophe reinsurance (expressed in New Zealand dollars) held by the licensed insurer before 8 September 2015, or an amount equivalent to the licensed insurer’s projected insurance losses calibrated to a specified loss return period to be published by the Bank in a formal Policy Position Paper which will set out the Bank’s future loss return period requirements, (moving progressively to a maximum calibration of 1 in 1000 years).
71. If the amount of catastrophe reinsurance (expressed in New Zealand
dollars) held by a licensed insurer before the date of granting a full licence under sub-part 1 of Part 2 of the Act is greater than the licensed insurer’s REVOKED

Ref #5951613 v1.3 projected insurance losses calibrated to a loss return period of 1 in 1000 years then the licensed insurer may (but is not obliged to) reduce its catastrophe reinsurance to a level equal to the licensed insurer’s calculation of projected insurance losses calibrated to a loss return period of 1 in 1000 years.
72. The requirements of paragraph 30 of this solvency standard (three year
forward assessment of solvency position) are to be interpreted by the licensed insurer in the context of the return period applicable to the licensed insurer at the date of the forward assessment of solvency.
73. The Catastrophe Risk Capital Charge is the net cost (after reinsurance
recoverable amounts) to the licensed insurer of the Extreme Event Exposure calculated in paragraphs 68 - 71, including any gap or shortfall in the reinsurance cover, plus the cost (if any) of one reinstatement of the full catastrophe reinsurance programme.
74. For a licensed insurer that does not have Extreme Event Exposures, and
does not have other per risk exposures greater than the licensed insurer’s net retention, the Catastrophe Risk Capital Charge is two times the largest per risk retention of the licensed insurer plus the cost of one reinstatement of the reinsurance programme if any.
75. The largest per risk retention is the cost to the licensed insurer of the
largest individual claim to which it could reasonably be exposed under policies issued, net of reinsurance recoveries and including the cost (if any) of one reinstatement of the appropriate reinsurance. If the licensed insurer issues policies that do not have a maximum sum insured, or are not protected by excess of loss reinsurance, then the licensed insurer must seek the advice of its appointed actuary as to a reasonable approximation for the largest per risk retention. Actuarial Review
76. The appointed actuary of the licensed insurer must review the basis of
the Catastrophe Risk Capital Charge. In carrying out the review of the Catastrophe Risk Capital Charge the appointed actuary must consider all relevant factors. If the appointed actuary has any concerns with respect to the Catastrophe Risk Capital Charge, the appointed actuary must raise them with the licensed insurer’s board and report those matters to the Bank along with the licensed insurer’s solvency calculation.
77. If the appointed actuary is of the opinion that the Extreme Event Exposure
of the licensed insurer or other form of catastrophe risk (in the case of non￾property exposure) is not adequately reflected in the Catastrophe Risk Capital Charge calculated as per paragraphs 68 - 75, the appointed actuary must recommend an appropriate alternative method of calculation for determining the Catastrophe Risk Capital Charge for the licensed insurer, which must be agreed by the Bank, and the licensed insurer must use that alternative method. REVOKED

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3.3. Asset Risk Capital Charge
Concept
78. The Asset Risk Capital Charge is intended to reflect the exposure of the
licensed insurer to losses on investment assets, and other asset classes. It is intended to reflect credit risk in respect of the relevant assets as well as asset concentration risk. Calculation
79. In order to determine the Asset Risk Capital Charge, the licensed insurer
must first assign each of its assets to the relevant Asset Class in Table 2. The counterparty grade must be determined in accordance with Section 3.5 of this solvency standard.
80. If the licensed insurer holds investments in a professionally managed
collective investment vehicle such as a unit trust, then the licensed insurer must ‘look through’ the investment vehicle to the nature of the underlying investments that represent the share of the assets attributable to the licensed insurer. Similarly, if the licensed insurer has a subsidiary entity that is primarily used to hold investments for the licensed insurer, then it must ‘look through’ the subsidiary entity to the nature of the underlying investments.
81. In applying the ‘look through’ approach in the preceding paragraph, the
licensed insurer must only ‘look through’ if it is satisfied with the quality and reliability of the information about the underlying investments. If the licensed insurer is not satisfied with the quality and reliability of the information about the underlying investments or, if the ‘look through’ approach is unable to be applied, then all other appropriate requirements of this solvency standard apply. The licensed insurer must also take account of any special conditions (such as guarantees or redemption restrictions) that the investment vehicle may provide.
82. Assets that have been explicitly, unconditionally and irrevocably guaranteed
for their remaining term to maturity by a guarantor with a counterparty rating (or for governments, the long-term foreign currency credit rating) in Grades 1, 2 or 3 (refer Table 4) may be assigned the Asset Risk Capital Factor that would be applicable to the guarantor. Guarantees provided to a licensed insurer by its own parent entity or by any related party are not eligible for this treatment.
83. The Asset Risk Capital Charge is the total of the asset values in each Asset
Class (to the extent that the asset values have not been excluded from, or reduced in, the determination of Actual Solvency Capital in Section 2 of this solvency standard) multiplied by the relevant Asset Risk Capital Factor from Table 2 plus the Asset Concentration Risk Charge (if any).
84. Any asset that is a Deduction from Capital under Section 2 of this
solvency standard will not be subject to an Asset Risk Capital Charge. REVOKED

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Table 2 – Definition of Asset Classes, and Asset Risk Capital Factors
Asset Class Definition Asset Risk Capital Factor 1 Cash and Sovereign Debt Notes and coin Cash at bank on call Debt or other obligations issued by or guaranteed irrevocably by the New Zealand government or a government or supra-national agency with a Grade 1 counterparty rating 0.5% 2 AA rated fixed interest < 1 yr Any debt obligation (excluding subordinated debt) maturing or redeemable in less than one year with counterparty rating of Grade 1 or 2 Cash management trusts with counterparty rating Grade 1 or 2 1% 3 AA rated fixed interest

1 yr
Any debt obligation (excluding subordinated debt) maturing or redeemable in one year or more with counterparty rating of Grade 1 or 2 2% 4 A rated fixed interest Any debt obligation (excluding subordinated debt) with counterparty rating of Grade 3 Cash management trusts with counterparty rating of Grade 3 4% 5 Unpaid premiums < 6 months Unpaid premiums (including premium funding receivables) that are not yet due or are less than six months past the contractual due date for payment to the licensed insurer 4% 6 Deferred Acquisition Costs Deferred Acquisition Costs determined in accordance with Section 2.5 of this standard REVOKED 5%

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7 BBB rated fixed interest
Any debt obligation (excluding subordinated debt) with counterparty rating of Grade 4 Cash management trusts with counterparty rating of Grade 4 Credit provided to a related party (refer paragraph 104) on not more than 90 day terms in the ordinary course of business on an arm’s length commercial basis and where payment is not overdue 6% 8 Unrated Local Authority Debt, and Third Party Claims Recoveries Any debt obligation with a New Zealand local authority that is unrated Claim recoveries collectable from Third Parties (excluding reinsurance recoveries or coinsurance recoveries from the New Zealand Earthquake Commission (“EQC”)) 8% 9 Other fixed interest and short term unpaid premiums Any debt obligation with counterparty rating of Grade 5 or unrated Cash management trusts with counterparty rating of Grade 5 or unrated Subordinated debt of a counterparty with rating of Grade 1 or 2 or 3 Unpaid premiums (including premium funding receivables) that are more than six months but less than twelve months past the contractual due date for payment to the licensed insurer 15% 10 Off Balance Sheet Exposures not covered elsewhere Off balance sheet exposures and contingent liabilities not dealt with elsewhere 20% 11 Listed equity & trusts, and property, plant and equipment Equities listed on a recognised stock exchange Listed trusts (unless the look through provisions require them to be included in another asset class) Listed property trusts Direct property holdings Owner occupied property Property, plant and equipment 25% REVOKED

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12 Unlisted equity, unlisted trusts
Unlisted equities
Unlisted trusts (unless the look through provisions require them to be included in another asset class) 35% 13 Any Other Assets (not described elsewhere) Any other asset not described in the table, including assets associated with Non-insurance Activities that are not dealt with elsewhere, but not including reinsurance assets covered under
Section 3.4 and not including any
coinsurance amounts recoverable from EQC 40% 14 Assets incurring a full Capital Charge Loans to directors of the licensed insurer or of associated parties Unsecured loans to employees or agents of the licensed insurer in excess of $1,000 Assets under a fixed or floating charge Obligations of a related party (but refer paragraph 104) Unpaid premiums (including premium funding receivables) that are twelve months or more past the contractual due date for payment to the licensed insurer 100% Asset Concentration Risk Charge
85. In order to determine the Asset Concentration Risk Charge, the licensed
insurer must first calculate the total value of its assets that represent obligations of one entity (counterparty) or group of related entities, (to the extent that the asset values have not been excluded from, or reduced in, the determination of Actual Solvency Capital in Section 2).
86. The Asset Concentration Risk Charge for each counterparty is a separate
charge in addition to the Asset Risk Capital Charge calculated in accordance with paragraph 83, and applies only to the licensed insurer’s total asset exposure to each counterparty that exceeds the limits specified in Table 3.
87. The Asset Concentration Risk Charge in respect of each counterparty is
calculated as the product of the licensed insurer’s total assets with that counterparty in excess of the limits specified in Table 3, and the applicable Asset Risk Capital Factors determined from Table 2, except for the obligation category “Any other asset or counterparty exposure” for which the multiplier will be two times the applicable Asset Risk Capital Factor determined from Table 2. REVOKED

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88. For licensed insurers with total assets less than NZ $10 million there is no
Asset Concentration Risk Charge for obligations secured by bank bills or deposits with a registered New Zealand bank.
89. The Asset Concentration Risk Charge is the total for the licensed insurer
across all relevant counterparties.
Table 3 – Asset Concentration Risk Limits
Nature of Obligation Limit (% of total assets of the licensed insurer excluding any reinsurance recoverable assets) Guaranteed by the New Zealand government or by a national government or supra-national agency of rating grade 1 100% Guaranteed by a New Zealand local authority or State-Owned Enterprise 50% (or $5m if greater) Secured by bank bills or deposits with any specific New Zealand banking group 25% (or $5m if greater) Any other asset or counterparty exposure (except for reinsurance recoverable assets dealt with elsewhere) 10% (or $2m if greater) Derivatives
90. For equity and bond derivatives, the appropriate Asset Risk Capital Charge
is calculated by multiplying the asset or liability net position by the appropriate equity or bond Asset Risk Capital Factor within Table 2.
91. For options the position to be used is the delta weighted position i.e. face
value multiplied by delta factor. The delta factor is that implied after the application of the appropriate equity or bond Asset Risk Capital Factor within Table 2, the shock in foreign currency exchange rates specified in paragraph 97 and the shock in interest rates specified in paragraph 102.
92. There is no Asset Risk Capital Charge for the interest rate or foreign
currency position arising from derivative transactions.
93. Mark-to-market gains on any derivatives will attract an Asset Risk Capital
Charge calculated by multiplying the mark-to-market gain by the appropriate Asset Risk Capital Factor within Table 2. REVOKED

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Other off balance sheet exposures
94. A licensed insurer can be exposed to various investment risks through
transactions other than those reflected on its balance sheet, for example by issuing guarantees or letters of credit. A licensed insurer must allow for the amount of any such off balance sheet exposures that represent contingent liabilities as if they were assets when calculating its Asset Risk Capital Charge. All known contingent liabilities must be included when calculating the Asset Risk Capital Charge, whether or not the contingent liabilities are disclosed within the NZ GAAP financial statements of the licensed insurer. All contingent liabilities must be quantified or, if unable to be quantified, must be estimated at a prudent amount and noted as such, with the basis of the estimation clearly described in the Solvency Returns submitted to the Bank.
95. If it is not clear which Asset Class is relevant to the exposure then the Asset
Risk Capital Factor shall be 20% of the face value of the exposure. Foreign Currency and Interest Rate Risks
96. In applying the solvency standard a licensed insurer must consider the
degree of mismatching between assets and liabilities in terms of foreign currency and interest rate risks. Foreign Currency Risk
97. In the case of a currency position, an additional Foreign Currency Risk
Capital Charge of 22% must be applied to the net open foreign exchange position in each currency other than NZD, regardless of whether the position is long or short. The net open foreign currency position is the absolute difference (ignoring any negative sign in the outcome) between any assets and liabilities (taking into account applicable derivative positions) that are denominated in the relevant currency. Interest Rate Risk
98. An Interest Rate Capital Charge is calculated by reference to fixed interest￾bearing assets and fixed interest-bearing liabilities. For the purposes of
determining the Interest Rate Capital Charge:
(a) fixed interest-bearing assets are those assets and derivative positions bearing a fixed interest rate for a period of time (re-set period) beyond the balance date at which the solvency calculation is performed; (b) fixed interest-bearing liabilities are insurance liabilities and derivative positions and any other liabilities where the economic value depends upon discounting actual or expected cash flows; in other words those liabilities where the value depends implicitly or explicitly on interest rate assumptions; and REVOKED

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(c) insurance liabilities are Premium Liabilities (as defined in this solvency standard) and the Net Outstanding Claims Liability at a minimum 75% probability of sufficiency, as advised by the appointed actuary.
99. The Interest Rate Capital Charge is calculated by separately revaluing both
the licensed insurer’s fixed interest-bearing assets and fixed interest￾bearing liabilities and by then calculating the net impact of the revaluation on fixed interest-bearing assets and fixed interest-bearing liabilities (“net revaluation impact”).
100. The revaluation of fixed interest-bearing assets and fixed interest-bearing
liabilities must be performed using a 175 basis point change in all interest rates used to value or discount the licensed insurer’s fixed interest-bearing assets and fixed interest-bearing liabilities at the balance date at which the solvency calculation is performed, either for the purpose of preparing financial statements or for internal risk management purposes.
101. The net revaluation impact for any revaluation of assets and liabilities is
the change in the value of assets less the change in the value of liabilities resulting from the revaluation.
102. The net revaluation impact should be calculated for both a 175 basis point
increase (“upshock impact”) and 175 basis point decrease (“downshock impact”) in all interest rates, across all fixed interest-bearing assets and fixed interest-bearing liabilities, where the downshock impact is limited to the absolute size of the interest rates prior to the decrease. The upshock impact and downshock impact are both gross of tax. The Interest Rate Capital Charge is the greater of the adverse upshock impact and the adverse downshock impact. Related Party Assets
103. A related party is defined in the Act (refer Section 6) and the definition is
significantly broader than the definition of associated person in NZ GAAP.
104. Notwithstanding this definition an asset is not regarded as a related party
asset for the purpose of determining Deductions From Capital as per paragraph 38, or the Asset Risk Capital Charge, if:
(a) The related party is a bank subject to prudential regulation and / or supervision by the Bank or its international equivalents; or (b) The asset is a reinsurance asset in which case the reinsurance recovery risk capital charge applies; or (c) The primary party is a captive insurer (as defined in the Act) and the related party is the parent owner of the captive insurer; or (d) The asset is a related party trade credit, that does not in substance represent permanent funding, that is provided on not more than 90 REVOKED

Ref #5951613 v1.3 day terms in the ordinary course of business on an arm’s length commercial basis and where payment is not overdue.
3.4. Reinsurance Recovery Risk Capital Charge
Concept
105. The Reinsurance Recovery Risk Capital Charge is intended to reflect the
exposure of the licensed insurer to losses arising from failure to fully recover on reinsurance contracts, including losses due to reinsurer failure and contract dispute. For the purposes of this solvency standard only, reinsurance will be deemed to include any coinsurance recoveries that become receivable from the EQC through government direction. Calculation
106. In order to determine the Reinsurance Recovery Risk Capital Charge,
the licensed insurer must first determine the amount due from each reinsurer or EQC in respect of the total reinsurance or coinsurance recovery asset on its balance sheet. The total reinsurance recovery asset is the sum of the reinsurance recoverable in respect of outstanding claims as included in the 75% POS provision as defined in Section 3.1, the deferred reinsurance expense (less any unearned exchange commission) and amounts due from reinsurers in respect of paid claims. It should not include recoveries other than from reinsurance (e.g. salvage and subrogation). Where arrangements with a reinsurer involve both liability and asset components, these may be taken as a single net exposure to the extent they are certain and are subject to a legally enforceable right of offset.
107. The Reinsurance Recovery Risk Capital Charge is the sum across all
reinsurers of the reinsurance recovery asset in respect of each reinsurer multiplied by the Reinsurance Risk Capital Factor determined from Table 4. The reinsurer counterparty grade must be determined in accordance with
Section 3.5.
3.5. Determining Counterparty Grades
108. Some of the capital charges in this solvency standard depend upon the
counterparty grade of reinsurers and asset counterparties. The counterparty grade is determined based on financial strength ratings issued by recognised rating agencies. Because rating agencies do not always agree it is necessary to have a consistent method of determining which financial strength rating to use.
109. Each licensed insurer must adopt a policy that states the rating agency
that it will use as a first preference and other agencies (in order of preference) that it will use if the preferred agency does not publish ratings for a particular counterparty. A licensed insurer must notify the Bank as soon as practicable if it changes its counterparty grading policy and explain the nature of and reasons for the change. REVOKED

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110. The counterparty grades are determined from Table 4.
Table 4 – Counterparty Grades
S&P/Fitch AM Best Moody’s Counterparty
Grade
Reinsurance
Risk Capital
Factor
AAA A++ Aaa 1 2%
AA- to AA+ A+ Aa3 to Aa1 2 2%
A- to A+ A- A A3 to A1 3 4%
BBB- to BBB+ B+ B++ Baa3 to Baa1 4 10%, up to a 20% proportion of the total reinsurance recovery asset, and 20% above that limit Below or unrated Below or unrated Below or unrated 5 20%, up to a 10% proportion of the total reinsurance recovery asset, and 40% above that limit
3.6. Special Circumstances
111. If the Bank is not satisfied that the methods and capital charges specified
in this solvency standard are appropriate for the risk profile of, or other matters relating to, the licensed insurer the Bank may impose a condition of licence (as per section 22(1) of the Act) to vary the Solvency Margin for the licensed insurer, or it may issue a new solvency standard (as per
section 55(2)(c) of the Act) to apply to the licensed insurer. Any such
variation or specific solvency standard may incorporate amended capital charges, alternative calculation methods, alternative parameters or assumptions, or any other requirements considered appropriate by the Bank.
112. Once notified in writing by the Bank of such amended requirements, the
licensed insurer and its appointed actuary must apply these in accordance with the requirements of the Bank. REVOKED

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4. Obligations of the Licensed insurer
4.1. Appointment of an Actuary
113. Each licensed insurer must appoint an actuary, as required by Section
76 of the Act.
114. The suitability of an individual actuary for the role is the responsibility of
the licensed insurer and must be dealt with in its fit and proper policy.
115. The appointed actuary must be a Fellow of the New Zealand Society of
Actuaries, or hold an equivalent professional qualification approved by notice to the licensed insurer from the Bank.
4.2. Licensed insurer must provide Solvency Returns to the Bank
116. Section 56(d) of the Act allows the Bank to issue solvency standards
that include requirements for reports relating to the solvency of a licensed insurer and the frequency with which such reports must be provided to the Bank.
4.3. Frequency of Solvency Returns to the Bank
117. The licensed insurer must provide an annual solvency return to the
Bank within five months and twenty days after the end of the licensed insurer’s financial year. The annual solvency return must be in the form specified by the Bank and be accompanied by:
(a) An attestation by two directors of the licensed insurer (or in the case of an overseas insurer, its New Zealand Chief Executive Officer) in the form specified by the Bank; and (b) A copy of the audited financial statements of the licensed insurer; and (c) A report by the auditor of the licensed insurer on the audit of the solvency return; and (d) A Financial Condition Report prepared by the appointed actuary of the licensed insurer.
118. The licensed insurer must provide a half-yearly solvency return to the
Bank within five months of the date six months after the end of the licensed insurer’s financial year. The half-yearly solvency return must be in the form specified by the Bank and must be accompanied by an attestation by two directors of the licensed insurer (or in the case of an overseas insurer, its New Zealand Chief Executive Officer) in the form specified by the Bank. REVOKED

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119. The Bank may (as per section 121(1) of the Act), at its discretion, require
the licensed insurer to provide the Bank with solvency returns on a more frequent basis, and in such format and subject to such verification or attestation as it may require.
4.4. Audit of Annual Solvency Return
120. A licensed insurer must engage its auditor to undertake an audit of the
annual solvency return and must do everything necessary to allow the auditor to undertake this function.
121. The auditor’s report on the solvency return must address the matters
prescribed in this solvency standard and must be signed by the auditor.
122. The Bank may, at its discretion, require independent review of the audit
and auditor’s report.
4.5. Report by the Appointed actuary
123. A licensed insurer must engage its appointed actuary to prepare a
Financial Condition Report for the licensed insurer and must do everything necessary to enable the appointed actuary to undertake this function.
4.6. Disclosure of Solvency Calculations
124. A licensed insurer must disclose in its annual financial statements
(required under the Financial Reporting Act 1993) and on its website (if any) the licensed insurer’s current Solvency Margin from its most recent annual solvency return. Website disclosure must reflect the solvency position in the latest financial statements provided to the Bank in accordance with
Section 81 of the Act.
125. Following submission of its half-yearly solvency return to the Bank, a
licensed insurer must update the disclosure on its website (if any) to reflect the Solvency Margin from that half-yearly return.
4.7. Advice to the Bank on likely breach
126. Section 24 of the Act requires that, if a licensed insurer has reasonable
grounds to believe that a failure to maintain a Solvency Margin is likely to occur at any time within the next three years, the licensed insurer must report the likely failure to the Bank as soon as is reasonably practicable.
127. In order to comply with Section 24 of the Act a licensed insurer will need
to consider a forward looking assessment of its compliance with the solvency standard in addition to the calculations at the most recent balance date.
128. The forward looking assessment must extend at least three years from
the current date and must take into account known aspects of the licensed insurer’s business plan. REVOKED

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129. Because Section 24 of the Act applies continuously, not just once a year,
a licensed insurer will need to be satisfied that it has adequate procedures in place to identify and escalate circumstances that may give rise to a reporting obligation under Section 24. Those procedures must include timely advice to the licensed insurer’s appointed actuary. REVOKED

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5. Obligations of the appointed actuary
5.1. Financial Statements
130. Section 77 of the Act requires a review by a licensed insurer’s
appointed actuary of actuarial information in the financial statements.
Section 77(4)(c) allows the Bank to specify, within a solvency standard,
information which is actuarial information for the purpose of the solvency standard. The specified information for the purpose of this solvency standard is:
(a) the Premium Liabilities as defined in this solvency standard; (b) the Net Outstanding Claims Liability as defined in this solvency standard; (c) the reinsurance and any other recovery asset(s) relevant to the Reinsurance Recovery Risk Capital Charge; (d) any deferred acquisition cost or deferred fee revenue relevant to the Premium Liabilities; and (e) any other information deemed by the appointed actuary to warrant actuarial review for the purpose of profit or solvency reporting.
131. If it is the licensed insurer’s established policy to seek the advice of the
appointed actuary in respect of part or all of this actuarial information and to always adopt that advice in its financial statements, then the advice from the appointed actuary to the licensed insurer satisfies the review requirements of this solvency standard.
132. In other circumstances the appointed actuary must undertake whatever
additional work is necessary in order to complete the review for the purposes of this solvency standard.
133. The appointed actuary’s review must cover:

• Net outstanding claims as per NZ IFRS 4 including:
  – central estimate of expected claims and recoveries; – discounting at a risk free rate; – allowance for claim handling expenses; and – a risk margin intended to provide the specified probability of sufficiency;
• Application of the Liability Adequacy Test; and
  REVOKED

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• The level of deferred acquisition cost in the financial
  statements after the application of the Liability Adequacy Test as detailed in paragraph 49.

134. Any adjustments arising as a result of the review in paragraph 130 - 133
     must be incorporated into the solvency calculations.
135. The appointed actuary must use professional judgement to determine
     the extent of work required regarding the Liability Adequacy Test, considering the nature and size of the licensed insurer’s business and the materiality of the risks involved. A full assessment would include comparison of:

• the relevant accounting provisions (unearned premium,
  deferred acquisition cost, deferred reinsurance expense, deferred reinsurance commissions, unexpired risk and the like); and
• the actuarial estimate of net premium liabilities comprising:
  – determination of the appropriate assessment period for Premium Liabilities; – central estimate of expected claims and recoveries; – discounting at a risk free rate; – allowance for policy administration and claim handling expenses; – allowance for the cost of any future reinsurance (i.e. that has not yet been purchased) required to cover unexpired risks; and – a risk margin intended to provide a 75% POS (or such higher percentage that may have been used).

136. Any adjustments arising as a result of this assessment must be
     incorporated into the premium liability adjustment.
137. The results of the appointed actuary’s review must be documented in a
     report that meets the requirements of Section 78 of the Act.
     5.2. Solvency Calculations
138. The appointed actuary must perform or review the licensed insurer’s
     calculations of Actual Solvency Capital and Minimum Solvency Capital in accordance with this solvency standard. The results of the review must be documented in the Financial Condition Report.
139. The appointed actuary’s review must include specific comment on the
     basis for determining the Catastrophe Risk Capital Charge, the adjustment of various items for tax and any other material issues arising from Sections 2 and 3 of this solvency standard.
140. In considering the appropriate adjustment for tax the relevant
     considerations include:
     REVOKED

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• The fact that the items subject to adjustment are usually revenue
  items whereas the solvency standard is based on comparison of balance sheet items;
• The appropriate adjustment will normally be to reduce the relevant
  amount by the applicable company tax rate;
• If the overall impact of tax adjustments would be to create a
  greater deferred tax asset then a corresponding adjustment to the Deductions from Capital should be made; and
• Whether any particular features of the tax laws or the taxation
  status of the licensed insurer need to be taken into account.
  5.3. Financial Condition Report

141. Section 56(d) of the Act allows the Bank to include, within a solvency
     standard, the requirement for a report on the financial condition of a licensed insurer. The appointed actuary must prepare a Financial Condition Report in accordance with Section 56(d) of the Act which must, inter alia:
     (a) identify and describe the Material risks (of which it is reasonable to expect the appointed actuary to be aware) facing the licensed insurer that, in the appointed actuary’s opinion, pose a threat to the licensed insurer’s ability to meet the solvency standard now and in the future, and where practicable quantify such risks; (b) comment on the steps taken or proposed to be taken by the licensed insurer to address the risks identified in (a); (c) where the licensed insurer has issued any instruments that form
     part of Actual Solvency Capital but that may not be both of a
     permanent nature and freely available to meet losses, comment on the implications for current and future compliance with the solvency standard; (d) comment on whether, in the appointed actuary’s opinion, the outstanding claim provision established by the licensed insurer is materially different from that which would be determined in accordance with NZ IFRS 4 and with a risk margin required to achieve the specified POS, and if so on the relevant figures by class of insurance business; (e) advise the licensed insurer on the appropriate treatment, for solvency purposes, of any insurance business with long term risk characteristics or any product, activity or insurance business with risk characteristics not adequately covered by this solvency standard; REVOKED

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(f) advise the licensed insurer, if relevant, on the treatment of derivatives and the approximate impact on the Asset Risk Capital Charge over the course of the year and at the date of calculation of the Solvency Margin; (g) comment on the risks involved with mismatching of assets and liabilities and any relevant capital charge; (h) detail all assumptions used in the calculation of the Solvency Margin, and identify those assumptions to which the licensed insurer’s Solvency Margin is most sensitive (“key sensitivities”), and quantify those key sensitivities; and (i) advise the licensed insurer on whether, in the appointed actuary’s opinion, the licensed insurer needs to consider reporting to the Bank under Section 24 of the Act, taking account of the licensed insurer’s forward looking assessment of the solvency standard and the appointed actuary’s assessment of the licensed insurer’s business plans, its enterprise risk management practices and the external environment.
142. The appointed actuary may need to deal with issues that are not within
the relevant skills and experience of the appointed actuary. In this situation the appointed actuary will need to utilise the skills and experience of others and may rely on other relevant experts provided adequate disclosure is included on the nature of that reliance.
5.4. New Zealand Society of Actuaries’ Professional Standards
143. The appointed actuary must ensure that all actuarial work carried out for
the purposes of, or supporting, this solvency standard is carried out in accordance with the New Zealand Society of Actuaries’ Professional Standards. REVOKED Standard Ends

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MATERIALITY
Appendix A

1. All calculations required in relation to this solvency standard are subject to the
   following materiality requirements.
2. Particular values or components are considered material to the overall result of a
   calculation when their misstatement or omission would cause that result to be misleading to the users of the information.
3. Materiality tests assess the significance of the particular value or component by
   relating it to the amount of the overall result to which it contributes.
4. The base amount for materiality purposes is the Solvency Margin.
5. The Appointed actuary must consider materiality relative to the amount of both:
   (a) the major individual components of the calculation; and (b) the overall cumulative effect of those individual components.
6. Values or components generating variations in amounts of 10% or more of the
   Solvency Margin must be presumed material, while those generating variations in amounts of 5% or less of the Solvency Margin may be presumed immaterial. The materiality of values or components generating variations between 5% and 10% will be a matter for professional judgement.
7. In applying the materiality standards described in paragraphs 4 - 6 above:
   (a) it is appropriate to use as the base amount for materiality purposes a rolling average of the Solvency Margin provided that the average so derived is a function of not less than three and not more than five years experience and reflects the current and anticipated future experience; and (b) it is appropriate, as the Solvency Margin approaches zero, for alternative key indicators to be used in establishing materiality.
8. Materiality applies to all aspects of the determination and covers the acceptability
   of grouped data, modelled projections and approximate valuation methods. REVOKED

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Website http://rbnz.govt.nz/finstab/insurance/ Email insurance@rbnz.govt.nz Telephone +64 471 3591 Mail Reserve Bank of New Zealand Prudential Supervision – Insurance Policy PO Box 2498 WELLINGTON 6140 REVOKED