Reserve Bank of New Zealand: Insights from New Zealand Solvency Returns for the 2015 Financial Year

19 October 2016 Insights from New Zealand solvency returns for the 2015 financial year COLE, R1 and ALLOTT, A1 Abstract A review of the regulatory solvency returns provided to RBNZ by licensed New Zealand insurers has been made for 2015 financial year reporting. The industry’s solvency results and components of solvency requirements are analysed and presented in aggregate form as well as with comparisons between insurers. We comment on some of the issues that have been identified as well as some other aspects that may be of interest. Policy considerations and supervisory responses are out of scope for this paper. 1 Reserve Bank of New Zealand

2 19 October 2016 This page is deliberately left blank.

3 19 October 2016 Contents List of figures 5 Executive summary 7 Introduction 11 Regulatory framework for solvency 12 Data for analysis 14 Terminology 15 Part One – New Zealand solvency requirements 16 Overview of New Zealand solvency requirements 16 Solvency standards 16 Fixed Capital Amount 17 Licence conditions 17 Consolidation 17 Multiple solvency requirements 17 Effective solvency requirement 18 Solvency standards 20 Fixed Capital Amount 21 Non-solvency exempted branches 21 Licence conditions 22 Consolidation 23 Multiple solvency requirements 24 Capital 26 Deductions From Capital 27 Aggregate Minimum Solvency Capital 29 Minimum Solvency Capital 30 Non-Life solvency standards 31 Non-Life SS Minimum Solvency Capital 32 Non-Life SS Insurance Risk Capital Charge 34 Non-Life SS Catastrophe Risk Capital Charge 36 Non-Life SS Reinsurance Recovery Risk Capital Charge 38 Non-Life SS Asset Risk Capital Charge 39 Non-Life SS Foreign Currency Risk Capital Charge 40 Non-Life SS Interest Rate Risk Capital Charge 41 Life solvency standard 42 Life SS Minimum Solvency Capital 43 Life SS Insurance Risk Capital Charge 45 Life SS Catastrophe Risk Capital Charge 46 Life SS Reinsurance Recovery Risk Capital Charge 47 Life SS Asset Risk Capital Charge 48 Life SS CEP Capital Charge 49 Life SS Foreign Currency Risk Capital Charge 50 Life SS Impact of Interest Rate Risk 51 Effective solvency requirement 52 Movement in Solvency Margin Adjusted during 2014/15 55 Capital target 57 Capital target measure 57 Capital target level 58 Solvency position relative to capital target 59 Solvency projection 61 Appointed Actuary 62 Auditor 65

4 19 October 2016 Feedback on Solvency Return 69 Strength of solvency position 79 Solvency position relative to size of insurer 80 Solvency position relative to risk charges 81 Part Two – Home jurisdiction solvency requirements 84 Insurers subject to Australian solvency requirements 86 Feedback on Solvency Exempt Return 87 Part Three – Conclusion 89 Appendices 90 Appendix – Schedule of insurers 91 Appendix – Capital 93 Appendix – Deductions From Capital 95 Appendix – Aggregate Minimum Solvency Capital 97 Appendix – Non-Life solvency standards 99 Non-Life SS Minimum Solvency Capital 99 Non-Life SS Insurance Risk Capital Charge 103 Non-Life SS Reinsurance Recovery Risk Capital Charge 105 Non-Life SS Asset Risk Capital Charge 107 Appendix – Life solvency standard 109 Life SS Minimum Solvency Capital 109 Life SS Insurance Risk Capital Charge 113 Life SS Reinsurance Recovery Risk Capital Charge 115 Life SS Asset Risk Capital Charge 117 Life SS CEP Capital Charge 119 Appendix – Effective solvency requirement 121 Appendix – Movement in Solvency Margin Adjusted during 2014/15 123 Appendix – Capital target 125 Solvency position relative to capital target 125 Appendix – Solvency projection 127 Appendix – Strength of solvency position 129 Solvency position relative to size of insurer 129 Solvency position relative to risk charges 131

5 19 October 2016 List of figures Figure 1 – Jurisdiction of applicable solvency requirements 13 Figure 2 – Simplified diagram of NZ solvency requirements (Fund level) 18 Figure 3 – Simplified diagram of NZ solvency requirements (insurer level) 19 Figure 4 – NZ solvency standards applied 20 Figure 5 – Fixed Capital Amount requirement 21 Figure 6 – Multiple solvency requirements 25 Figure 7 – Capital components 26 Figure 8 – Deductions From Capital as % Net Assets 27 Figure 9 – Deductions From Capital components 28 Figure 10 – Aggregate Minimum Solvency Capital components 29 Figure 11 – Non-Life SS Minimum Solvency Capital components 32 Figure 12 – Non-Life SS implied average risk factors 33 Figure 13 – Non-Life SS Insurance Risk Capital Charge components 34 Figure 14 – Non-Life SS Catastrophe Risk Capital Charge method 36 Figure 15 – Non-Life SS RI Recovery Risk Capital Charge components 38 Figure 16 – Non-Life SS Asset Risk Capital Charge components 39 Figure 17 – Non-Life SS direction of interest rate risk 41 Figure 18 – Life SS Minimum Solvency Capital components 43 Figure 19 – Life SS implied average risk factors 43 Figure 20 – Life SS Insurance Risk Capital Charge components 45 Figure 21 – Life SS Catastrophe Risk Capital Charge method 46 Figure 22 – Life SS Reinsurance Recovery Risk Capital Charge components 47 Figure 23 – Life SS Asset Risk Capital Charge components 48 Figure 24 – Life SS CEP Capital Charge components 49 Figure 25 – Life SS direction of interest rate risk 51 Figure 26 – Simplified diagram of NZ solvency requirements (insurer level) 52 Figure 27 – Effective solvency requirement as % of net assets 53 Figure 28 – Solvency Ratio Adjusted 53 Figure 29 – Effective solvency requirement components 54 Figure 30 – Movement in Solvency Margin Adjusted during 2014/15 financial year 55 Figure 31 – Movement in Solvency Margin Adjusted during 2014/15 55 Figure 32 – Capital target measure 57 Figure 33 – Capital target level as % of Minimum Solvency Capital Adjusted 58 Figure 34 – Solvency position relative to capital target 59 Figure 35 – Solvency Margin/Ratio in excess of Capital target 60 Figure 36 – Projected Solvency Margin/Ratio 61 Figure 37 – Appointed Actuary solvency task by main type of insurance 62 Figure 38 – Appointed Actuary solvency task by size of insurer 63 Figure 39 – Appointed Actuary solvency task by employment status 64 Figure 40 – Auditor solvency task by main type of insurance 65 Figure 41 – Auditor solvency task by size of insurer 66 Figure 42 – Auditor solvency task by audit firm type 67 Figure 43 – Audit firm type by size of insurer 68 Figure 44 – Solvency Margin Adjusted relative to size 80 Figure 45 – Solvency Margin Adjusted relative to risk charges 82 Figure 46 – Jurisdiction of applicable solvency requirements 84 Figure 47 – Solvency ratio under home jurisdiction solvency requirements 85 Figure 48 – Australian Solvency Ratio Adjusted for 19 insurers 86 Figure A1 – Schedule of insurers 91 Figure A7 – Capital components 93

6 19 October 2016 Figure A9 – Deductions From Capital components 95 Figure A10 – Aggregate Minimum Solvency Capital components 97 Figure A11 – Non-Life SS Minimum Solvency Capital components 99 Figure A12 – Non-Life SS implied average risk factors 101 Figure A13 – Non-Life SS Insurance Risk Capital Charge components 103 Figure A14 – Non-Life SS RI Recovery Risk Capital Charge components 105 Figure A15 – Non-Life SS Asset Risk Capital Charge components 107 Figure A18 – Life SS Minimum Solvency Capital components 109 Figure A19 – Life SS implied average risk factors 111 Figure A20 – Life SS Insurance Risk Capital Charge components 113 Figure A21 – Life SS Reinsurance Recovery Risk Capital Charge components 115 Figure A22 – Life SS Asset Risk Capital Charge components 117 Figure A23 – Life SS CEP Capital Charge components 119 Figure A29 – Effective solvency requirement components 121 Figure A31 – Movement in Solvency Margin Adjusted during 2014/15 123 Figure A35 – Solvency Margin/Ratio in excess of Capital target 125 Figure A36 – Projected Solvency Ratio 127 Figure A44 – Solvency Margin Adjusted relative to size 129 Figure A45 – Solvency Margin Adjusted relative to risk charges 131 The numbering for figures in the appendices has been set to align with the corresponding number of the figure with totals that is in the body of this paper. This means there are some missing figure numbers in the appendices.

7 19 October 2016 Executive summary Risk-based solvency requirements, such as the Reserve Bank of New Zealand (“RBNZ”) solvency standards, require a minimum amount of capital to be held that is calculated with respect to the main types of financial risks that insurers face. This paper reviews the regulatory solvency returns provided to RBNZ by licensed New Zealand insurers as at their financial year end date during 2015. There were 62 licensed New Zealand insurers subject to New Zealand solvency requirements and 34 subject to home jurisdiction solvency requirements (with Australia being the most common). The paper has separate parts for New Zealand solvency requirements and home jurisdiction solvency requirements, with much more detail on the New Zealand requirements. Unless otherwise stated, comments are in respect of insurers that are subject to New Zealand solvency standards. New Zealand solvency requirements RBNZ has issued six solvency standards that are currently in effect. The analysis groups the four non-life solvency standards and the two life solvency standards. Insurers are required to maintain a solvency margin or solvency ratio in excess of a minimum figure specified by licence condition (generally $0) in respect of each solvency standard that has been applied (for each Life Fund for life insurers). There are nine insurers with two solvency standards applied. Insurers are also subject to a minimum capital amount of $1 million (captives), $3 million (non-life) or $5 million (life), except for eight insurers which qualify for an exemption. There are 18 insurers with minimum capital amount exceeding the solvency requirement that would otherwise apply in the absence of a minimum capital amount. The effective solvency requirement for each insurer is the sum of amounts specified in solvency standards for non-qualifying capital instruments (NQCI), Deductions From Capital, Minimum Solvency Capital, and the impact of minimum capital amount; plus the impact (if any) of licence condition(s) specifying minimum solvency margin or minimum solvency ratio. ∑ NQCI < 0.5 ∑ Deductions From Capital 1,428 Aggregate Minimum Solvency Capital 3,127 ∑ Licence Condition 585 ∑ Effective Solvency Requirement 5,141 Net Assets 6,953 ∑ Capital 6,952 ∑ Actual Solvency Capital 5,524 ∑ Solvency Margin 2,397 ∑ Solvency Margin Adjusted 1,812 ∑ Solvency Margin Adjusted 1,812 Amounts are in $ million. ∑ is the sum across all applicable funds. Aggregate Minimum Solvency Capital is the greater of Fixed Capital Amount & ∑ MSC.

8 19 October 2016 Main components In total for all insurers, Deductions From Capital is $1.4 billion or 21% of net assets. This is most significant for general insurers (32% of net assets) and least significant for specialist health insurers (8% of net assets) and life insurers (9% of net assets). The largest components are deferred tax assets ($0.6 billion) and goodwill & other intangible assets ($0.6 billion). In total for all insurers, Minimum Solvency Capital is $3.1 billion or 45% of net assets. This is most significant for life insurers (67% of net assets) and least significant for specialist health insurers (19% of net assets). In total for general insurers, Minimum Solvency Capital is $1.1 billion or 32% of net assets. The largest components are Asset Risk Capital Charge ($0.5 billion), Insurance Risk Capital Charge ($0.2 billion) and Catastrophe Risk Capital Charge ($0.2 billion). Some insurers have a significant negative Outstanding Claims Adjustment within Insurance Risk Capital Charge due to their risk margins being set at greater than the required 75% probability of sufficiency. In total for specialist health insurers, Minimum Solvency Capital is $0.11 billion or 19% of net assets. The largest components are Insurance Risk Capital Charge $0.06 billion and Asset Risk Capital Charge $0.04 billion. In total for life insurers, Minimum Solvency Capital is $1.9 billion or 67% of net assets. The largest component is Insurance Risk Capital Charge less Liabilities of $1.5 billion. Generally insurers have relatively low risk assets and use highly rated reinsurers. However, there are exceptions – some insurers have significant investments in higher risk assets and/or with substantial concentration, and some insurers use unrated reinsurers.

9 19 October 2016 Results There is considerable variation in reported solvency ratios, adjusted for licence conditions. The median is 171% with upper and lower quartiles of 307% and 133% respectively. For about a quarter of insurers, the difference between solvency margin in excess of licence conditions at the start and end of the financial year during 2015 was small (within ± 4% of start of year capital). For about a quarter of insurers there was a material reduction in solvency margin and about half there was a material increase. The solvency return collects information on target capital. A variety of measures are used for target capital. The levels have been compared to Minimum Solvency Capital (adjusted for licence condition). The median is 33% with upper and lower quartiles of 53% and 20%. Converted into the equivalent solvency ratio terms, this means insurers are generally targeting a minimum solvency ratio (adjusted for licence condition) of between 120% and 153%. About a quarter of insurers did not provide information on their capital target, or it was unclear. At financial year end during 2015 insurers generally reported a solvency position at or above their target level. The median difference between reported solvency position and target capital, as a % of Minimum Solvency Capital (adjusted for licence condition) was +14%, with upper and lower quartiles of +33% and +1%. Feedback on solvency returns The analysis has identified some issues that are relevant generally to insurers as well as some issues that are specific to some individual insurers. RBNZ is in the process of providing feedback through multiple channels as appropriate (i.e. discussions with insurers, industry newsletter, publications, guidance, etc.).

10 19 October 2016 Home jurisdiction solvency requirements There are nine different jurisdictions for licensed New Zealand insurers that are subject to home jurisdiction solvency requirements. This includes Australia (20 insurers), three EU countries (seven insurers), three US states (three insurers) and two Asian countries (four insurers). There is a wide range of methods and presentations for solvency requirements across these jurisdictions, which makes comparisons difficult. This paper includes a very brief, and simple, analysis of 19 insurers subject to Australian solvency requirements (one insurer was in the middle of restructuring at their financial year end date during 2015 and is excluded). There is considerable variation in reported solvency ratios. For the licensed New Zealand insurers that are subject to Australian solvency requirements, the median is 184% with upper and lower quartiles of 242% and 118% respectively. Some generalised feedback on common issues and queries from a review of the 2015 solvency exempt returns is included.

11 19 October 2016 Introduction Solvency refers to the ability of an insurer to meet its obligations to policyholders when they fall due. The nature of insurance is that financial outcomes are uncertain – indeed the primary purpose of insurance is to transfer financial risk away from policyholders in return for a premium. Solvency requirements are important for insurer soundness, and for maintaining public confidence in the sector. This is because the minimum requirements are intended to ensure that insurer obligations to policyholders and other creditors will be met in full with a reasonably high probability (but there are no guarantees). Without solvency requirements, some insurers may have chosen to hold less capital with the consequence of a greater risk of obligations not being met. Risk-based solvency requirements, such as the Reserve Bank of New Zealand (“RBNZ”) solvency standards, require a minimum amount of capital to be held that is calculated with respect to the main types of financial risks that insurers face. This paper reviews the regulatory solvency returns provided to RBNZ by licensed New Zealand insurers as at their financial year end date during 2015. An overview of solvency requirements for licensed New Zealand insurers is provided, although details are omitted. Interested readers are referred to the solvency standards for the detail of these requirements2 . This paper provides an analysis of solvency results, components of solvency calculations, and some other information reported in solvency returns across all insurers that are licensed in New Zealand. Commentary and generalised feedback is provided on some aspects of these. However, policy considerations and supervisory responses are out of scope for this paper. For some insurers there have been material changes (positive or negative) to their solvency position and/or their circumstances since their 2015 financial year end date. Readers should not rely on information and comments in this paper for the current solvency position of any insurer. Unlike some jurisdictions, New Zealand legislation permits insurers to offer more than one type of insurance (i.e. life and general, life and health, etc.). Solvency calculation and reporting is not necessarily separated by type of insurance – for example due to composite policies and the absence of a solvency standard specific to health insurance. In practice almost all of the insurers that provide more than one type of insurance have a predominant type, with a very small percentage of their insurance from other types. Our analysis by type of insurance classifies every insurer based on their main type of insurance. The figures in the appendices contain anonymised information by insurer, in order to present the distribution of amounts (in percentage terms) across insurers. Dollar amounts are not shown by insurer. The order of insurers in each figure has been randomised independently of all other tables. This means rows in a table do not correspond to the same rows in any other table, other than for totals. 2 http://www.rbnz.govt.nz/regulation-and-supervision/insurers/regulation

12 19 October 2016 Regulatory framework for solvency Insurers licensed in New Zealand are subject to various solvency requirements under the Insurance (Prudential Supervision) Act 2010 (“IPSA”) and Insurance (Prudential Supervision) Regulations 2010 (“IPSR”). The solvency requirements apply continuously and there is also a three-year forward looking solvency assessment required by section 24 of IPSA. Licensed insurers that are domiciled in New Zealand are subject to solvency standards issued by RBNZ, as the prudential supervisor of insurers. Relevant solvency standards are applied by licence conditions which generally specify a minimum solvency margin of $0. Effectively this sets a risk-based minimum capital requirement for the insurer as a whole, or for portions of the insurer. In addition, there is a minimum level of capital for the insurer as a whole, unless exempted. This is referred to as minimum capital in IPSA, but to reduce confusion with other capital requirements (which are minimums) for this paper we refer to as Fixed Capital Amount. This is the terminology used in the solvency standards from 2014 versions onwards. Fixed Capital Amount acts as a floor to the risk-based calculations. For some licensed insurers with special circumstances the solvency standards do not adequately reflect the risks being borne by the insurer and a non-standard licence condition increases the effective capital requirement. The condition either requires a minimum solvency margin for a specified amount that is greater than $0, or requires a minimum solvency ratio for a specified level that is greater than 100%. Foreign insurers are licensed for the insurer as a whole not just for the New Zealand branch. Most licensed insurers that operate as branches in New Zealand are subject to solvency requirements of their home supervisor. An exemption notice may be issued under section 59 of IPSA if certain requirements are met. One of these requirements may be satisfied if the foreign insurer is domiciled in a jurisdiction prescribed by regulation 5 of IPSR. Three branch insurers are subject to New Zealand solvency standards in respect of their New Zealand insurance business – because they are not domiciled in a prescribed jurisdiction for the purposes of statutory funds requirements (subpart 3 of part 2 of IPSA). One insurer in liquidation and on a provisional licence is not subject to any insurer solvency requirements.

13 19 October 2016 Insurers with New Zealand solvency exemptions at financial year end date during 2015 are based in certain approved jurisdictions of Australia, European Union (three countries), United States of America (three states), and Asia (two countries). Figure 1 – Jurisdiction of applicable solvency requirements A schedule setting out jurisdictions and some other aspects of solvency requirements by insurer are shown in the Appendices as figure A1. Some of these other aspects are discussed in later sections of this paper. All insurers are required to report their solvency position to RBNZ at financial year end and half year using either a solvency return or solvency exempt return template provided on the website3 . Immediate notification is required for any breach of solvency requirements, or any likely breach within the next 3 years under section 24 of IPSA. 3 http://www.rbnz.govt.nz/regulation-and-supervision/insurers/new-zealand-insurer-data-collections

14 19 October 2016 Data for analysis This paper analyses solvency reporting for financial year end dates during 2015. The reporting dates vary by insurer between 20 February and 31 December 2015. Most insurers have a financial year end date that is the end of a calendar year quarter. By number of insurers the most common date is 31 December, but weighted by size of insurer the most common date is 30 June. Financial year end reporting has been chosen because there is more information available to aid interpretation than at half year. Financial statements are more detailed, there is a financial condition report at financial year end, and insurers that are subject to New Zealand solvency standards are required to have a review by their auditor of the financial year end solvency return. Most solvency data included in this paper is as reported by insurers in their solvency return or solvency exempt return. Some factual information has been adjusted – for example, where the relevant solvency standards and exemptions have been entered incorrectly in the returns we have used corrected data. There are some figures where the solvency standards do not appear to have been applied correctly (see feedback section). These have not been corrected, in part because we do not always have enough information to quantify the impacts and in part because some issues are identifiable as issues but there is subjectivity over the correct amounts. The 62 insurers that are subject to New Zealand solvency requirements are discussed in Part One, while the 35 insurers that are subject to home jurisdiction solvency requirements are discussed in Part Two. The Appendices contain tables and graphs for individual insurers (anonymously in the public version). One insurer was licensed during 2015 but did not have a financial year end date during 2015, and is excluded from the analysis. Another insurer was undergoing a restructuring on their 2015 balance date and had two licensed insurers on this date but is treated as one insurer for this analysis.

15 19 October 2016 Terminology This paper generally uses terms defined in IPSA or in the solvency standards. However, in some cases the official terminology may not be consistent or may cause confusion – for example where a term means different things in different solvency standards. We have attempted to clarify or use an alternative term or description in those cases. Reference to insurer includes all forms of insurer (reinsurer, direct insurer, captive insurer) unless explicitly stated otherwise. “Fund” is used to describe the portion of an insurer to which a solvency standard applies. This could be the whole insurer, the New Zealand insurance business of a foreign insurer, the non-life insurance business of an insurer with life and non-life solvency standards applied, a statutory fund, etc. Reference to Non-Life solvency standard includes all of the solvency standards for non-life insurance business (including run-off, captive and NZLGIC), except where there is mention of a specific solvency standard. SS is used as short-hand for solvency standard in figures.

16 19 October 2016 Part One – New Zealand solvency requirements Overview of New Zealand solvency requirements Solvency standards At financial year end dates during 2015 there were 62 licensed insurers subject to New Zealand solvency requirements. Solvency standards are issued by RBNZ and published on the website4 . The solvency standards that were in effect for financial year end dates during 20155 are:  Life Insurance Business 2014.  Variable Annuity Business 2015.  Non-Life Insurance Business 2014.  Non-Life Insurance Business in Run-Off 2014.  NZLGIC 2014.  Captive Insurers Transacting Non-Life Insurance Business 2014. The solvency standard for Variable Annuity Business 2015 was issued during 2015 but was not in effect at any insurer’s financial year end date during 2015. This solvency standard applies to one insurer but they were licensed during 2015 and did not have their first financial year end date until March 2016. There is one solvency standard, NZLGIC 2014, which is specific to an individual insurer to cater for a particular circumstance. Otherwise, solvency standards are generic and are intended to be applied to all relevant insurers (in similar circumstances). There are four non-life solvency standards – the generic one, in run￾off, NZLGIC, and captive. The run-off and captive solvency standards have some higher and lower factors respectively - to allow for reduced risk diversification during run-off, and the special relationship between a captive and sole policyholder. Solvency standards are applied by way of licence condition under section 21 of IPSA. Insurers also have a licence condition requiring RBNZ to be advised if circumstances change so that additional solvency standards need to be applied. Solvency standards specify calculations for: Solvency Margin (“SM”) = ASC – MSC Solvency Ratio (“SR”) = ASC  MSC where ASC = Actual Solvency Capital = Capital - Deductions From Capital MSC = Minimum Solvency Capital = calculation based on risk capital charges 4 http://www.rbnz.govt.nz/regulation-and-supervision/insurers/regulation. 5 All of these solvency standards remain in effect at time of writing.

17 19 October 2016 Fixed Capital Amount Solvency standards also specify a Fixed Capital Amount – the minimum capital required by the licensed insurer as a whole, unless exempted. If more than one solvency standard applies, the greatest Fixed Capital Amount applies (not the sum of Fixed Capital Amounts). Licence conditions Licence conditions specify a minimum solvency margin or a minimum solvency ratio for each Fund. The standard licence condition is a minimum solvency margin of $0. For some insurers with special circumstances the solvency standards do not adequately reflect the risks borne and additional requirements have been applied by non-standard licence condition under section 21 of IPSA. The non-standard licence conditions require a minimum solvency margin of a specified amount greater than $0 or a minimum solvency ratio of a specified level that is greater than 100%. Since insurers are required to comply with the licence conditions, RBNZ calculates the insurer’s position relative to the requirements as follows: Solvency Margin Adjusted (“SMA”) = ASC – (MSC + LC) Solvency Ratio Adjusted (“SRA”) = ASC  (MSC + LC) where ASC = Actual Solvency Capital = Capital - Deductions From Capital MSC = Minimum Solvency Capital = calculation based on risk capital charges LC = $ impact of licence condition for minimum solvency margin or minimum solvency ratio LC, if minimum solvency margin = LC$ LC, if minimum solvency ratio = (LC% - 100%)  MSC Consolidation Complicating matters slightly, some insurers have subsidiaries which conduct insurance business (whether in New Zealand or overseas). For these insurers solvency standards and licence conditions apply in respect of the licensed insurer on a solo basis, and also in respect of the consolidation of the licensed insurer and all of its subsidiaries which conduct insurance business (other subsidiaries are not consolidated). Multiple solvency requirements Each solvency standard applies to a Fund (all of the business that is subject to that solvency standard), or in the case of life insurance business to each Life Fund (there may be more than one). If there is more than one Fund, assets and liabilities are allocated to the relevant Funds by the insurer.

18 19 October 2016 Effective solvency requirement The effective solvency requirement in respect of each Fund: Effective solvency requirement = NQCI + DFC + MSC + LC where NQCI = allocated non-qualifying capital instruments6 DFC = Deductions From Capital MSC = Minimum Solvency Capital = calculation based on risk capital charges LC = $ impact of licence condition for minimum solvency margin or minimum solvency ratio LC, if minimum solvency margin = LC$ LC, if minimum solvency ratio = (LC% - 100%)  MSC Figure 2 – Simplified diagram of NZ solvency requirements (Fund level) The effective solvency requirement for the insurer as a whole is the sum of requirements in respect of each Fund but subject to the Fixed Capital Amount as a minimum for Aggregate Minimum Solvency Capital. 6 The solvency standards only permit qualifying capital instruments to be counted as Capital. NQCI Deductions From Capital Minimum Solvency Capital Licence Condition Effective Solvency Requirement Net Assets Capital Actual Solvency Capital Solvency Margin Solvency Margin Adjusted Solvency Margin Adjusted

19 19 October 2016 Figure 3 – Simplified diagram of NZ solvency requirements (insurer level) The Solvency Margin Adjusted must not be less than zero for every Fund, including on a consolidated basis if applicable. ∑ NQCI < 0.5 ∑ Deductions From Capital 1,428 Aggregate Minimum Solvency Capital 3,127 ∑ Licence Condition 585 ∑ Effective Solvency Requirement 5,141 Net Assets 6,953 ∑ Capital 6,952 ∑ Actual Solvency Capital 5,524 ∑ Solvency Margin 2,397 ∑ Solvency Margin Adjusted 1,812 ∑ Solvency Margin Adjusted 1,812 Amounts are in $ million. ∑ is the sum across all applicable funds. Aggregate Minimum Solvency Capital is the greater of Fixed Capital Amount & ∑ MSC.

20 19 October 2016 Solvency standards Solvency standards are applied by licence condition based on the nature of the insurance business undertaken and other circumstances of the insurer. With the current solvency standards that have been issued (and not revoked), in theory an insurer could have up to three solvency standards applied. 53 insurers are subject to one solvency standard, nine insurers are subject to two solvency standards, and no insurers are subject to three solvency standards, as shown in figure 4 below. At financial year end dates during 2015 there were no insurers subject to the Variable Annuity Business 2015 solvency standard. Figure 4 – NZ solvency standards applied

21 19 October 2016 Fixed Capital Amount Eight insurers had an exemption under regulation 9(1)(b) of IPSR (“small insurer exemption”). For these insurers the Fixed Capital Amount is effectively $0 (as no solvency standard permits a negative figure for Minimum Solvency Capital). The other 54 insurers are subject to a Fixed Capital Amount, being the greatest amount specified in the applied solvency standards: Life 2014 = $5 million Variable Annuity 2015 = $5 million Non-Life 2014 = $3 million Non-Life Run-Off 2014 = $3 million NZLGIC 2014 = $3 million Captive Non-Life 2014 = $1 million Of the 54 insurers subject to a Fixed Capital Amount, for 36 insurers there is no effect because the Aggregate Minimum Solvency Capital (i.e. the sum of risk capital charges) is larger than the specified Fixed Capital Amount. This is shown in figure 5 below. The impact of Fixed Capital Amount is to increase Aggregate Minimum Solvency Capital by between $0.026 million and $4.3 million; and is $22 million in total (an average of $1.3 million for the 18 impacted insurers). Figure 5 – Fixed Capital Amount requirement Non-solvency exempted branches The three branches that are subject to New Zealand solvency standards are not exempted from minimum capital requirements.

22 19 October 2016 Licence conditions Licence conditions specify a minimum solvency margin or a minimum solvency ratio for each Fund. A Fund is the portion of the insurer (or the whole insurer) to which a solvency standard is applied. The standard licence condition is a minimum solvency margin of $0. For some insurers with special circumstances the solvency standards do not adequately reflect the risks borne and additional requirements have been applied by non-standard licence condition under section 21 of IPSA. The non-standard licence conditions require a minimum solvency margin of a specified amount greater than $0 or a minimum solvency ratio of a specified level that is greater than 100%. RBNZ is required to consult with insurers before applying or varying a licence condition. There is a regular review (typically annually) of all non-standard licence conditions to ensure the condition remains appropriate for the circumstances. At financial year end dates during 2015 there were four insurers with a non-standard solvency-related licence condition. In all cases the licence condition specifies a higher solvency margin, rather than specifying a higher solvency ratio. Since insurers are required to comply with the licence conditions, RBNZ calculates the insurer’s position relative to the requirements as follows: Solvency Margin Adjusted (“SMA”) = ASC – (MSC + LC) Solvency Ratio Adjusted (“SRA”) = ASC  (MSC + LC) where ASC = Actual Solvency Capital = Capital - Deductions From Capital MSC = Minimum Solvency Capital = calculation based on risk capital charges LC = $ impact of licence condition for minimum solvency margin or minimum solvency ratio LC, if minimum solvency margin = LC$ LC, if minimum solvency ratio = (LC% - 100%)  MSC

23 19 October 2016 Consolidation Insurers with subsidiaries that conduct insurance business (whether in New Zealand or overseas) have solvency requirements that apply on a solo basis as well as on a consolidated basis (including only insurance subsidiaries). While there were previously several licensed insurers with subsidiaries conducting insurance business, by financial year end dates during 2015 there were only two instances. One of those insurers has two insurer subsidiaries domiciled in New Zealand (i.e. insurers which are subject to New Zealand solvency requirements in their own right as well as through consolidation). Accordingly it is not a surprise that for this insurer the solvency margin at financial year end date during 2015 is lower on a solo basis than on a consolidated basis. The other insurer has multiple foreign-domiciled insurer subsidiaries (i.e. insurers which are not themselves subject to New Zealand solvency requirements other than through the consolidation). For this insurer the solvency margin at financial year end date during 2015 is lower on a solo basis than on a consolidated basis, due to strongly capitalised subsidiaries. However, in future the most onerous solvency requirement could instead be on a consolidated basis, if the subsidiaries become weakly capitalised. There are other insurers with related insurers. However, none of the other related insurers are subsidiaries of the insurer that is licensed in New Zealand, and therefore for these insurers there are no consolidated solvency requirements in effect in New Zealand.

24 19 October 2016 Multiple solvency requirements For this paper, a solvency requirement means a minimum capital requirement, a minimum solvency margin requirement or a minimum solvency ratio requirement. The number of solvency requirements is a function of the nature of the insurance business (hence the solvency standards that have been applied), the number of Life Funds for life insurers, any subsidiaries conducting insurance business, and Fixed Capital Amount requirements (if not exempted). The large number of different combinations of solvency requirements reflects:  The permissive nature of the regime (insurers can provide more than one type of insurance whereas as in some jurisdictions they cannot).  The principle of avoiding unnecessary compliance costs (section 4(h) of IPSA) by provision of various exemptions.  Choices made by insurers (some life insurers opt to have a Life Fund outside their Statutory Fund when they could have a Statutory Fund covering their entire business). For financial year end dates during 2015 there were eight insurers with an exemption to Fixed Capital Amount requirements under regulation 9(1)(b) of IPSR (“small insurer exemption”). Of these insurers, seven have a single solvency standard applied and one has two solvency standards applied. The remaining 54 insurers have one or more solvency standards applied and a Fixed Capital Amount requirement. There are 28 insurers that have only a Non-Life solvency standard applied and two insurers have only a Non-Life solvency standard applied but have subsidiaries that conduct insurance business (thus have solo and consolidated requirements). There is one insurer has only the Life solvency standard applied but has a Statutory Fund exemption under regulation 9(1)(a) of IPSR (“small life insurer exemption”). This insurer has the small life insurer exemption but does not have a small insurer exemption because the combined life and health insurance premium does not qualify under regulation 9(1)(b) of IPSR, and health insurance can be covered under either Life or Non-Life solvency standards. There are four insurers that have only the Life solvency standard applied and have elected to have no funds outside the Statutory Fund. Eleven insurers have only the Life solvency standard applied and are required to have a Life Fund outside the Statutory Fund (due to having health insurance business and no general insurance business) or alternatively have elected to have a Life Fund outside the Statutory Fund (to provide greater flexibility for capital management). There are eight insurers that have the Life solvency standard and one of the Non-Life solvency standards applied. Five insurers have a Statutory Fund exemption under regulation 9(1)(a) of IPSR (“small life insurer exemption”). Three insurers have elected to have no Life Fund outside the Statutory Fund.

25 19 October 2016 Figure 6 – Multiple solvency requirements consol. = consolidated, SF = Statutory Fund, o/s = outside In theory there could be insurers with different arrangements than the combinations that are in effect, as described above. Life insurers could create multiple Statutory Funds – none of the life insurers that are subject to New Zealand solvency standards have chosen to do so. Insurers could be subject to three solvency standards, although there are none currently. None of the insurers that are subject to both Life and Non-Life solvency standards and not exempted from Statutory Fund requirements have chosen to have a Life Fund outside the Statutory Fund (perhaps because the desired capital flexibility is available through the Non-Life solvency standard which does not have the additional Statutory Fund restrictions). There are currently no licensed life insurers with non-life insurer subsidiaries or vice versa.

26 19 October 2016 Capital For solvency purposes, Capital includes high quality capital instruments, reserves (other than for assessed likelihood of loss), retained earnings and non-controlling interests. Qualifying capital instruments must be permanent, loss absorbing, not impose an unavoidable service charge, and rank behind policyholders and other creditors upon wind-up. Figure 7 – Capital components Capital components by insurer are shown in the Appendices as figure A7. At financial year end dates during 2015 there was only one insurer using a lower figure for Capital than their net assets. In this case non-qualifying capital instruments comprised about 2% of net assets due to being a restricted reserve (not freely available to absorb losses). By value, most of the Capital amount relates to shares or other instruments, as opposed to reserves. In part this is due to the substantial negative retained earnings for some general insurers with large losses arising from the Canterbury earthquakes. There are some insurers which recorded all of their Capital under qualifying shares even though they actually have non-zero retained earnings or are a mutual insurer – thus retained earnings and mutual members’ funds are slightly understated and qualifying shares are slightly overstated in figure 7 below. Head office balance refers to branch insurers. qualifying Shares qualifying Perpetual & Credit Union qualifying Reserves Retained Earnings Mutual Members' Funds Head Office Balance Total All 5,898.9 4.9 ( 226.0) 566.7 528.1 179.6 6,952.2 General 4,478.7 0.1 ( 235.5) ( 749.1) - - 3,494.2 Life 1,388.2 4.7 9.3 1,252.0 19.5 179.6 2,853.4 Health 32.0 - 0.2 63.8 508.6 - 604.5 qualifying Shares qualifying Perpetual & Credit Union qualifying Reserves Retained Earnings Mutual Members' Funds Head Office Balance Total All 85% 0% ( 3%) 8% 8% 3% 100% General 128% 0% ( 7%) ( 21%) - - 100% Life 49% 0% 0% 44% 1% 6% 100% Health 5% - 0% 11% 84% - 100% Main type of insurance Main type of insurance Capital components (% of Net Assets) Capital components ($ million)

27 19 October 2016 Deductions From Capital Deductions From Capital comprises assets that in full or in part are not readily available to meet liabilities in a high stress situation. The components of Deductions From Capital are:  Goodwill and other intangible assets.  Deferred tax assets.  Equity and subordinated loans in related parties.  Equity and subordinated loans in financial institutions (in excess of limits).  Assets with fair value of limited reliability (for own credit risk or for not being based on an active market).  Defined benefit scheme surplus.  Declared but unpaid dividends and capital repayments.  Deferred acquisition costs unsupported by a prescribed liability adequacy test.  Restricted branch net assets. The median Deductions From Capital is 3% of Net Assets. The upper and lower quartiles are <1% and 12% respectively. Figure 8 – Deductions From Capital as % Net Assets

28 19 October 2016 By value, approximately 40% of Deductions From Capital relate to goodwill, 40% to deferred tax assets, and the rest is mostly unpaid declared dividends and related party equity or subordinated debt. Figure 9 – Deductions From Capital components Deductions From Capital components by insurer are shown in the Appendices as figure A9. About half of the insurers have zero or very low Deductions From Capital (2% or less of net assets). However, for some insurers the Deductions From Capital amount is a material proportion of net assets with a maximum of 69% and eight insurers having at least 30%. Goodwill & Intangible Deferred Tax Assets Related Party Declared Dividends Deferred Acquisition Cost excess Other Total All 551.1 624.0 100.9 126.5 16.6 9.3 1,428.5 General 379.1 546.7 56.2 115.3 4.3 8.3 1,109.8 Life 146.3 64.5 44.8 11.2 - 1.0 267.8 Health 25.7 12.9 - - 12.3 - 51.0 Goodwill & Intangible Deferred Tax Assets Related Party Declared Dividends Deferred Acquisition Cost excess Other Total All 8% 9% 1% 2% 0% 0% 21% General 11% 16% 2% 3% 0% 0% 32% Life 5% 2% 2% 0% - 0% 9% Health 4% 2% - - 2% - 8% Main type Deductions From Capital components ($ million) of insurance Main type of insurance Deductions From Capital components (% of Net Assets)

29 19 October 2016 Aggregate Minimum Solvency Capital Most insurers are subject to only one solvency standard. There are three insurers with mainly life insurance business with some general insurance business and six insurers with mainly general insurance business with some life insurance business. Figure 10 – Aggregate Minimum Solvency Capital components Aggregate Minimum Solvency Capital components by insurer are shown in the Appendices as figure A10. For insurers with more than one solvency standard applying, the Minimum Solvency Capital requirement under the primary solvency standard (i.e. for the main type of insurance) is generally much greater (typically > 10 times) the Minimum Solvency Capital requirement under the secondary solvency standard. There is one exception – an insurer with mainly life insurance business has a much larger requirement for their general insurance business. The insurers for which the Fixed Capital Amount has the effect of increasing solvency requirements includes some insurers in run-off, some captive insurers, some recent new entrants, and several insurers in other circumstances that are not small enough to be exempted from the minimum capital requirement. The effect of Fixed Capital Amount is generally less than 20% of net assets. There are four insurers with the effect of Fixed Capital Amount of between 42% and 64% of net assets. effect of Fixed Capital Amount Non-Life SS Minimum Solvency Capital Life SS Minimum Solvency Capital Variable Annuity SS Minimum Solvency Capital Aggregate Minimum Solvency Capital All 22.4 1,216.9 1,887.4 - 3,126.7 General 15.4 1,096.5 0.2 - 1,112.1 Life 4.7 9.6 1,887.2 - 1,901.5 Health 2.2 110.8 - - 113.1 effect of Fixed Capital Amount Non-Life SS Minimum Solvency Capital Life SS Minimum Solvency Capital Variable Annuity SS Minimum Solvency Capital Aggregate Minimum Solvency Capital All 0% 18% 27% - 45% General 0% 31% 0% - 32% Life 0% 0% 66% - 67% Health 0% 18% - - 19% Main type of insurance Main type Aggregate Minimum Solvency Capital components ($ million) of insurance Aggregate Minimum Solvency Capital components (% of Net Assets)

30 19 October 2016 Minimum Solvency Capital Minimum Solvency Capital effectively comprises the sum of various risk capital charges. The solvency standards contain risk capital charges in respect of Insurance Risk, Catastrophe Risk, Asset Risk, Foreign Currency Risk, Interest Rate Risk, Asset Concentration Risk, Reinsurance Recovery Risk, and Variable Annuities. There are some differences between solvency standards in the way the risk charges are constructed, the components included, and some of the factors. Examples of differences include:  To improve comparability across the various solvency standards, our analysis in respect of Insurance Risk Capital Charge subtracts the value of liabilities for Life insurance solvency standards (this is actually subtracted from the sum of risk charges but the liability value is included within Insurance Risk Capital Charge only).  The Asset Risk Capital Charge for the Life solvency standard includes Foreign Currency Risk and Interest Rate Risk, whereas these are separated in Non-Life insurance solvency standards.  The Insurance Risk Capital Charge for the Captive Non-Life solvency standard caters for Catastrophe Risk.  In the Variable Annuity solvency standard, Insurance Risk and Asset Risk are combined in order to allow for dynamic hedging.

31 19 October 2016 Non-Life solvency standards Despite some differences in the detail of requirements, for analysis purposes the various Non-Life solvency standards (Non-Life, Non-Life Run-Off, NZLGIC, Non-Life Captive) are grouped together since they are reasonably comparable.

32 19 October 2016 Non-Life SS Minimum Solvency Capital Figure 11 – Non-Life SS Minimum Solvency Capital components RI = reinsurance Non-Life Solvency Standard Minimum Solvency Capital components by insurer are shown in the Appendices as figure A11. Minimum Solvency Capital under the Non-Life solvency standards is made up of approximately 50% for Asset Risk Capital Charge, 25% for Insurance Risk Capital Charge, and the rest other. A reason that Insurance Risk Capital Charge is not larger is because the Non-Life solvency standards provide a credit for risk margins7 in excess of 75% probability of sufficiency (90% for Non-Life Run-Off and NZLGIC solvency standards). This is shown as a negative value for Outstanding Claims Adjustment and was large at financial year end dates during 2015. For health insurers the Underwriting Risk Capital Charge may be significantly understated due to the use of a short period for Premium Liabilities. Currency Risk Capital Charge and Interest Rate Risk Capital Charge are small in total reflecting the generally conservative approach to investments used by general and health insurers, including matching to liabilities. There are seven insurers with Non-Life Minimum Solvency Capital components of at least 30% of net assets for one of the Insurance Risk Capital Charge, Catastrophe Risk Capital Charge or Reinsurance Recovery Risk Capital Charge components. 7 Risk margin is the portion of the balance sheet liability that is in excess of the best estimate. NZ IFRS 4 appendix D accounting standard requires a risk margin for non-life insurance accounting methods. RBNZ solvency standards specify a requirement for the risk margin to be calculated (for solvency purposes) at 75% probability of sufficiency (or 90% for certain solvency standards). Probability of sufficiency is the probability that the best estimate plus risk margin is at least as great as the ultimate cost of the liability. Insurance Risk Capital Charge Catastrophe Risk Capital Charge RI Recovery Risk Capital Charge Asset Risk Capital Charge Currency Risk Capital Charge Interest Rate Risk Capital Charge Total All 263.0 197.9 89.5 575.9 18.3 72.2 1,216.9 General 205.6 191.8 89.5 530.2 16.5 63.0 1,096.5 Life 2.0 1.8 - 5.2 0.5 0.1 9.6 Health 55.4 4.3 - 40.6 1.4 9.2 110.8 Insurance Risk Capital Charge Catastrophe Risk Capital Charge RI Recovery Risk Capital Charge Asset Risk Capital Charge Currency Risk Capital Charge Interest Rate Risk Capital Charge Total All 6% 5% 2% 14% 0% 2% 29% General 6% 5% 3% 15% 0% 2% 31% Life 1% 1% - 3% 0% 0% 6% Health 9% 1% - 7% 0% 2% 18% Main type Non-Life Solvency Standard Minimum Solvency Capital components ($ million) of insurance Main type of insurance Non-Life Solvency Standard Minimum Solvency Capital components (% of Net Assets)

33 19 October 2016 Four of the Non-Life solvency standard Minimum Solvency Capital components are expressed relative to a suitable measure of exposure to provide an implied average risk factor, shown in figure 12 below. Figure 12 – Non-Life SS implied average risk factors Non-Life Solvency Standard implied average risk factors by insurer are shown in the Appendices as figure A12. Currency Risk is excluded from this figure because the Currency Risk Capital Charge is fixed at 22% of the sum of net open exposures. Interest Rate Risk Capital Charge is excluded because a suitable exposure amount is not available for all insurers – while interest-bearing assets are generally identifiable in the solvency returns, it is not always clear which liabilities have been discounted and which have not. For most insurers, the implied average risk factor for Insurance Risk Capital Charge is the weighted average of the factors for Run-Off Risk and Underwriting Risk set out in the solvency standard. However some insurers have adjustments for risk margins not equal to the prescribed probability of sufficiency (generally negative adjustment for higher risk margins), and some insurers have an additional charge for Long-Term Risks. There are seven insurers with Catastrophe Risk Capital Charge of at least 10% of annual gross premium, although a few are much larger. Reinsurance Recovery Risk Capital Charge is almost always between 2% and 4% of reinsurance assets, reflecting limited use of unrated or poorly rated reinsurers. Asset Risk Capital Charge as a percentage of applicable assets varies considerably across insurers. There are some with implied average risk factor of only 1% (indicating most assets are cash or government securities), while four insurers have an implied average risk factor of more than 15% (and up to 44%). Insurance Risk Capital Charge as % of Catastrophe Risk Capital Charge as % of Reinsurance Recovery Risk Capital Charge as % of Asset Risk Capital Charge as % of Premium Liabilities

• Net Outstanding Claims Liabilities Annual Gross Premium Reinsurance Assets Assets (excluding reinsurance & Deductions From Capital) All 6% 3% 3% 6% General 6% 4% 3% 6% Life 30% 2% - 7% Health 15% 0% - 5% Main type Non-Life Solvency Standard implied average risk factors of insurance

34 19 October 2016 Non-Life SS Insurance Risk Capital Charge Figure 13 – Non-Life SS Insurance Risk Capital Charge components Non-Life Solvency Standard Insurance Risk Capital Charge components by insurer are shown in the Appendices as figure A13. No insurers have reported a Premium Liabilities Adjustment. This appears to be a consequence of non-life insurers generally forecasting their current premiums to be adequate (at 75% probability of sufficiency). The few insurers which forecast a premium deficiency all have a longer period for unearned premiums in their financial statements than the assessment period for Premium Liabilities, and as a consequence have a nil adjustment despite the premium deficiency. For general insurers in aggregate, the Underwriting Risk Capital Charge is smaller than the Run-Off Risk Capital Charge before adjustment. However, there is a large negative adjustment for net outstanding claims reserves that are in excess of minimum requirements (i.e. risk margins8 are in excess of 75% or 90% probability of sufficiency). For those insurers net assets reflect a more conservative provision than required. In aggregate the adjusted Run-Off Risk Capital Charge is near zero. For health insurers in aggregate, the Underwriting Risk Capital Charge is considerably greater than the Run-Off Risk Capital Charge. The reason for the low Run-Off Risk Capital Charge is that for most health insurers the vast majority of claims costs are paid within a month or so of occurrence – the exception is one health insurer which does not cover surgery. There are also two insurers with a small negative figure for Outstanding Claims Adjustment. 8 Risk margin is the portion of the balance sheet liability that is in excess of the best estimate. NZ IFRS 4 appendix D accounting standard requires a risk margin for non-life insurance accounting methods. RBNZ solvency standards specify a requirement for the risk margin to be calculated (for solvency purposes) at 75% probability of sufficiency (or 90% for certain solvency standards). Probability of sufficiency is the probability that the best estimate plus risk margin is at least as great as the ultimate cost of the liability. Underwriting Risk (before adj.) Premium Liabilities Adjustment Run-Off Risk (before adj.) Outstanding Claims Adjustment Long-Term Risk Captive Total All 240.3 - 260.9 ( 243.5) 1.6 3.8 263.0 General 194.1 - 249.0 ( 242.8) 1.6 3.8 205.6 Life 1.9 - 0.1 - - - 2.0 Health 44.3 - 11.8 ( 0.7) - - 55.4 Underwriting Risk (before adj.) Premium Liabilities Adjustment Run-Off Risk (before adj.) Outstanding Claims Adjustment Long-Term Risk Captive Total All 6% - 6% ( 6%) 0% 0% 6% General 6% - 7% ( 7%) 0% 0% 6% Life 1% - 0% - - - 1% Health 7% - 2% ( 0%) - - 9% Main type Non-Life Solvency Standard Insurance Risk Capital Charge components ($ million) of insurance Main type of insurance Non-Life Solvency Standard Insurance Risk Capital Charge components (% of Net Assets)

35 19 October 2016 Only one insurer has recorded an additional charge for Long-Term Risk. There are several insurers which appear to have some non-life insurance business with long￾term characteristics but which have nil additional charge for Long-Term Risk. The Insurance Risk Capital Charge for captives is shown separately since it is of the nature of a Catastrophe Risk Capital Charge. One of the five captive insurers has a nil charge due to nil claim retention.

36 19 October 2016 Non-Life SS Catastrophe Risk Capital Charge Catastrophe Risk Capital Charge in the Non-Life solvency standards is calculated based on Extreme Events (being calibrated return period net losses), No Extreme Events (being twice maximum net retention), or an Alternative Method (recommended by the appointed actuary). The solvency standards specify whether Extreme Event or No Extreme Event methods apply depending on the circumstances of the insurer. The Alternative Method provides an option for the appointed actuary to recommend a different method when circumstances warrant it in their opinion, but subject to RBNZ agreement. Figure 14 – Non-Life SS Catastrophe Risk Capital Charge method Non-Life Solvency Standard Catastrophe Risk Capital Charge method by insurer is shown in the Appendices as figure A14. From the solvency returns there are 20 insurers using Extreme Events method, nine insurers using No Extreme Events method, and seven insurers using Alternative Methods. Under the Extreme Events method, a component of the calculation (calibrated return period for New Zealand earthquake losses) is in transition through to the start of the financial year that commences on or after 8 September 2016. The transition requirements are set out in a policy position paper published by RBNZ. However, by the end of the financial year during 2015 most insurers were not eligible to utilise this transition because the component is not applicable to them or else the “limited backsliding” provision in the solvency standard applies.

37 19 October 2016 In addition to the seven insurers that have reported using an Alternative Method in the solvency return, there are some other insurers where it appears the Appointed Actuary has either recommended or endorsed the use of a method other than the default one specified by the solvency standards. I.e. the number of insurers using an Alternative Method in figure 14 appears to be understated. There is no Catastrophe Risk Capital Charge for the five captive insurers (this risk is recorded under Insurance Risk Capital Charge instead). Insurers in run-off have no exposure to catastrophe once all their policies are expired or cancelled, which was the case at financial year end date during 2015 for the three relevant insurers. The Catastrophe Risk Capital Charge includes an element for net losses as well as for the cost of reinstating reinsurance. Only six insurers have reported a cost of reinsurance reinstatement – for these insurers the reinstatement cost varies from about 25% to 200% of the cost of net loss. Other insurers have reported no cost of reinsurance reinstatement because they have no catastrophe reinsurance or the reinstatement is fully pre-paid up to the required level.

38 19 October 2016 Non-Life SS Reinsurance Recovery Risk Capital Charge Figure 15 – Non-Life SS RI Recovery Risk Capital Charge components RI = reinsurance Non-Life Solvency Standard Reinsurance Recovery Risk Capital Charge components by insurer are shown in the Appendices as figure A15. Health insurers and general insurers which specialise in consumer credit insurance and/or pet insurance typically have no reinsurance. Therefore for those insurers there is no Reinsurance Recovery Risk Capital Charge. Generally at financial year end dates captive insurers do not have a Reinsurance Recovery Risk Capital Charge, since most of the time there are no outstanding recoveries and deferred reinsurance premiums are zero at this point in time (assuming reinsurance renewals are aligned to financial years which is usually the case). The Reinsurance Recovery Risk Capital Charge is small, typically under 1% of net assets. There are 11 insurers with Non-Life Reinsurance Recovery Risk Capital Charge of at least 3% of net assets – mostly arising from considerable Canterbury earthquake reinsurance recoveries (with capital charge between 3% and 10% of net assets). Comparing the implied average risk factor in respect of outstanding claims recoveries and deferred reinsurance expense, these are generally the same or similar. However, there are three insurers with an implied average risk factor for outstanding claims recoveries that is at least 0.5% higher than for deferred reinsurance expense – i.e. they are using higher rated reinsurers for future cover than for past cover (their remaining exposure for outstanding and paid claims). There is one insurer where the opposite is true – one of the reinsurers they use is unrated but there are no or very low outstanding recoveries from this reinsurer and thus the implied average risk factor for deferred reinsurance expense is over 30% compared to a more typical 4% for outstanding claims recoveries. Only one insurer reports a charge for coinsurer or EQC recoveries in respect of claims that have been paid by the insurer for which the coinsurer or EQC is liable. Outstanding Claims Deferred Reinsurance Expense Paid Claims Coinsurers and EQC Total All 73.1 10.9 4.7 0.9 89.5 General 73.1 10.9 4.7 0.9 89.5 Life - - - - - Health - - - - - Outstanding Claims Deferred Reinsurance Expense Paid Claims Coinsurers and EQC Total All 2% 0% 0% 0% 2% General 2% 0% 0% 0% 3% Life - - - - - Health - - - - - Main type Non-Life Solvency Standard RI Recovery Risk Capital Charge components ($ million) of insurance Main type of insurance Non-Life Solvency Standard RI Recovery Risk Capital Charge components (% of Net Assets)

39 19 October 2016 Non-Life SS Asset Risk Capital Charge Figure 16 – Non-Life SS Asset Risk Capital Charge components Non-Life Solvency Standard Asset Risk Capital Charge components by insurer are shown in the Appendices as figure A16. The Asset Risk Capital Charge under the Non-Life solvency standards is comprised of the sum of charges for risk weighted exposures, Derivatives Risk and Asset Concentration Risk. Reinsurance assets and assets that are subject to a Deduction From Capital are excluded. There are 14 Exposure Classes, and the Solvency Return further subdivides some of these to collect data on 21 Exposure sub-classes. For the purpose of analysis, the Exposure Classes and sub-classes have been grouped based on the factor level – low (0.5% to 5%), medium (6% to 15%), high (20% to 40%) and full (100%). The majority of assets ($8.2 billion out of $9.9 billion total assets that are subject to Asset Risk Capital Charge) have a low factor of between 0.5% and 5%. These include cash, government securities, highly rated fixed interest, unpaid premiums less than six months overdue, and qualifying deferred acquisition costs. Overall, about half of the Asset Risk Capital Charge corresponds to the high and full factor Exposure Classes. These include contingent liabilities, equities, property, any other assets (i.e. not elsewhere classified), and related party assets. The Exposure Class with a factor of at least 20% that has the largest Exposure amount is any other asset with $0.4 billion (40% factor applies). There is considerable variation in the size and composition of Asset Risk Capital Charge across insurers, reflecting a wide range of approaches to managing investments and other assets. There is one insurer with a small Derivatives Risk Capital Charge. There are other insurers with derivatives that have nil Derivatives Risk Capital Charge. There are 15 insurers with an Asset Concentration Risk Capital Charge, mostly 2% of net assets or less. Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Asset Concentration Risk Total All 183.1 88.3 258.8 34.9 0.2 10.5 575.9 General 169.0 79.9 243.4 28.5 0.2 9.3 530.2 Life 0.5 0.0 3.3 0.3 - 1.1 5.2 Health 13.6 8.5 12.2 6.1 - 0.2 40.6 Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Asset Concentration Risk Total All 4% 2% 6% 1% 0% 0% 14% General 5% 2% 7% 1% 0% 0% 15% Life 0% 0% 2% 0% - 1% 3% Health 2% 1% 2% 1% - 0% 7% Non-Life Solvency Standard Asset Risk Capital Charge components ($ million) Main type of insurance Main type of insurance Non-Life Solvency Standard Asset Risk Capital Charge components (% of Net Assets)

40 19 October 2016 Non-Life SS Foreign Currency Risk Capital Charge The Foreign Currency Risk Capital Charge is 22% of the sum of the absolute value of net open currency exposures. For most non-life insurers, this is generally the smallest component of Minimum Solvency Capital, ignoring any components that are not applicable. Many non-life insurers have no Currency Risk and most others partially match their foreign liabilities with foreign assets denominated in the same currencies. Of the 21 insurers with a Non-Life solvency Foreign Currency Risk Capital Charge, it exceeds 4% of net assets (equivalent to a total net open currency exposure of more than about 20% of net assets) for only three insurers.

41 19 October 2016 Non-Life SS Interest Rate Risk Capital Charge The Interest Rate Risk Capital Charge is the largest adverse net impact on capital of prescribed upshock and downshock movements in interest rates. The Interest Rate Risk Capital Charge is a small component of Minimum Solvency Capital for almost all non-life insurers. Figure 17 – Non-Life SS direction of interest rate risk There are 15 non-life insurers that report nil net exposure to interest rates – all liabilities are undiscounted and there are no interest-bearing assets. There are 23 non-life insurers with greater impact from an upshock than a downshock, compared with only 6 non-life insurers with greater impact from a downshock than an upshock. The predominance of upshock impacts is not surprising – many non-life insurers have undiscounted liabilities (since they are all or mostly expected to be paid within 12 months) but have considerable interest-bearing investments. The largest Non-Life solvency Interest Rate Risk Capital Charge as a percentage of net assets is between 3% and 6% for six insurers.

42 19 October 2016 Life solvency standard There are currently two Life solvency standards (Life, Variable Annuities). As at financial year end dates during 2015 there were no insurers with the Variable Annuities solvency standard applied, and so there is no need to group these solvency standards for analysis purposes in this paper.

43 19 October 2016 Life SS Minimum Solvency Capital Figure 18 – Life SS Minimum Solvency Capital components Life Solvency Standard Minimum Solvency Capital components by insurer are shown in the Appendices as figure A18. Approximately 80% of the Minimum Solvency Capital under the Life solvency standard is comprised of the excess of Insurance Risk Capital Charge over Liabilities, where Liabilities is the sum of Policy Liabilities and Other Liabilities. Asset Risk Capital Charge and Catastrophe Risk Capital Charge are each about 10%, with negligible amounts for other components. There are 11 insurers with Life Minimum Solvency Capital components of at least 40% of net assets for one of Insurance Risk less Liabilities, Reinsurance Recovery Risk or Asset Risk. Four of the Life solvency standard Minimum Solvency Capital components are expressed relative to a suitable measure of exposure to provide an implied average risk factor, shown in figure 19 below. Figure 19 – Life SS implied average risk factors CEP = credit, equity & property Life Solvency Standard implied average risk factors by insurer are shown in the Appendices as figure A19. Insurance Risk Capital Charge less Liabilities Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge effect of Minimum Zero Total All 1,519.3 161.8 13.6 191.9 0.7 1,887.4 General ( 0.4) 0.3 0.0 0.2 0.1 0.2 Life 1,519.7 161.6 13.6 191.7 0.6 1,887.2 Health - - - - - - Insurance Risk Capital Charge less Liabilities Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge effect of Minimum Zero Total All 32% 3% 0% 4% 0% 40% General ( 0%) 0% 0% 0% 0% 0% Life 53% 6% 0% 7% 0% 66% Health - - - - - - Main type Life Solvency Standard Minimum Solvency Capital components ($ million) of insurance Main type of insurance Life Solvency Standard Minimum Solvency Capital components (% of Net Assets) Insurance Risk Capital Charge less Liabilities as % of Catastrophe Risk Capital Charge as % of Reinsurance Recovery Risk Capital Charge as % of CEP Capital Charge + Asset Concentration Risk Charge absolute value of Policy Liabilities Annual Gross Premium Reinsurance Assets

• reinsurance catastrophe exposure as % of Assets (excluding reinsurance & Deductions From Capital) All 43% 4% 3% 4% General ( 13%) 0% 2% 2% Life 43% 9% 3% 4% Health - - - - Main type Life Solvency Standard implied average risk factors of insurance

44 19 October 2016 For some insurers Policy Liabilities are negative in the balance sheet. The Insurance Risk Capital Charge is the greater of stressed liabilities (which may be positive or negative) and Current Termination Value (which may be zero or positive), for each Related Product Group. Pure risk insurance often has negative Policy Liabilities and a nil Current Termination Value. Therefore it is not unusual to have an Insurance Risk Capital Charge in excess of Liabilities whilst also having negative value for Policy Liabilities. This is why the absolute value of Policy Liabilities is used as the exposure measure in our analysis. However, for some insurers there may still be a distortion due to some Related Product Groups having negative Policy Liabilities and some Related Product Groups having positive Policy Liabilities while only the net figure is recorded in the solvency return. This situation arises for life insurers with a mixture of traditional and pure risk products. For about half of the life insurers, the excess of Insurance Risk Capital Charge over Liabilities is large (over 90%) relative to the absolute value of Policy Liabilities. For the other half, the excess is either negative or small (up to 34%) relative to the absolute value of Policy Liabilities. This suggests there is a wide range in the level of margins in Policy Liabilities, relative to the stresses set out in the Life solvency standard or Current Termination Values. Compared with non-life insurers, the Catastrophe Risk Capital Charge is much more significant for life insurers, typically 5% to 20% of annual gross premium. This is perhaps due to generally less use of reinsurance protecting against catastrophes by life insurers. One insurer has a much higher charge due to pandemic exposure that is not reinsured. The Reinsurance Recovery Risk Capital Charge is almost always between 2% and 4% of reinsurance assets, reflecting the limited use of unrated or poorly rated reinsurers. To aid comparison with non-life insurers, the sum of the CEP Risk Charge and Asset Concentration Risk Charge have been compared with applicable asset values. Other components of Asset Risk Capital Charge (Currency Risk and Interest Rate Risk) are excluded. There is considerable variability in the implied average factor for these Asset Risk components, with several insurers under 5%, while four insurers have an implied average risk factor of at least 15% (and up to 39%).

45 19 October 2016 Life SS Insurance Risk Capital Charge Figure 20 – Life SS Insurance Risk Capital Charge components CTV = Current Termination Value, Solv. Liab. = Solvency Liabilities RPG = Related Product Group. Life Solvency Standard Insurance Risk Capital Charge components by insurer are shown in the Appendices as figure A20. In order to be comparable with other components of solvency requirements, in our analysis Liabilities have been subtracted from the Insurance Risk Capital Charge. Liabilities are the sum of Policy Liabilities and Other Liabilities. This then provides the excess of stressed amounts over reserved amounts. No insurers have reported a Repayable Amounts Adjustment. This means there are no new reinsurance arrangements that are subject to a charge, because existing reinsurance arrangements have a transition period that produces nil charge for financial year end dates during 2015. There are four insurers with Life solvency Insurance Risk Capital Charge slightly less than Liabilities – two are insurers with mainly life insurance business, and two are insurers with mainly general insurance business. All four have reserved amounts in excess of stressed amounts, with the two life insurers having large margins in their Policy Liabilities and the two general insurers using general insurance accounting methods including risk margin. There are two insurers with Life solvency Insurance Risk Capital Charge equalling Liabilities – one is a reinsurer with 100% retrocession9 and the other is an insurer with mainly general insurance business with immaterial life insurance. Of the remaining life insurers, there are seven insurers with Life Insurance Risk Capital Charge less Liabilities of at least 40% of net assets. This includes all of the largest life insurers that are subject to New Zealand solvency standards. 9 Retrocession is reinsurance of a reinsurer’s business. ∑ max of {CTV,Solv. Liab.} @ RPG Repayable Amount Adjustment Other Liabilities Insurance Risk Capital Charge Liabilities Insurance Risk Capital Charge less Liabilities All 4,172.0 - 491.9 4,663.9 3,144.5 1,519.3 General 2.5 - 0.3 2.7 3.1 ( 0.4) Life 4,169.5 - 491.6 4,661.2 3,141.4 1,519.7 Health - - - - - - ∑ max of {CTV,Solv. Liab.} @ RPG Repayable Amount Adjustment Other Liabilities Insurance Risk Capital Charge Liabilities Insurance Risk Capital Charge less Liabilities All 89% - 10% 99% 67% 32% General 0% - 0% 0% 0% ( 0%) Life 146% - 17% 163% 110% 53% Health - - - - - - Main type Life Solvency Standard Insurance Risk Capital Charge - Liabilities components ($ million) of insurance Main type of insurance Life Solvency Standard Insurance Risk Capital Charge - Liabilities components (% of Net Assets)

46 19 October 2016 Life SS Catastrophe Risk Capital Charge The Catastrophe Risk Capital Charge in the Life solvency standard is calculated based on the greatest net cost for Pandemic or Other Extreme Events. Figure 21 – Life SS Catastrophe Risk Capital Charge method Life Solvency Standard Catastrophe Risk Capital Charge method by insurer is shown in the Appendices as figure A21. From the solvency returns there are 23 insurers using Pandemic, two insurers using Other Extreme Events, and two insurers using a mixture of Pandemic and Other Extreme Events. Where a mixture is used, the method in respect of the Statutory Fund is Pandemic and the method in respect of Life Funds outside the Statutory Fund is Other Extreme Events.

47 19 October 2016 Life SS Reinsurance Recovery Risk Capital Charge Figure 22 – Life SS Reinsurance Recovery Risk Capital Charge components Life Solvency Standard Reinsurance Recovery Risk Capital Charge components by insurer are shown in the Appendices as figure A22. Reinsurance Recovery Risk Capital Charge is very small, typically under 0.5% of net assets. A significant exception is a reinsurer with 100% retrocession. Based on the implied average risk factors, there are at least two life insurers using an unrated or poorly rated reinsurer. The most common implied average risk factor is 2%, which is a lower factor than for non-life insurers. Outstanding Claims Policy Liabilities Reinsurance Premium Paid in Advance Paid Claims Catastrophe Risk Total All 4.3 1.8 0.0 1.4 6.1 13.6 General 0.0 - - - - 0.0 Life 4.3 1.8 0.0 1.4 6.1 13.6 Health - - - - - - Outstanding Claims Policy Liabilities Reinsurance Premium Paid in Advance Paid Claims Catastrophe Risk Total All 0% 0% 0% 0% 0% 0% General 0% - - - - 0% Life 0% 0% 0% 0% 0% 0% Health - - - - - - Main type Life Solvency Standard Reinsurance Recovery Risk Capital Charge components ($ million) of insurance Main type of insurance Life Solvency Standard Reinsurance Recovery Risk Capital Charge components (% of Net Assets)

48 19 October 2016 Life SS Asset Risk Capital Charge Figure 23 – Life SS Asset Risk Capital Charge components CEP = credit, equity & property; Solv. Liab. = Solvency Liability RRCC = Resilience Risk Capital Charge Life Solvency Standard Asset Risk Capital Charge components by insurer are shown in the Appendices as figure A23. The Asset Risk Capital Charge under the Life solvency standard is comprised of the sum of charges for Credit, Equity & Property Risk (CEP which covers risk weighted Exposures and Derivatives Risk), Foreign Currency Risk, net Interest Rate Risk, and Asset Concentration Risk. Reinsurance assets and assets that are subject to a Deduction From Capital are excluded from the calculation of charges for CEP and Asset Concentration Risk, but are included for Foreign Currency Risk and Interest Rate Risk. The impact of Interest Rate Risk on assets and the Solvency Liability Resilience Impact together make up the charge for net Interest Rate Risk. The charge for net Interest Rate Risk is generally small (under 2% of net assets). There are five life insurers with material net exposure to Interest Rate Risk. There are also very limited risk charges for Foreign Currency Risk and Asset Concentration Risk – about 90% of Asset Risk Capital Charge arises from CEP. There are four insurers with a Life solvency standard Asset Concentration Risk Capital Charge, generally less than 2% of net assets. CEP Capital Charge Foreign Currency Risk Impact of Interest Rate Risk Solv. Liab. Resilience Impact effect of minimum zero RRCC Asset Concentration Risk Total All 174.0 14.6 ( 106.2) 108.0 - 1.5 191.9 General 0.1 - 0.1 0.0 - - 0.2 Life 173.8 14.6 ( 106.3) 108.0 - 1.5 191.7 Health - - - - - - - CEP Capital Charge F. Currency Risk Capital Charge Impact of Interest Rate Risk Solv. Liab. Resilience Impact effect of minimum zero RRCC Asset Concentration Risk Charge Total All 4% 0% ( 2%) 2% - 0% 4% General 0% - 0% 0% - - 0% Life 6% 1% ( 4%) 4% - 0% 7% Health - - - - - - - Main type Life Solvency Standard Asset Risk Capital Charge components ($ million) of insurance Main type of insurance Life Solvency Standard Asset Risk Capital Charge components (% of Net Assets)

49 19 October 2016 Life SS CEP Capital Charge Figure 24 – Life SS CEP Capital Charge components CEP = credit, equity & property Life Solvency Standard CEP Capital Charge components by insurer are shown in the Appendices as figure A24. There are 15 Exposure Classes, and the Solvency Return further subdivides some of these to collect data on 22 Exposure sub-classes. For the purpose of analysis, the Exposure Classes and sub-classes have been grouped based on the factor level – low (0.5% to 5%), medium (6% to 15%), high (20% to 40%) and full (100%). The majority of assets ($3.2 billion out of $4.3 billion total assets subject to CEP Capital Charge) correspond to the low factor Exposure Classes. These include cash, government securities, and highly rated fixed interest, unpaid premiums less than six months overdue, residential mortgages, and secured unpaid premiums & loans. Overall about 70% of the CEP Capital Charge corresponds to the high and full factor groups of Exposure Classes. These include contingent liabilities, equities, property, any other assets (i.e. not elsewhere classified), related party assets. The largest Exposure Class is equities with $0.8 billion. Only one insurer reports a charge for Derivatives Risk, and this was very small. There are other insurers with derivatives that have nil Derivatives Risk Capital Charge. There is considerable variation in the size and composition of the CEP Capital Charge across insurers, reflecting a wide range of approaches to managing investments and other assets. Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Total All 39.6 9.7 108.7 15.9 0.1 174.0 General 0.1 0.0 0.1 0.0 - 0.1 Life 39.5 9.7 108.6 15.9 0.1 173.8 Health - - - - - - Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Total All 1% 0% 2% 0% 0% 4% General 0% 0% 0% 0% - 0% Life 1% 0% 4% 1% 0% 6% Health - - - - - - Main type Life Solvency Standard CEP Capital Charge components ($ million) of insurance Main type of insurance Life Solvency Standard CEP Capital Charge components (% of Net Assets)

50 19 October 2016 Life SS Foreign Currency Risk Capital Charge The Foreign Currency Risk Capital Charge is 22% of the sum of the absolute value of net open currency exposures. For most life insurers, this is a small component of Asset Risk Capital Charge. Many life insurers have no currency risk and most others partially match their foreign liabilities with foreign assets denominated in the same currencies. Of the ten insurers with a Life solvency Foreign Currency Risk Capital Charge, it exceeds 4% of net assets (equivalent to a total net open currency exposure of more than about 20% of net assets) for only three insurers.

51 19 October 2016 Life SS Impact of Interest Rate Risk The Impact of Interest Rate Risk is the largest adverse net impact on capital of prescribed upshock and downshock movements in interest rates. The Impact of Interest Rate Risk is a small component of Minimum Solvency Capital for almost all life insurers. Figure 25 – Life SS direction of interest rate risk SF = Statutory Fund There are five life insurers that report nil net exposure to interest rates. There are nine life insurers with greater impact from an upshock than a downshock, compared with eight life insurers with greater impact from a downshock than an upshock. There are five insurers with mixed interest rate impacts – the Statutory Fund being impacted more by a downshock and the Life Fund outside the Statutory Fund being impacted more by an upshock. The Life solvency Impact of Interest Rate Risk exceeds 3% of net assets for eight insurers. There is one insurer with a negative Impact of Interest Rate Risk, and this is a very large negative amount which largely offsets a large positive CEP Capital Charge.

52 19 October 2016 Effective solvency requirement The effective solvency requirement for the insurer as a whole is the sum of requirements in respect of each Fund (non qualifying capital instruments, Deductions From Capital, Minimum Solvency Capital, impact of licence condition), but subject to the Fixed Capital Amount as a minimum for Aggregate Minimum Solvency Capital. Figure 26 – Simplified diagram of NZ solvency requirements (insurer level) The Solvency Margin Adjusted must not be less than zero for every Fund, including on a consolidated basis if applicable. ∑ NQCI < 0.5 ∑ Deductions From Capital 1,428 Aggregate Minimum Solvency Capital 3,127 ∑ Licence Condition 585 ∑ Effective Solvency Requirement 5,141 Net Assets 6,953 ∑ Capital 6,952 ∑ Actual Solvency Capital 5,524 ∑ Solvency Margin 2,397 ∑ Solvency Margin Adjusted 1,812 ∑ Solvency Margin Adjusted 1,812 Amounts are in $ million. ∑ is the sum across all applicable funds. Aggregate Minimum Solvency Capital is the greater of Fixed Capital Amount & ∑ MSC.

53 19 October 2016 Figure 27 – Effective solvency requirement as % of net assets There is considerable variation in effective solvency requirement relative to net assets. The median effective solvency requirement is 64% of net assets with upper and lower quartiles of 81% and 38% respectively. Figure 28 – Solvency Ratio Adjusted There is also considerable variation in solvency ratio adjusted. The median solvency ratio adjusted is 171% with upper and lower quartiles of 307% and 133% respectively.

54 19 October 2016 There is one insurer in breach of solvency requirements (as reported), and a further six insurers that have a small buffer above requirements (Solvency Ratio Adjusted between 110% and 119%). The six insurers with a small buffer are in a range of circumstances and appear to be targeting a high return on equity. There are 26 insurers with a Solvency Ratio Adjusted of 200% or higher. These include five captive insurers (which generally aren’t subject to shareholders demanding a high return on capital) and 10 mutually owned general or health insurers (which require larger buffers due to the lack of a parent to provide support). Some of the remaining 11 insurers have special circumstances requiring larger buffers (e.g. rapid growth or being in run-off). Health insurers have a much larger buffer compared with general insurers and life insurers (weighted average Solvency Ratio Adjusted 490% compared with 142% and 135% respectively). This reflects the strategy of the dominant mutually owned health insurer. Figure 29 – Effective solvency requirement components Effective solvency requirement components by insurer are shown in the Appendices as figure A29. The largest component of effective solvency requirements is Minimum Solvency Capital ($3.1 billion out of $5.1 billion total). Deductions From Capital are also large at $1.4 billion. Capital excluded Deductions From Capital Minimum Solvency Capital Licence Condition ∑ effective solvency requirement as reported adjusted for licence condition All 0.5 1,428.5 3,126.7 585.0 5,140.6 2,397.0 1,812.0 General 0.0 1,109.8 1,112.1 570.0 2,791.9 1,272.3 702.3 Life 0.5 267.8 1,901.5 15.0 2,184.7 684.2 669.2 Health - 51.0 113.1 - 164.0 440.5 440.5 Capital excluded Deductions From Capital Minimum Solvency Capital Licence Condition ∑ effective solvency requirement as reported adjusted for licence condition All 0% 21% 45% 8% 74% 177% 149% General 0% 32% 32% 16% 80% 214% 142% Life 0% 9% 67% 1% 77% 136% 135% Health - 8% 19% - 27% 490% 490% Main type Solvency requirement components ($ million) Solvency Margin ($ million) of insurance Main type of insurance Solvency requirement components (% of Net Assets) Solvency Ratio (%)

55 19 October 2016 Movement in Solvency Margin Adjusted during 2014/15 Figure 30 – Movement in Solvency Margin Adjusted during 2014/15 financial year The movement in Solvency Margin Adjusted in the financial year that ended during 2015 has been analysed. The median movement was an increase of 5% of Capital at the start of the financial year, with upper quartile an increase of 14% and lower quartile a decrease of 3%. Figure 31 – Movement in Solvency Margin Adjusted during 2014/15 Movement in Solvency Margin Adjusted during 2014/15 financial year by insurer are shown in the Appendices as figure A31. Capital at start of financial year Profit After Tax ∆ Capital Transactions (excl. Profit) ∆ Deductions From Capital ∆ Minimum Solvency Capital ∆ Licence Condition ∆ Solvency Margin Adjusted All 6,194.8 229.0 528.4 ( 178.4) 534.8 ( 350.0) 763.9 General 2,832.4 ( 236.9) 898.8 ( 263.8) 719.6 ( 350.0) 767.7 Life 2,792.6 428.8 ( 367.9) 92.8 ( 175.9) - ( 22.2) Health 569.8 37.2 ( 2.4) ( 7.4) ( 8.9) - 18.5 Profit After Tax ∆ Capital Transactions (excl. Profit) ∆ Deductions From Capital ∆ Minimum Solvency Capital ∆ Licence Condition ∆ Solvency Margin Adjusted All 4% 9% ( 3%) 9% ( 6%) 12% General ( 8%) 32% ( 9%) 25% ( 12%) 27% Life 15% ( 13%) 3% ( 6%) - ( 1%) Health 7% ( 0%) ( 1%) ( 2%) - 3% Main type ∆ in Solvency Margin Adjusted during 2014/15 financial year ($ million) of insurance Main type of insurance ∆ in Solvency Margin Adjusted during 2014/15 financial year (% of Capital at start of financial year)

56 19 October 2016 Across all insurers there was an increase of $0.8 billion (+12% of Capital at the start of the financial year), with a relatively large increase for general insurers (+27%), a small increase for health insurers (+3%) and a small decrease for life insurers (-1%). A significant portion of the overall increase arises from one insurer. By component, capital transactions (i.e. injections less dividends and return of capital) and reduced Minimum Solvency Capital (i.e. risk charges) each contributed about $0.5 billion to the improvement in Solvency Margin Adjustment. Profit was almost offset by an increased Deductions From Capital (mostly increased deferred tax assets for insurers that reported losses), and increases to licence conditions also reduced the movement in Solvency Margin Adjustment. Some insurers experiencing or planning rapid growth have had made capital injections that were large compared with capital at the start of the financial year, to fund the costs of that growth as well as to maintain their solvency position (given solvency requirements generally increase along with growth in insurance business). The few insurers reporting a substantial loss in the financial year ended during 2015 generally made a significant capital injection to restore their solvency position. While it is good that this has occurred, it is of some concern that some insurers appear to rely upon “just in time” parental capital injections rather than having a suitable buffer above solvency requirements to manage adverse experience. For the more usual case of insurers that reported profits, the capital movement has a timing mismatch with profits because part or all of the capital transactions are dividends set based on the previous financial year’s profits. For some insurers, dividends or a return of capital was used to substantially reduce capital (i.e. the amounts were large compared with profits) and to improve the rate of return on equity. There were eight insurers with a net effect of profit, capital transactions, and change in Deductions From Capital (generally a movement in deferred tax assets or declared unpaid dividends) resulting in a decrease in Solvency Margin Adjusted of at least 10% of the Capital at start of financial year. There were nine insurers with a net effect of changes in Minimum Solvency Capital and licence condition resulting in a decrease in Solvency Margin Adjusted of at least 10% of the Capital at start of financial year.

57 19 October 2016 Capital target The solvency return collects summary information on insurers’ capital target(s), including measures used in the target (e.g. solvency margin or solvency ratio), the nature of the target (e.g. minimum or range), and the calibration of the target level. The appropriate capital target is highly dependent on the circumstances of the insurer and their risk appetite. Capital target measure Figure 32 – Capital target measure About a quarter of insurers have either no capital target or no explicit capital target. This suggests that, for those insurers, there may be an undue reliance upon regulatory requirements instead of proper consideration of their own capital needs. Insurers that are subject to multiple solvency requirements generally have separate capital targets for each requirement. This paper uses the capital target for the insurer in total. While some insurers have reported (in their Solvency Return) a capital target that is a range or an average level over time, most insurers have expressed their capital target as a minimum level. About half have chosen a Solvency Margin (i.e. $ amount) and half a Solvency Ratio (i.e. % amount). There are some unusual cases. Two insurers have a target for Actual Solvency Capital – this is relatively insensitive to risk and thus may be less appropriate than alternative measures for capital target. Two insurers have a target Solvency Margin that is expressed as a percentage of annual premiums. One insurer has a target that is a minimum Solvency Ratio plus a minimum dollar amount above this. Three insurers have a capital target that incorporates minimums for both Solvency Margin and Solvency Ratio (e.g. capital target is the greater of each sub-target).

58 19 October 2016 Capital target level Figure 33 – Capital target level as % of Minimum Solvency Capital Adjusted There is a wide range in calibration of the level of capital target. In order to compare the differing methods and to allow for solvency-related licence conditions, the level has been converted to a percentage of Minimum Solvency Capital Adjusted. Minimum Solvency Capital Adjusted is the sum of Minimum Solvency Capital and the effective dollar amount of any licence condition. The capital target level used in this analysis is the minimum figure, or equivalently the bottom of a range for insurers that report a capital target as a range. There are 11 insurers with a capital target level less than 20% of Minimum Solvency Capital Adjusted (i.e. the target is equivalent to a Solvency Ratio Adjusted of less than 120%). Some of these insurers appear to have a relatively high risk appetite for a breach of solvency requirements. In contrast, for 10 insurers the capital target level is 100% or more of Minimum Solvency Capital Adjusted (i.e. the target is equivalent to a Solvency Ratio Adjusted of 200% or more), in some cases much higher. By inspection, the insurers with the highest and lowest capital target levels have widely varying circumstances. Excluding the 17 insurers with no capital target or no explicit capital target, the median capital target is 33% of Minimum Solvency Capital Adjusted. The upper and lower quartiles are 53% and 20% respectively.

59 19 October 2016 Solvency position relative to capital target The following analysis compares reported solvency position with the capital target for each insurer. The capital target level used in this analysis is the minimum figure, or equivalently the bottom of a range for insurers that report a capital target as a range. To enable comparisons between insurers, the capital target expressed as a percentage of Minimum Solvency Capital Adjusted is subtracted from Solvency Ratio Adjusted to obtain the excess solvency ratio above the capital target. Care is needed in interpreting solvency position at any given point in time since there are a range of approaches to dividends – some of which affect reported year end solvency figures and some do not. Figure 34 – Solvency position relative to capital target Nine insurers have a target shortfall (solvency ratio below capital target). In contrast 14 insurers have a significant target excess (solvency ratio well above capital target). Excluding the 17 insurers with no capital target or no explicit capital target, the median difference between Solvency Ratio Adjusted and capital target is +14% of Minimum Solvency Capital Adjusted (i.e. solvency ratio is higher than capital target). The upper and lower quartiles are +33% (i.e. solvency ratio is higher than capital target) and +1% (i.e. solvency ratio is higher than capital target), respectively.

60 19 October 2016 Figure 35 – Solvency Margin/Ratio in excess of Capital target Solvency Margin/Ratio in excess of Capital target by insurer is shown in the Appendices as figure A35. Insurers with a capital target in the lower quartile (below 20% of Minimum Solvency Capital Adjusted) have a similar distribution to all insurers for the difference between solvency ratio and capital target. That is, as a group they did not appear to compensate for low capital targets by holding an increased buffer above the target level, as at the financial year end date during 2015. The converse does not hold. Insurers with a capital target in the upper quartile (above 53% of Minimum Solvency Capital Adjusted) have a different distribution than all insurers for the difference between solvency position and capital target. They are over-represented in insurers that are below their capital target, and also over￾represented in insurers with solvency position at least 30% in excess of capital target as a percentage of Minimum Solvency Capital Adjusted. Solvency Margin Adjusted Capital target in excess of Minimum Solvency Capital Adjusted Solvency Margin Adjusted in excess of Capital target All 1,812.0 1,091.1 720.9 General 702.3 486.9 215.4 Life 669.2 294.3 374.9 Health 440.5 309.9 130.6 Solvency Ratio Adjusted Capital target in excess of Minimum Solvency Capital Adjusted Solvency Ratio Adjusted in excess of Capital target All 149% 29% 19% General 142% 29% 13% Life 135% 15% 20% Health 490% 274% 115% Main type Solvency Margin, Capital target and difference ($ million) of insurance Main type of insurance Solvency Ratio, Capital target and difference (% of Minimum Solvency Capital Adjusted)

61 19 October 2016 Solvency projection The Solvency Return includes the insurer’s projected solvency results, on a solo basis for the insurer as a whole, over the next four years after report date. This period is longer than the three year requirement under section 24 of IPSA, because that obligation is continuous thus insurers need to project their solvency position for a longer period. These figures do not adjust for licence conditions because these may change over time. Figure 36 – Projected Solvency Margin/Ratio Projected Solvency Margin/Ratio by insurer are shown in the Appendices as figure A36. For some insurers the projections show improving solvency position as they are based on business plans that forecast strong profits, and often do not allow for future dividends. This does not seem to be realistic in every case. The expected future solvency position is likely to be worse than shown in figure 36, since future dividends are missing for some insurers. Furthermore, anecdotally business plans seem to be generally optimistic (e.g. assuming future experience is significantly more favourable than past experience). If so, future experience deviations from the projections may be more likely to reduce than to improve solvency position relative to the projections, all else being equal. Three insurers only provided projected solvency figures for the next three years. For the purpose of calculating totals in figure 36 we have assumed there is nil change in solvency position between years three and four. This may slightly understate total Solvency Margin and slightly overstate total Solvency Ratio – because these insurers are projecting a slow growth in Solvency Margin each year and also have materially lower than average Solvency Ratio. Two insurers in run-off have only projected to their expected completion of the run￾off, which seems reasonable. Actual one year prior Actual financial year end date during 2015 Projected in one year's time Projected in two year's time Projected in three year's time Projected in four year's time All 1,281.9 2,397.0 2,273.3 2,316.1 2,395.1 2,489.8 General 154.6 1,272.3 1,215.3 1,214.3 1,223.6 1,251.9 Life 705.3 684.2 606.4 621.7 658.9 691.1 Health 422.0 440.5 451.6 480.1 512.6 546.7 Actual one year prior Actual financial year end date during 2015 Projected in one year's time Projected in two year's time Projected in three year's time Projected in four year's time All 135% 177% 169% 166% 164% 162% General 108% 214% 210% 206% 202% 200% Life 141% 136% 129% 128% 127% 126% Health 505% 490% 482% 488% 496% 503% Actual and Projected Solvency Margin ($ million) Main type of insurance Main type of insurance Actual and Projected Solvency Ratio (%)

62 19 October 2016 Appointed Actuary The Appointed Actuary is required to perform or review solvency calculations at financial year end and half year. At financial year end date during 2015 about half of the solvency calculations were performed by the Appointed Actuary and half were reviewed by the Appointed Actuary. Figure 37 – Appointed Actuary solvency task by main type of insurance There is no marked difference by type of insurer (i.e. general, life and health) – for each type about half of the solvency calculations were performed by the Appointed Actuary and half were reviewed by the Appointed Actuary.

63 19 October 2016 Figure 38 – Appointed Actuary solvency task by size of insurer There is a distinct difference by size of insurer – solvency calculations were mostly performed by the Appointed Actuary for insurers with gross annual premium less than $50 million, and mostly reviewed by the Appointed Actuary for larger insurers. This is not surprising as small and medium-sized insurers generally do not have any in-house actuarial expertise.

64 19 October 2016 Figure 39 – Appointed Actuary solvency task by employment status There are also significant differences when considering the employer of the Appointed Actuary. Employees of the insurer or related businesses mostly review the solvency calculations. In contrast the Appointed Actuaries that are consultants perform solvency calculations more often than review them, particularly where the Appointed Actuary is with a specialist actuarial firm (as opposed to an accounting/audit firm or a wider financial services firm).

65 19 October 2016 Auditor The auditor is required to audit or review the Solvency Return at financial year end, excluding Catastrophe Risk Capital Charge and solvency projections, and provide a report on this. Most of the auditor reports on Solvency Returns are heavily caveated. Typically the auditor only provides a limited assurance as to the reasonableness, and explicitly does not confirm the solvency result is correct or any components of solvency calculations are correct. This has implications for both insurers and RBNZ! Figure 40 – Auditor solvency task by main type of insurance At financial year end date during 2015 the auditor for most insurers reviewed the Solvency Returns, rather than audited them. There is no marked difference by type of insurer (i.e. general, life, health) – for each type the auditor for most insurers reviewed the Solvency Returns, rather than audited them.

66 19 October 2016 Figure 41 – Auditor solvency task by size of insurer There is a distinct difference by size of insurer – the auditor reviewed the Solvency Returns for all insurers with gross annual premium greater than $50 million, reviewed the Solvency Returns for most insurers with gross annual premium between $1.5 million and $50 million, and audited almost as many Solvency Returns as were reviewed for small insurers (gross annual premium less than $1.5 million).

67 19 October 2016 Figure 42 – Auditor solvency task by audit firm type There are also significant differences when considering the audit firm type. The insurers with a big 4 audit firm as auditor all had reviews of the Solvency Return by the auditor (none had audits). The 13 insurers with another auditor mostly had audits of the Solvency Return by the auditor.

68 19 October 2016 Figure 43 – Audit firm type by size of insurer Almost all large and medium-large sized insurers use a big 4 audit firm as auditor. The majority of medium-small sized insurers also use a big 4 audit firm, although several do not. Small insurers are roughly evenly split between using a big 4 audit firm and another auditor.

69 19 October 2016 Feedback on Solvency Return The feedback in this section is necessarily general in nature, and may only apply to insurers in certain circumstances. This feedback does not cover all of the questions or issues that have been identified by RBNZ in relation to Insurer Solvency Return (ISR). ISR Requirement Topic Feedback

1. S121 notice Due date All returns must be submitted by the relevant due date.
2. S121 notice Submission method ISR must be submitted using the RBNZ secure upload facility, and not by email unless otherwise agreed by RBNZ. Email is not as secure and is less efficient for our processing.
3. S121 notice Format ISR must be submitted in Excel format. PDF format is unable to be loaded.
4. S121 notice Version Please submit ISR using the correct version of the template, as specified on the insurer data collections webpage based on report date (the as at date of the calculations). An incorrect version might not be able to be loaded.
5. CEO sign-off CEO sign-off Details of the CEO sign-off must be provided in the spaces provided. If the ISR is resubmitted a fresh sign-off is required (i.e. the date of sign-off should be updated).
6. All solvency standards Use of judgement and discretions There are several aspects of the solvency calculations which require judgement. The purpose of solvency requirements is to have some protection against very adverse experience. The circumstances of the insurer and the particular risk under consideration are also relevant. RBNZ may ask for justification of any judgement that has been applied if it appears to be unreasonable, unrealistic, inappropriate, or imprudent. Examples of considerations that may be relevant to the application of discretions include – the inability to have perfect foresight leads to imperfect decisions, consequent changes in policyholder behaviours, constraints in data and systems, the time needed to make decisions, competitive pressures influencing decisions, etc.

70 19 October 2016 ISR Requirement Topic Feedback 7. All solvency standards Financial statements For some insurers the financial statements which form the basis of the solvency calculations are not compliant with NZ GAAP (e.g. at financial half-year). In this situation case is needed to make appropriate adjustments to the Alternative Financial Information, upon which the solvency calculations are based. 8. All solvency standards Tax The solvency standard treatment of tax is complex and requires careful consideration of the appropriate tax position at balance date and also under stressed circumstances. 9. All solvency standards Capital All solvency standards currently in force have eligibility requirements for capital instruments and reserves to qualify as Capital for the purposes of solvency. This was a change from earlier solvency standards. For a few insurers there appears to be a component of balance sheet equity/net assets that may not qualify for solvency, but which has not been excluded from Capital. 10. All solvency standards Assets For some insurers some assets have not been Deducted From Capital and have not had relevant asset capital charge(s) applied. All assets should have either a Deduction From Capital or relevant asset capital change(s) applied. 11. All solvency standards Assets Applying investment asset look through provisions when the data is not detailed enough for full and accurate allocation to Exposure Classes. In this circumstance the appropriate Exposure Class for the investment vehicle as a whole should be used. 12. All solvency standards Assets Refunds of GST, fire service levy and earthquake commission levy could be classified as sovereign debt if the amounts are certain. 13. All solvency standards Assets Misclassifying term deposits as cash. 14. All solvency standards Assets Misclassification of unrated or subordinated debt.

71 19 October 2016 ISR Requirement Topic Feedback 15. All solvency standards Assets Sometimes the Exposure Class for “any other asset” has been used when another Exposure Class is applicable. 16. All solvency standards Assets Some insurers have not made a Deduction From Capital for equity in related parties. 17. All solvency standards Assets In some cases it is not clear that the criteria have been correctly applied for exempting certain related party assets from being treated as related party for solvency. E.g. is the asset in substance a permanent funding or is it short-term on commercial terms and not overdue? 18. All solvency standards Assets Some assets are not freely available for the benefit of the insurer. For example assets that are subject to charges, encumbrances for the benefit of another party, collateral provided to a cedant or derivative counterparty, etc. The solvency treatment of these restricted assets should have regard to the effects of the constraints. 19. All solvency standards Contingent liabilities Contingent liabilities should not be reduced by a factor to account for the probability of loss, because the Resilience Capital Factor already takes this into account. 20. All solvency standards Contingent liabilities Contingent liabilities with exposures to a related party attract a full capital charge. This was made explicit in the 2014 solvency standards. 21. All solvency standards Contingent liabilities If the potential value of the contingent liability is uncertain or a range of outcomes is possible a value greater than best estimate (i.e. a prudent amount) must be used. In some cases it appears a best estimate value has been used with no conservatism. 22. All solvency standards Guarantees (purchased) The 2014 solvency standards changed the criteria for reducing the Asset Risk Capital Charge on assets that have been guaranteed. In some cases it is not clear that the criteria have been correctly applied. 23. All solvency standards Derivatives Very few insurers have recorded an amount for Derivatives Risk Capital Charge.

72 19 October 2016 ISR Requirement Topic Feedback 24. All solvency standards Asset concentration Various issues have arisen including - the correct calculation of the relevant thresholds, failure to include all exposures to the same counterparty (when there are multiple exposure types for the same counterparty), failing to use a multiplier of two for the obligation category of “any other asset or counterparty exposure”, the calculations when there are multiple exposure classes for the same counterparty, treatment of bank exposures that are not bills or deposits (e.g. long-term debt securities or swaps). 25. All solvency standards Reinsurance In some instances reinsurance assets and reinsurance liabilities have been netted off when these have different counterparties. 26. All solvency standards Counterparty grades Some insurers have used default minimum ratings based on their investment policy or reinsurance policy when the actual ratings (at report date) are unknown. If the actual rating has not been identified then treating as unrated is a more prudent approach. 27. Non-life solvency standards Insurance risk For solvency purposes classes of insurance business have not been defined. Nonetheless, for some insurers the classification used for some of their business is unexpected. 28. Non-life solvency standards Insurance risk Some insurers have incorporated the Premium Liabilities Adjustment or Outstanding Claims Adjustment in the cells for base risk charges by class instead of in the provided separate cells (totalled but not by class). This does not affect the results but makes it more difficult to interpret. 29. Non-life solvency standards Outstanding claims Some insurers with negative net outstanding claims have negative figures for Run-off Risk Capital Charge. This isn’t prudent because it effectively reduces the solvency requirement by a percentage of the amount of recoveries that are in excess of provisions.

73 19 October 2016 ISR Requirement Topic Feedback 30. Non-life solvency standards Outstanding claims Some insurers have infrequent reviews of their risk margins (e.g. every two years). If there is no review at report date, it is not clear that the risk margins used are calibrated at the required probability of sufficiency for solvency purposes. 31. Non-life solvency standards Premium liabilities For some insurers, particularly health insurers, the period of assessment for premium liabilities appears to be very short compared with current and past business practices. In some instances there appears to be reliance upon potential significant benefit reductions at very short notice without regard to whether this is practicable or reasonable (i.e. ignoring consequences); and similarly for reliance on potential significant premium increases. 32. Non-life solvency standards Premium liabilities There are some issues with calculation of premium liabilities. For example, some insurers appear to be assuming significantly lower loss ratios than have been experienced recently, allowance for relevant expenses including reinsurance sometimes appears to be very light or missing. 33. Non-life solvency standards Long-term risk Some insurers have business with long-term characteristics for either the period of exposure and/or for the claim settlement period, but have no additional charge. The rationale for this is missing in some cases, and in other cases does not appear to be reasonable or appropriately prudent. 34. Non-life solvency standards Reinsurance Some captive insurers have not included reinstatement premiums in the calculation of Insurance Risk Capital Charge on the assumption that this cost will be funded by the parent. This may be questionable if there is no arrangement in place to do so. 35. Non-life solvency standards Catastrophe The calculations are in respect of a future event and therefore should take into account known changes to exposures and reinsurance that are about to occur (e.g. on the day after report date).

74 19 October 2016 ISR Requirement Topic Feedback 36. Non-life solvency standards Catastrophe Some insurers have used an alternative method recommended by the Appointed Actuary without obtaining RBNZ agreement as required. Insurers with Extreme Event Exposure (i.e. liable for claims on more than one insurance contract from an event) but using the twice maximum net retention method are using an alternative method, and similarly for insurers without Extreme Event Exposure that are not using twice maximum net retention method. 37. Non-life solvency standards Catastrophe For some insurers the default calculation appears to produce an inappropriately low Catastrophe Risk Capital Charge considering the circumstances of the insurer, but no alternative method has been used. 38. Non-life solvency standards Catastrophe Under the Extreme Event method, the ISR has spaces for providing information on whether the transition in the policy position paper has been applied, the amount of assessed gross losses for the required return period, and the return period of the limit of catastrophe reinsurance. These all provide context for the Catastrophe Risk Capital Charge. Sometimes the information is missing or inconsistent. 39. Non-life solvency standards Catastrophe The transition in the policy position paper appears to have been applied for some insurers that are not eligible (due to the no backsliding restriction). 40. Non-life solvency standards Catastrophe Some insurers may be exposed to multiple reinsurance retentions that should be allowed for under the Extreme Event method. Similarly, some insurers may be exposed to claims under multiple parts of a policy and thus requiring allowance that is in excess of maximum benefit limit under the twice maximum net retention method.

75 19 October 2016 ISR Requirement Topic Feedback 41. Non-life solvency standards Catastrophe The treatment of reinsurance is not always clear cut. The solvency standards refer to catastrophe reinsurance under the Extreme Event method, but to any reinsurance under the twice maximum net retention method. Insurers should consider how to appropriately deal with their reinsurance situations. For example if catastrophe reinsurance cover is shared with other cedant(s) that are exposed to the same event then it may not be possible for the insurer to recover fully up to the required level. The potential recoveries under reinsurance that substantially varies depending on the circumstances (e.g. surplus lines or aggregate) also requires care. 42. Non-life solvency standards Catastrophe Assessment of Extreme Event Exposures is complex and cannot be determined solely by running a catastrophe model. An explanation of this analysis should be provided in financial condition reports (and to a lesser degree of detail also solvency returns). 43. Non-life solvency standards Assets Some insurers have recoveries that are not reinsurance recoveries, but have not been correctly treated for solvency calculations. Third party recoveries (includes ACC) – these have an Exposure Class for Asset Risk Capital Charge. Recoveries including EQC for the coinsurer share of claims previously paid by the insurer are included in the Reinsurance Recovery Risk Capital Charge. 44. Life solvency standards Related product groups For some insurers related product groups appear to be very broad and may not be appropriate prudent. 45. Life solvency standards Assets Some insurers report as Solvency Liability Resilience Impact the net effect on assets and liabilities instead of the gross effect on liabilities only. 46. Life solvency standards Assets Some insurers exclude from Resilience Risk Capital Charge any unit-linked assets in respect of investment-linked insurance business. Insurers should only do this if the Solvency Liability Resilience Impact either perfectly offsets the asset impact, or if the net effect is immaterial.

76 19 October 2016 ISR Requirement Topic Feedback 47. Life solvency standards Reinsurance Some insurers did not include in Reinsurance Recovery Risk Capital Charge the required amount for reinsurance recoveries assumed in the Catastrophe Risk Capital Charge. 48. Life solvency standards Reinsurance The 2014 solvency standard requires specific information in respect of reinsurance to be reported in the financial condition report. This is missing from some. 49. Consolidated solvency Consolidated solvency Some insurers provided figures in this table when there is no insurance subsidiary to consolidate. 50. Solvency projection Solvency projection When the projected solvency figures are missing for the date that is four years after the report date, this means the solvency return has not been fully completed. 51. Solvency projection Solvency projection Some solvency projections have high and growing solvency levels that appear to be unrealistic under the circumstances. For example nil dividends when capital far exceeds target levels. 52. Solvency projection Solvency projection If an insurer currently has a small insurer exemption from minimum capital but is growing such that the exemption is reasonably anticipated to be lost within the next 4 years, then this should be reflected in their solvency projection. 53. Solvency projection S24 statement If an insurer is in breach of solvency requirements at report date, or is projecting solvency requirements to be breached at any time within the next 3 years, or has recently notified RBNZ under section 24, then “s24=yes” should be selected from the drop￾down options. This has not always occurred. 54. Form Cover sheet Selecting the wrong insurer name causes problems in loading the data. 55. Form Cover sheet Entering the wrong report date (as at date of calculation) causes problems in loading the data. 56. Form All sheets Monetary amounts in the ISR are required to be NZ$ thousands. Some insurers have reported in NZ$s or NZ$ millions.

77 19 October 2016 ISR Requirement Topic Feedback 57. Form All sheets Sometimes comments are ambiguously worded or missing when they are relevant. Good comments support clear interpretation of the solvency data. Poor comments are unhelpful. E.g. “same as last year” or “target is a reasonable margin” do not provide useful information. There have also been instances where comments contradict other information (in the solvency return, in the financial condition report, or otherwise provided by the insurer). 58. Form Minimum capital exemption Selecting the wrong option in the drop-down for exemption to minimum capital may result in the incorrect calculation of solvency and capital requirements (because minimum capital is not applied). 59. Form Solvency standards Selecting the wrong option(s) in the drop￾downs for solvency standards affects our interpretation of results as we take into account differences in the solvency standards. 60. Form Interest rate risk For some insurers the selected option in the drop-down for direction of interest rate change that applies has either been not selected or appears inconsistent with the results. 61. Form Sign-off sheet The actuary statement should be completed and dated. 62. Form Sign-off sheet The auditor statement should be completed and dated. Sometimes the wrong option has been selected from the drop-down list. 63. Form Sign-off sheet The contact(s) entered should be the person(s) at the insurer or their agent (e.g. an external accountant or actuary) to whom RBNZ should, in the first instance, direct its feedback or questions. Sometimes a contact person at RBNZ is listed instead. 64. Form Links Links to other files can cause problems in loading the data. Please paste as values all cells that link to an external file before submission.

78 19 October 2016 ISR Requirement Topic Feedback 65. N/A Notes and workings Notes and workings are optional but improve our understanding of reported solvency. These can be provided within the template in the unlocked sheet labelled “Notes and Workings”, in sheet(s) added to the template, or in separate workings files.

79 19 October 2016 Strength of solvency position For this paper we define the strength of a solvency position to be the size of shock that can be absorbed and still meet solvency requirements. Under this approach, the shock is the combined impact of the effect of adverse experience on net assets, consequent changes to solvency requirements, allowance for mitigation, and to some extent allowance for the effect of management discretions and actions. In contrast, the Solvency Margin is a measure of the size of shock that can be absorbed and still maintain positive net assets. Solvency Margin and Solvency Ratio figures, adjusted for licence conditions, provide the solvency position relative to regulatory requirements. However they do not provide complete context for the size of the insurer or for risk exposures. A level for Solvency Margin or Solvency Ratio that may provide very strong protection for one insurer may provide weaker protection for another insurer in different circumstances. The following analysis is used to illustrate the concepts, but is overly simplistic. It is not a stress testing exercise. We expect insurers, particularly larger insurers, to perform robust analysis of their capital needs taking into account their own circumstances including the risks they are exposed to and the mitigants that are available. Consideration of the appropriate strength of the solvency position, whether for regulatory purposes or for insurer management purposes, is out of scope for this paper.

80 19 October 2016 Solvency position relative to size of insurer One broad indicator of strength is the solvency position relative to the size of business. This can be measured by the ratio of Solvency Margin Adjusted to various size metrics – e.g. gross annual premium and net assets. Total assets are also a useful size metric. However, for most insurers the financial year end date during 2015 pre-dates the commencement of insurer data collections10, and therefore we do not have a measure of total assets that is consistent across all insurers. This is because accounting standards provide flexibility in the presentation of assets and liabilities, including the treatment of negative amounts (particularly relevant for most life insurers with negative insurance liabilities), and the extent to which balances can be offset (within a category for positive and negative balances or by corresponding items such as reinsurance or tax). Figure 44 – Solvency Margin Adjusted relative to size Solvency Margin Adjusted relative to size by insurer is shown in the Appendices as figure A44. For strength relative to gross premium and net assets, in aggregate general insurers have the lowest metric followed by life insurers, and with health insurers much higher. However, there is considerable variation between insurers – much more than the variation in Solvency Ratio. There are nine insurers with Solvency Margin Adjusted of less than 8% of Gross Annual Premium (the equivalent of one month of gross premium). In contrast there are 19 insurers with Solvency Margin Adjusted of the equivalent of at least 100% of Gross Annual Premium. There are seven insurers with Solvency Margin Adjusted of 10% or less of Net Assets. In contrast there are 24 insurers with Solvency Margin Adjusted of at least 50% of net assets. 10 Insurer data collections include the reporting of financial and exposure data in a specified format. These returns commenced between June 2015 and August 2016, depending on the insurer’s financial year and other circumstances. For more information see the insurer data collections webpage at http://www.rbnz.govt.nz/regulation-and-supervision/insurers/new-zealand-insurer-data-collections. Solvency Ratio Solvency Ratio Adjusted Solvency Margin Adjusted as % of Gross Annual Premium Solvency Margin Adjusted as % of Net Assets All 177% 149% 23% 26% General 214% 142% 14% 20% Life 136% 135% 34% 23% Health 490% 490% 40% 73% Main type Solvency Ratio Solvency Margin Adjusted of insurance

81 19 October 2016 Solvency position relative to risk charges Another broad indicator of strength is a comparison of the various risk charges relative to the solvency margin. A solvency margin that is smaller than certain risk charges could identify the types of risks that are the most important for an insurer to have strong mitigation against. Since the risk charges generally incorporate some mitigants based on the solvency standards, it could also indicate areas of risks for which the existing mitigants are weak relative to existing mitigants protecting against other types of risks. It does not necessarily follow that an insurer with solvency margin smaller than certain risk charges will have a solvency breach upon the occurrence of adverse experience in that area. It also does not necessarily follow that an insurer with a solvency margin much larger than certain risk charges is immune from risk. This is for many reasons, including:  The solvency standard does not fully cover all types of risks.  The effect of minimum capital requirement (i.e. Fixed Capital Amount) reduces the sensitivity of solvency position to risks (up to a point) for some insurers.  Risk charges in the solvency standard cater for fairly extreme outcomes.  Solvency requirements following adverse experience will generally be different to those before the adverse experience (e.g. after a large fall in investment values the Asset Risk Capital Charge is likely to be smaller).  Many risks have highly non-linear impacts (e.g. due to exhaustion of any discretions, changes in tax status, effects of aggregate or stop-loss reinsurance).  Adverse experience could occur with multiple areas of risk.  Management actions following significant adverse experience may materially change the exposures to risk and/or relevant mitigants.  Some balance sheet components may partially protect against some risks. In the analysis below Liabilities are subtracted from Insurance Risk Capital Charge under the life solvency standard (only); and Asset Risk Capital Charge includes Asset Concentration Risk Capital Charge, net impact of Interest Rate Risk, and Foreign Currency Risk Capital Charge. This treatment is required due to differences between life and non-life solvency standards.

82 19 October 2016 Figure 45 – Solvency Margin Adjusted relative to risk charges Solvency Margin Adjusted relative to risk charges by insurer are shown in the Appendices as figure A45. For general insurers in aggregate, the Asset Risk Capital Charge and Reinsurance Recovery Risk Capital Charge are both (separately) between half and one times the amount of Solvency Margin Adjusted. Part of the Asset Risk Capital Charge is due to liabilities being largely undiscounted. For life insurers in aggregate, the Insurance Risk Capital Charge less Liabilities exceeds the Solvency Margin Adjusted, with all of the other risk charges being less than half the amount of Solvency Margin Adjusted. However, this is not the case for individual insurers. For health insurers, all of the risk charges are less than half the amount of Solvency Margin Adjusted. Five out of eight insurers with a small insurer exemption have an impact of loss of small insurer exemption that exceeds net assets. Another insurer has an impact that exceeds the Solvency Margin Adjusted, and a further insurer has an impact between half and one times the amount of Solvency Margin Adjusted. For only one insurer with a small insurer exemption is the impact less than half the amount of their Solvency Margin Adjusted. This suggests small insurers may need to carefully manage any growth that is large enough to cause the loss of small insurer exemption (by gross annual premium exceeding $1.5 million) in the future. There are six out of 35 general insurers with Insurance Risk Capital Charge exceeding Solvency Margin Adjusted. For a further five general insurers it is between half and one times the amount of Solvency Margin Adjusted. There are eight out of 21 life insurers with Insurance Risk Capital Charge less Liabilities exceeding Solvency Margin Adjusted. For a further two life insurers it is between half and one times the amount of Solvency Margin Adjusted. Solvency Margin Adjusted impact of loss of small insurer exemption Insurance Risk Capital Charge (less Liabilities) Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge All 1,812.0 21.8 1,817.4 359.8 515.6 858.3 General 702.3 13.3 240.2 192.1 447.6 609.8 Life 669.2 8.5 1,521.7 163.4 68.0 197.4 Health 440.5 - 55.4 4.3 - 51.2 Solvency Margin Adjusted impact of loss of small insurer exemption Insurance Risk Capital Charge (less Liabilities) Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge All 26% 0% 26% 5% 7% 12% General 20% 0% 7% 5% 13% 17% Life 23% 0% 53% 6% 2% 7% Health 73% - 9% 1% - 8% Main type of insurance Solvency Margin Adjusted, and aggregate Capital Charges ($ million) Main type of insurance Solvency Margin Adjusted, and aggregate Capital Charges (% of Net Assets)

83 19 October 2016 There are three insurers (two general insurers and one life insurer) with Catastrophe Risk Capital Charge exceeding Solvency Margin Adjusted. For a further five general insurers and one life insurer it is between half and one times the amount of Solvency Margin Adjusted. There are six insurers (five general insurers and one life insurer) with Reinsurance Recovery Risk Capital Charge exceeding Solvency Margin Adjusted. These include insurers with elevated reinsurance assets due to the Canterbury earthquakes and a reinsurer that has 100% retrocession. For a further four general insurers it is between half and one times the amount of Solvency Margin Adjusted. There are nine general insurers with Asset Risk Capital Charge exceeding Solvency Margin Adjusted. For a further four general insurers it is between half and one times the amount of Solvency Margin Adjusted. There are six life insurers with Asset Risk Capital Charge exceeding Solvency Margin Adjusted. For a further four life insurers it is between half and one times the amount of Solvency Margin Adjusted.

84 19 October 2016 Part Two – Home jurisdiction solvency requirements Foreign insurers are licensed for the insurer as a whole not just for the New Zealand branch. Most licensed insurers that operate as branches in New Zealand are subject to solvency requirements of their home supervisor. An exemption notice may be issued under section 59 of IPSA if certain requirements are met. One of these requirements may be satisfied if the foreign insurer is domiciled in a jurisdiction prescribed by regulation 5 of IPSR. A small number of branch insurers are subject to New Zealand solvency standards in respect of their New Zealand insurance business – because they are not domiciled in a prescribed jurisdiction for the purposes of statutory funds requirements (subpart 3 of part 2 of IPSA). Figure 46 – Jurisdiction of applicable solvency requirements There are nine different prescribed jurisdictions which have a New Zealand solvency exemption and home jurisdiction solvency requirements applied. The most common home jurisdiction is Australia. Three EU jurisdictions had Solvency I requirements applying for the financial year end date during 2015 (Solvency II requirements at time of writing this paper). The other five home jurisdictions are three US states and two countries in Asia (Japan and India). All foreign insurers that are subject to their home jurisdiction solvency requirements (with a New Zealand solvency exemption) are required to report their solvency position to RBNZ at financial year end and half year by a copy of their home supervisor’s solvency report and also using the solvency exempt return template provided on the website11 . 11 http://www.rbnz.govt.nz/regulation-and-supervision/insurers/new-zealand-insurer-data-collections

85 19 October 2016 How solvency requirements and results are presented varies considerably across jurisdictions. For example some jurisdictions have a requirement to maintain a minimum ratio of 200% or some other level than 100%, and accordingly cannot be directly compared to a New Zealand requirement of a minimum solvency margin of $0 (or equivalently a minimum solvency ratio of 100%). Some jurisdictions have multiple solvency requirements (e.g. multiple triggers for various supervisory actions including optional and compulsory supervisory actions), and the insurer has not necessarily reported on the more onerous one of these. The calculations are made for the insurer as a whole, not the New Zealand branch. For many foreign insurers, their New Zealand insurance business is well under 1% of their total insurance business and so their New Zealand branch may not be representative of the insurer as a whole. Therefore we are unable to provide detailed analysis of solvency of insurers that are subject to home jurisdiction solvency requirements, and it is also generally not meaningful to make direct comparisons with the insurers that are subject to the New Zealand solvency requirements. Figure 47 – Solvency ratio under home jurisdiction solvency requirements The median reported solvency ratio is 236% and the lowest is 118%.

86 19 October 2016 Insurers subject to Australian solvency requirements Australian solvency requirements have several common elements to New Zealand solvency requirements, and with broadly similar calibration overall. There were 19 insurers subject to Australian solvency requirements at the financial year end date during 2015. We can do a limited analysis of their solvency position, including comparisons with the insurers that are subject to the New Zealand solvency requirements. However, the figures are not fully comparable for several reasons, including:  Differences in the solvency requirements including calibration.  The reported solvency position for 19 insurers subject to Australian solvency requirements are for the insurer as a whole and not the New Zealand branch.  The circumstances of 62 insurers subject to New Zealand solvency standards may differ from the 19 licensed New Zealand insurers that are subject to Australian solvency requirements. This includes a different mix of insurers (e.g. no specialist health insurers), different exposures to risks, different mitigants, different risk appetites, etc. Figure 48 – Australian Solvency Ratio Adjusted for 19 insurers For the 19 licensed New Zealand insurers that are subject to Australian solvency requirements, the median Solvency Ratio Adjusted is 184%, the upper quartile is 242%, the lower quartile is 136%, and the lowest is 118%. At first glance the median, upper and lower quartile Solvency Ratios Adjusted are similar for licensed New Zealand insurers that are subject to Australian solvency requirements and for those that are subject to New Zealand solvency standards. However, there is only one insurer (5% by number) that is subject to Australian solvency standards with Solvency Ratio Adjusted below 130%, compared with 13 (21% by number) insurers that are subject to New Zealand solvency standards.

87 19 October 2016 Feedback on Solvency Exempt Return The feedback in this section is necessarily general in nature and may only apply to insurers in certain circumstances. This feedback does not cover all of the questions or issues that have been identified by RBNZ in relation to Insurer Solvency Exempt Return (ISER). ISER Requirement Topic Feedback

1. S121 notice Due date All returns must be submitted by the relevant due date.
2. S121 notice Submission method ISER must be submitted using the RBNZ secure upload facility, and not by email unless otherwise agreed by RBNZ. Email is not as secure and is less efficient for our processing.
3. S121 notice Format ISER must be submitted in Excel format. PDF format is unable to be loaded.
4. S121 notice Version Please submit ISER using the correct version of the template, as specified on the insurer data collections webpage based on report date (the as at date of the calculations). An incorrect version might not be able to be loaded.
5. CEO sign-off CEO sign-off Details of the CEO sign-off must be provided in the space provided. If the ISER is resubmitted a fresh sign-off is required (i.e. the date of sign-off should be updated).
6. Solvency data Reporting entity The home jurisdiction solvency position is required to be reported for the licensed insurer. The reporting entity is therefore wider than the New Zealand branch or the statutory fund to which the New Zealand insurance business is referable.
7. Solvency data Supervisory adjustment Some insurers are subject to a supervisory adjustment to their solvency requirements, and this has not been reflected in the data.
8. Solvency data Multiple solvency requirements In some jurisdictions there are multiple solvency requirements (e.g. a level for mandatory intervention by the supervisor and a higher requirement). It is expected that the most onerous solvency requirement that applies is reported, at a minimum. There is space for two solvency requirements to be reported.

88 19 October 2016 ISER Requirement Topic Feedback 9. Solvency data Internal targets The regulatory solvency position should be reported. The solvency position relative to internal targets is not currently collected in ISER. 10. Solvency data Jurisdiction Please provide the correct name of the home jurisdiction and supervisor. E.g. in USA this is the relevant state. 11. Solvency data Labels Please provide the names of solvency requirement, required amount and actual amount as specified by the home jurisdiction supervisor. This assists checking against the copy of solvency returns to the home jurisdiction supervisor. 12. Form Cover sheet Selecting the wrong insurer name causes problems in loading the data. 13. Form Cover sheet Entering the wrong report date (the as at date of the calculation) causes problems in loading the data. 14. Form All sheets Monetary amounts in the ISER are required to be NZ$ thousands. Some insurers have reported in NZ$s or NZ$ millions, or in their home currency. 15. Form All sheets Sometimes comments are ambiguously worded or missing when they are relevant. Good comments support clear interpretation of the solvency data. 16. Form Sign-off sheet The contact(s) entered should be the person(s) at the insurer or their agent (e.g. an external accountant or actuary) to whom RBNZ should, in the first instance, direct its feedback or questions. Sometimes a contact person at RBNZ is listed instead in error. 17. Form Links Links to other files can cause problems in loading the data. Please paste as values all cells that link to an external file before submission.

89 19 October 2016 Part Three – Conclusion The analysis has identified some issues that are relevant generally to insurers as well as some issues that are specific to some individual insurers. RBNZ is in the process of providing feedback through multiple channels as appropriate (i.e. discussions with insurers, industry newsletter, publications, guidance, etc.). Some minor changes have been identified for the next versions of the Solvency Return template and the Guide to Completing the Solvency Return. There are also some areas for further consideration by RBNZ as part of its supervision. For example how appropriate are insurers’ capital targets (in general and in particular for insurers with capital targets that are small relative to the risks being borne)? RBNZ intends to conduct a thematic review of Appointed Actuaries in 2017. Some of this analysis will help inform the scope of that review (which is yet to be determined at the time of writing this paper). This analysis may also be a useful input to some components of the IPSA review and to the next update of the solvency standards. A regular publication of some of the information contained in this paper might be useful in the context of the purposes under IPSA section 3 to:  Promote the maintenance of a sound and efficient insurance sector.  Promote public confidence in the insurance sector. Some solvency data is already publicly available through disclosure requirements on insurer websites and in their annual financial statements (which for most insurers are available on MBIE’s website at the Companies Office or at the relevant mutual register). RBNZ intends to consult on a proposal for regular data publication in due course (probably in early 2017). Following the conference paper and presentation and/or following feedback from RBNZ, some insurers and Appointed Actuaries will wish to discuss with their supervisor aspects or issues that are relevant to them.

90 19 October 2016 Appendices Each figure that lists a solvency component or result by insurer is split into two parts (as applicable):  % amounts for insurers that are subject to New Zealand solvency standards with main type of insurance of general insurance.  % amounts for insurers that are subject to New Zealand solvency standards with main type of insurance of life insurance or health insurance. The numbering for figures in the appendices has been set to align with the corresponding number of the figure with totals that is in the body of this paper. This means there are some missing figure numbers in the appendices. The figures in the appendices contain anonymised information by insurer, in order to present the distribution of amounts (in percentage terms) across insurers. Dollar amounts are not shown by insurer. The order of insurers in each figure has been randomised independently of all other tables. This means rows in a table do not correspond to the same rows in any other table, other than for totals.

91 19 October 2016 Appendix – Schedule of insurers Figure A1 – Schedule of insurers Insurer (code) Domicile of home supervisor Jurisdiction of solvency requirements Main type of insurance Financial year end date AAINSU New Zealand New Zealand General 30-Jun ACANTH New Zealand New Zealand General 31-Dec ACSNZL New Zealand New Zealand General 31-Dec AIAINT Bermuda New Zealand Life 30-Nov AIGINS New Zealand New Zealand General 31-Dec AIOINI Japan Japan General 31-Mar ALLAUS Australia Australia General 31-Dec AMEINC USA (Indiana) New Zealand Life 31-Dec AMIINS New Zealand New Zealand General 30-Jun AMPLIF Australia Australia Life 31-Dec ASTERO New Zealand New Zealand Life 30-Jun ATRADI EU (Netherlands) EU (Netherlands) General 31-Dec BENEFI New Zealand New Zealand General 31-Mar BERINT EU (UK) EU (UK) General 31-Dec BERKSH USA (Nebraska) USA (Nebraska) General 31-Dec BNZLIF New Zealand New Zealand Life 30-Sep CBLINS New Zealand New Zealand General 31-Dec CHITAI New Zealand New Zealand General 31-Dec CHUAUS Australia Australia General 31-Dec CHUNZL New Zealand New Zealand General 31-Dec CIGNAL New Zealand New Zealand Life 31-Dec CONSUM New Zealand New Zealand General 30-Jun COOPLI New Zealand New Zealand Life 31-Mar CREDUN New Zealand New Zealand General 30-Jun DENTAL New Zealand New Zealand Life 31-Mar DPLINS New Zealand New Zealand Life 31-Mar EDUCAT New Zealand New Zealand Health 30-Jun FACMIN EU (UK) EU (UK) General 31-Dec FACMUT USA (Rhode Island) USA (Rhode Island) General 31-Dec FIDELI New Zealand New Zealand Life 30-Jun FIRAME Australia Australia General 31-Dec FMGINS New Zealand New Zealand General 31-Mar FOUNDA New Zealand New Zealand Life 30-Sep GENREA Australia Australia General 31-Dec GENREL Australia Australia Life 31-Dec GENWOR Australia Australia General 31-Dec GORDIA Australia Australia General 31-Dec GREATL EU (UK) EU (UK) General 31-Dec GROSVE New Zealand New Zealand General 30-Jun HALLMG Australia Australia General 31-Dec HALLML Australia Australia Life 31-Dec HANNOV Australia Australia Life 31-Dec HEALTH New Zealand New Zealand Health 31-Aug HOLLAR Australia Australia General 30-Jun IAGNZL New Zealand New Zealand General 30-Jun INDEMN New Zealand New Zealand General 31-Mar KIWIIN New Zealand New Zealand Life 30-Jun LIFETI New Zealand New Zealand Life 31-Mar LLOYDS EU (UK) EU (UK) General 31-Dec LOCGOV New Zealand New Zealand General 31-Dec LUMLEG New Zealand New Zealand General 30-Jun

92 19 October 2016 Insurer (code) Domicile of home supervisor Jurisdiction of solvency requirements Main type of insurance Financial year end date MANCHE New Zealand New Zealand Life 31-May MARACI New Zealand New Zealand General 30-Jun MEDINS New Zealand New Zealand General 31-Mar MEDLIF New Zealand New Zealand Life 31-Mar MEDPRO New Zealand New Zealand General 31-Mar MERIDI New Zealand New Zealand General 30-Jun MITSUI Japan Japan General 31-Mar MUNREA Australia Australia Life 31-Dec MUNREC EU (Germany) EU (Germany) General 31-Dec NATMUT Australia Australia Life 31-Dec NEWIND India India General 31-Mar NIBNZL New Zealand New Zealand Health 30-Jun ONEPAT New Zealand New Zealand Life 30-Sep PACINT Australia Australia General 30-Jun PACLIF New Zealand New Zealand Life 31-Dec PARTNE New Zealand New Zealand Life 31-Mar PINNAC New Zealand New Zealand Life 31-Mar POLICE New Zealand New Zealand Health 30-Jun PRODUC New Zealand New Zealand General 30-Jun PROVID New Zealand New Zealand General 31-Mar QBEAUS Australia Australia General 31-Dec QBEINT Australia Australia General 31-Dec QBELEN Australia Australia General 31-Dec QUESTI New Zealand New Zealand General 31-Mar RGAREA Australia Australia Life 31-Dec SCORGL EU (France) New Zealand Life 31-Dec SELACS New Zealand New Zealand General 31-Dec SOVERE New Zealand New Zealand Life 30-Jun STHBUR New Zealand New Zealand General 31-Dec STHCRB New Zealand New Zealand General 30-Jun STHCRM New Zealand New Zealand Health 30-Jun STHSUR New Zealand New Zealand Life 31-Mar SUNDER EU (UK) EU (UK) General 20-Feb SWISSL Australia Australia Life 31-Dec TEALIN New Zealand New Zealand General 30-Jun TELECO New Zealand New Zealand General 30-Jun TOKIOM Japan Japan General 31-Mar TOWINS New Zealand New Zealand General 30-Sep TRUSTP New Zealand New Zealand General 31-Mar UNIMED New Zealand New Zealand Health 30-Jun UNISON New Zealand New Zealand General 31-Mar VEROIN New Zealand New Zealand General 30-Jun VEROLI New Zealand New Zealand General 30-Jun VETPRO New Zealand New Zealand General 30-Sep VIRSUR USA (Illinois) USA (Illinois) General 31-Dec WESTPA New Zealand New Zealand Life 30-Sep YOUINZ New Zealand New Zealand General 30-Jun ZURICH Australia Australia General 31-Dec

93 19 October 2016 Appendix – Capital Figure A7 – Capital components qualifying Shares qualifying Perpetual & Credit Union qualifying Reserves Retained Earnings Mutual Members' Funds Head Office Balance Total General 128% 0% ( 7%) ( 21%) - - 100% G 1 121% - 9% ( 30%) - - 100% G 2 102% - - ( 2%) - - 100% G 3 51% - - 49% - - 100% G 4 241% - ( 161%) 20% - - 100% G 5 35% - - 65% - - 100% G 6 129% - - ( 29%) - - 100% G 7 137% - - ( 37%) - - 100% G 8 70% - - 30% - - 100% G 9 27% - - 73% - - 100% G 10 24% - - 76% - - 100% G 11 55% - - 45% - - 100% G 12 66% - - 34% - - 100% G 13 71% - - 29% - - 100% G 14 100% - - - - - 100% G 15 78% - - 21% - - 100% G 16 56% - - 44% - - 100% G 17 38% - 7% 56% - - 100% G 18 - - - 100% - - 100% G 19 69% - - 31% - - 100% G 20 141% - - ( 41%) - - 100% G 21 56% - - 44% - - 100% G 22 100% - - - - - 100% G 23 0% - - 100% - - 100% G 24 3% - ( 3%) 100% - - 100% G 25 28% - - 72% - - 100% G 26 98% 2% - - - - 100% G 27 80% - - 20% - - 100% G 28 71% - - 29% - - 100% G 29 100% - - - - - 100% G 30 100% - - - - - 100% G 31 198% - - ( 98%) - - 100% G 32 170% - 0% ( 70%) - - 100% G 33 100% - - - - - 100% G 34 72% - - 28% - - 100% G 35 262% - - ( 162%) - - 100% Insurer by Capital components (% of Net Assets) main type of insurance

94 19 October 2016 qualifying Shares qualifying Perpetual & Credit Union qualifying Reserves Retained Earnings Mutual Members' Funds Head Office Balance Total Life 49% 0% 0% 44% 1% 6% 100% L 1 62% - - 38% - - 100% L 2 35% - - 65% - - 100% L 3 63% 19% 0% 18% - - 100% L 4 26% - - 74% - - 100% L 5 100% - - - - - 100% L 6 7% - 1% 92% - - 100% L 7 14% - - 86% - - 100% L 8 0% - - 100% - - 100% L 9 70% - - 30% - - 100% L 10 23% - - 77% - - 100% L 11 100% - - - - - 100% L 12 - - - - 98% - 98% L 13 - - - - - 100% 100% L 14 - - - - - 100% 100% L 15 100% - - - - - 100% L 16 63% - - 37% - - 100% L 17 47% - - 53% - - 100% L 18 78% - 6% 16% - - 100% L 19 - - - - - 100% 100% L 20 100% - - - - - 100% L 21 0% - - 100% - - 100% qualifying Shares qualifying Perpetual & Credit Union qualifying Reserves Retained Earnings Mutual Members' Funds Head Office Balance Total Health 5% - 0% 11% 84% - 100% H 1 0% - 1% 99% - - 100% H 2 48% - - 52% - - 100% H 3 - - - - 100% - 100% H 4 - - - - 100% - 100% H 5 - - - - 100% - 100% H 6 - - - - 100% - 100% Capital components (% of Net Assets) Insurer by Capital components (% of Net Assets) main type of insurance Insurer by main type of insurance

95 19 October 2016 Appendix – Deductions From Capital Figure A9 – Deductions From Capital components Goodwill & Intangible Deferred Tax Assets Related Party Declared Dividends Deferred Acquisition Cost excess Other Total General 11% 16% 2% 3% 0% 0% 32% G 1 - 0% - - - - 0% G 2 - - - 6% - - 6% G 3 3% 1% - - - - 4% G 4 - - - - - - - G 5 - - - - - - - G 6 - - - - - - - G 7 7% - - - - - 7% G 8 1% - - - - - 1% G 9 - 0% - - - - 0% G 10 - - - - - - - G 11 1% - - - - - 1% G 12 17% - - - - 27% 44% G 13 13% 31% 1% - - - 45% G 14 5% - - - 2% - 8% G 15 0% - - - - - 0% G 16 - - - - - - - G 17 5% - - - - - 5% G 18 - - - - - - - G 19 - 3% - - - - 3% G 20 - 3% - 30% - 3% 35% G 21 - 5% 3% - - - 8% G 22 0% - - - - - 0% G 23 2% 8% - - - - 9% G 24 - - - - - - - G 25 18% 4% 8% 16% - - 46% G 26 - 4% - - - - 4% G 27 0% 23% - - - - 23% G 28 - - 42% - - - 42% G 29 - - 69% - 0% - 69% G 30 - - - - - - - G 31 - 5% - - - - 5% G 32 - 0% - - - - 0% G 33 - - - - - - - G 34 - - - - 6% - 6% G 35 34% - - - - - 34% Insurer by Deductions From Capital components (% of Net Assets) main type of insurance

96 19 October 2016 Goodwill & Intangible Deferred Tax Assets Related Party Declared Dividends Deferred Acquisition Cost excess Other Total Life 5% 2% 2% 0% - 0% 9% L 1 - - - - - - - L 2 2% - - - - - 2% L 3 - 5% 0% 10% - - 16% L 4 0% 12% 1% - - - 13% L 5 3% - - 15% - - 18% L 6 1% 5% - - - - 5% L 7 9% - - - - - 9% L 8 1% - 6% - - - 6% L 9 21% ( 2%) - - - - 19% L 10 - 1% - - - 0% 1% L 11 0% - 0% - - - 0% L 12 - - - - - - - L 13 - - - - - - - L 14 - - - - - - - L 15 - - 0% - - - 0% L 16 - - - - - - - L 17 - 0% - - - - 0% L 18 3% 17% - 2% - - 22% L 19 1% - - - - - 1% L 20 4% 19% - - - - 23% L 21 0% - - 16% - - 16% Goodwill & Intangible Deferred Tax Assets Related Party Declared Dividends Deferred Acquisition Cost excess Other Total Health 4% 2% - - 2% - 8% H 1 2% - - - - - 2% H 2 5% - - - - - 5% H 3 2% - - - - - 2% H 4 1% - - - - - 1% H 5 2% - - - - - 2% H 6 6% 19% - - 19% - 45% Insurer by main type of insurance Deductions From Capital components (% of Net Assets) Insurer by Deductions From Capital components (% of Net Assets) main type of insurance

97 19 October 2016 Appendix – Aggregate Minimum Solvency Capital Figure A10 – Aggregate Minimum Solvency Capital components effect of Fixed Capital Amount Non-Life SS Minimum Solvency Capital Life SS Minimum Solvency Capital Variable Annuity SS Minimum Solvency Capital Aggregate Minimum Solvency Capital General 0% 31% 0% - 32% G 1 - 31% - - 31% G 2 - 49% - - 49% G 3 - 28% - - 28% G 4 - 55% - - 55% G 5 - 40% - - 40% G 6 - 20% 0% - 20% G 7 - 92% - - 92% G 8 42% 41% 2% - 85% G 9 - 48% - - 48% G 10 - 19% - - 19% G 11 - 44% - - 44% G 12 - 71% - - 71% G 13 11% 61% - - 72% G 14 14% 60% - - 74% G 15 11% 13% - - 24% G 16 - 28% - - 28% G 17 0% 17% - - 17% G 18 - 49% - - 49% G 19 17% 20% - - 37% G 20 - 40% - - 40% G 21 64% 10% - - 75% G 22 - 51% 0% - 51% G 23 18% 6% - - 24% G 24 21% 44% - - 66% G 25 - 14% 1% - 15% G 26 17% 6% - - 22% G 27 - 64% - - 64% G 28 - 33% - - 33% G 29 - 65% - - 65% G 30 - 23% - - 23% G 31 - 48% - - 48% G 32 - 57% 0% - 57% G 33 - 36% - - 36% G 34 - 11% - - 11% G 35 49% 12% - - 61% Insurer by Aggregate Minimum Solvency Capital components (% of Net Assets) main type of insurance

98 19 October 2016 effect of Fixed Capital Amount Non-Life SS Minimum Solvency Capital Life SS Minimum Solvency Capital Variable Annuity SS Minimum Solvency Capital Aggregate Minimum Solvency Capital Life 0% 0% 66% - 67% L 1 - - 89% - 89% L 2 - - 68% - 68% L 3 - - 60% - 60% L 4 - 3% 23% - 27% L 5 - - 49% - 49% L 6 - - 48% - 48% L 7 10% 53% 6% - 69% L 8 - - 24% - 24% L 9 - - 56% - 56% L 10 - - 53% - 53% L 11 - - 64% - 64% L 12 42% - 20% - 62% L 13 - - 79% - 79% L 14 2% 11% 52% - 65% L 15 - - 72% - 72% L 16 - - 67% - 67% L 17 - - 46% - 46% L 18 3% - 32% - 35% L 19 - - 84% - 84% L 20 - - 16% - 16% L 21 - - 71% - 71% effect of Fixed Capital Amount Non-Life SS Minimum Solvency Capital Life SS Minimum Solvency Capital Variable Annuity SS Minimum Solvency Capital Aggregate Minimum Solvency Capital Health 0% 18% - - 19% H 1 16% 31% - - 47% H 2 - 10% - - 10% H 3 - 19% - - 19% H 4 - 20% - - 20% H 5 - 14% - - 14% H 6 13% 19% - - 32% Insurer by main type of insurance Insurer by main type of insurance Aggregate Minimum Solvency Capital components (% of Net Assets) Aggregate Minimum Solvency Capital components (% of Net Assets)

99 19 October 2016 Appendix – Non-Life solvency standards Non-Life SS Minimum Solvency Capital Figure A11 – Non-Life SS Minimum Solvency Capital components RI = reinsurance Insurance Risk Capital Charge Catastrophe Risk Capital Charge RI Recovery Risk Capital Charge Asset Risk Capital Charge Currency Risk Capital Charge Interest Rate Risk Capital Charge Total General 6% 5% 3% 15% 0% 2% 31% G 1 14% 10% 4% 18% 0% 3% 49% G 2 4% 5% - 14% 6% 2% 31% G 3 12% - 0% 24% - - 36% G 4 41% - 2% 2% - - 44% G 5 16% 7% 3% 11% 1% 2% 40% G 6 10% 2% - 47% - 0% 60% G 7 5% 7% - 58% - 0% 71% G 8 4% 1% - 9% 3% 2% 19% G 9 19% 9% 1% 29% - 6% 64% G 10 17% 8% 0% 6% 8% 1% 40% G 11 11% 31% 0% 9% 2% 2% 55% G 12 2% 4% - 3% - 1% 10% G 13 1% - 0% 16% 4% 2% 23% G 14 11% 13% 1% 13% 4% 3% 44% G 15 9% 5% - 26% - 0% 41% G 16 23% 5% 1% 25% 0% 2% 57% G 17 9% 10% 5% 8% - 2% 33% G 18 - - 3% 1% 1% - 6% G 19 3% 1% 0% 6% 0% 1% 11% G 20 ( 2%) 3% 1% 16% 0% 1% 20% G 21 8% 4% 10% 5% 0% 2% 28% G 22 17% - - 10% 1% 0% 28% G 23 16% 5% 0% 22% 0% 5% 48% G 24 7% - 5% 1% - 0% 13% G 25 6% - 67% 18% - - 92% G 26 2% - 1% 2% - 0% 6% G 27 2% 46% - 1% - - 49% G 28 12% 1% - 6% - 2% 20% G 29 34% 13% 5% 7% - 2% 61% G 30 2% 3% 0% 9% - - 14% G 31 3% - 1% 13% - - 17% G 32 21% 13% 7% 6% - 1% 48% G 33 27% 13% 6% 20% - 0% 65% G 34 1% 1% - 9% - 1% 12% G 35 19% 3% 11% 9% 2% 6% 51% Insurer by Non-Life Solvency Standard Minimum Solvency Capital components (% of Net Assets) main type of insurance

100 19 October 2016 RI = reinsurance Insurance Risk Capital Charge Catastrophe Risk Capital Charge RI Recovery Risk Capital Charge Asset Risk Capital Charge Currency Risk Capital Charge Interest Rate Risk Capital Charge Total Life 1% 1% - 3% 0% 0% 6% L 1 - - - - - - - L 2 - - - - - - - L 3 - - - - - - - L 4 - - - - - - - L 5 - - - - - - - L 6 - - - - - - - L 7 - - - - - - - L 8 - - - - - - - L 9 13% 1% - 38% 1% 0% 53% L 10 - - - - - - - L 11 - - - - - - - L 12 0% 1% - 2% 0% 0% 3% L 13 - - - - - - - L 14 - - - - - - - L 15 - - - - - - - L 16 - - - - - - - L 17 - - - - - - - L 18 6% 1% - 4% - - 11% L 19 - - - - - - - L 20 - - - - - - - L 21 - - - - - - - Insurance Risk Capital Charge Catastrophe Risk Capital Charge RI Recovery Risk Capital Charge Asset Risk Capital Charge Currency Risk Capital Charge Interest Rate Risk Capital Charge Total Health 9% 1% - 7% 0% 2% 18% H 1 8% 1% - 4% - 1% 14% H 2 7% 0% - 2% - 1% 10% H 3 20% 6% - 4% - 1% 31% H 4 3% 2% - 9% 1% 4% 20% H 5 2% 2% - 8% 6% 0% 19% H 6 11% 0% - 7% 0% 1% 19% Insurer by main type of insurance Non-Life Solvency Standard Minimum Solvency Capital components (% of Net Assets) Insurer by Non-Life Solvency Standard Minimum Solvency Capital components (% of Net Assets) main type of insurance

101 19 October 2016 Figure A12 – Non-Life SS implied average risk factors Insurance Risk Capital Charge as % of Catastrophe Risk Capital Charge as % of Reinsurance Recovery Risk Capital Charge as % of Asset Risk Capital Charge as % of Premium Liabilities

• Net Outstanding Claims Liabilities Annual Gross Premium Reinsurance Assets Assets (excluding reinsurance & Deductions From Capital) General 6% 4% 3% 6% G 1 16% 10% 2% 2% G 2 11% 5% 3% 6% G 3 12% 0% - 8% G 4 10% 5% 3% 3% G 5 141% - 3% 3% G 6 16% 40% - 12% G 7 10% 2% 3% 5% G 8 99% 26% - 44% G 9 14% 5% 25% 8% G 10 18% 4% - 6% G 11 14% 12% 3% 7% G 12 19% 84% 4% 6% G 13 - - 4% 1% G 14 10% 256% - 1% G 15 - - 4% 2% G 16 15% 3% 4% 2% G 17 15% 2% - 22% G 18 15% 1% 5% 3% G 19 14% 5% 2% 4% G 20 12% 3% 3% 4% G 21 16% 16% 2% 19% G 22 8% 3% 3% 3% G 23 - - 4% 15% G 24 22% - 4% 12% G 25 12% 3% - 14% G 26 11% 2% 2% 7% G 27 44% - 2% 4% G 28 - - - 10% G 29 13% 3% 4% 2% G 30 14% 2% - 3% G 31 ( 2%) 3% 2% 7% G 32 12% 8% 4% 2% G 33 14% 7% - 3% G 34 58% - 4% 1% G 35 - - 4% 15% Insurer by Non-Life Solvency Standard implied average risk factors main type of insurance

102 19 October 2016 Insurance Risk Capital Charge as % of Catastrophe Risk Capital Charge as % of Reinsurance Recovery Risk Capital Charge as % of Asset Risk Capital Charge as % of Premium Liabilities

• Net Outstanding Claims Liabilities Annual Gross Premium Reinsurance Assets Assets (excluding reinsurance & Deductions From Capital) Life 30% 2% - 7% L 1 - - - - L 2 - - - - L 3 - - - - L 4 14% 2% - 5% L 5 - - - - L 6 42% 1% - 21% L 7 60% 2% - 5% L 8 - - - - L 9 - - - - L 10 - - - - L 11 - - - - L 12 - - - - L 13 - - - - L 14 - - - - L 15 - - - - L 16 - - - - L 17 - - - - L 18 - - - - L 19 - - - - L 20 - - - - L 21 - - - - Insurance Risk Capital Charge as % of Catastrophe Risk Capital Charge as % of Reinsurance Recovery Risk Capital Charge as % of Asset Risk Capital Charge as % of Premium Liabilities
• Net Outstanding Claims Liabilities Annual Gross Premium Reinsurance Assets Assets (excluding reinsurance & Deductions From Capital) Health 15% 0% - 5% H 1 15% 2% - 2% H 2 12% 4% - 8% H 3 15% 0% - 5% H 4 12% 5% - 7% H 5 18% 0% - 1% H 6 14% 0% - 2% Insurer by main type of insurance Non-Life Solvency Standard implied average risk factors Insurer by main type of insurance Non-Life Solvency Standard implied average risk factors

103 19 October 2016 Non-Life SS Insurance Risk Capital Charge Figure A13 – Non-Life SS Insurance Risk Capital Charge components Underwriting Risk (before adj.) Premium Liabilities Adjustment Run-Off Risk (before adj.) Outstanding Claims Adjustment Long-Term Risk Captive Total General 6% - 7% ( 7%) 0% 0% 6% G 1 4% - 4% - - - 8% G 2 - - - - - 12% 12% G 3 7% - 4% - - - 11% G 4 - - 13% 28% - - 41% G 5 - - 6% - - - 6% G 6 0% - 1% - - - 1% G 7 - - - - - - - G 8 33% - 1% - - - 34% G 9 - - - - - 17% 17% G 10 7% - 4% ( 2%) - - 9% G 11 16% - 40% ( 29%) - - 27% G 12 2% - 2% - - - 4% G 13 1% - 1% - - - 2% G 14 12% - 9% - - - 21% G 15 10% - 18% ( 5%) - - 23% G 16 6% - 14% - - - 19% G 17 13% - 3% ( 2%) - - 14% G 18 9% - 2% - - - 11% G 19 1% - - - - - 1% G 20 2% - 0% - - - 2% G 21 11% - 5% - - - 16% G 22 5% - 4% - - - 9% G 23 12% - 1% ( 1%) - - 12% G 24 3% - 8% ( 13%) - - ( 2%) G 25 0% - 0% - 5% - 5% G 26 1% - 3% - - - 4% G 27 - - 7% - - - 7% G 28 - - - - - 3% 3% G 29 9% - 1% - - - 10% G 30 - - - - - 2% 2% G 31 13% - 4% - - - 17% G 32 11% - 8% - - - 19% G 33 1% - 0% 0% - - 2% G 34 3% - 0% - - - 3% G 35 13% - 4% ( 2%) - - 16% Insurer by Non-Life Solvency Standard Insurance Risk Capital Charge components (% of Net Assets) main type of insurance

104 19 October 2016 Underwriting Risk (before adj.) Premium Liabilities Adjustment Run-Off Risk (before adj.) Outstanding Claims Adjustment Long-Term Risk Captive Total Life 1% - 0% - - - 1% L 1 - - - - - - - L 2 6% - - - - - 6% L 3 - - - - - - - L 4 - - - - - - - L 5 - - - - - - - L 6 - - - - - - - L 7 - - - - - - - L 8 - - - - - - - L 9 - - - - - - - L 10 - - - - - - - L 11 13% - 0% - - - 13% L 12 0% - 0% - - - 0% L 13 - - - - - - - L 14 - - - - - - - L 15 - - - - - - - L 16 - - - - - - - L 17 - - - - - - - L 18 - - - - - - - L 19 - - - - - - - L 20 - - - - - - - L 21 - - - - - - - Underwriting Risk (before adj.) Premium Liabilities Adjustment Run-Off Risk (before adj.) Outstanding Claims Adjustment Long-Term Risk Captive Total Health 7% - 2% ( 0%) - - 9% H 1 9% - 2% - - - 11% H 2 1% - 2% - - - 2% H 3 7% - 2% ( 0%) - - 8% H 4 3% - 1% ( 1%) - - 3% H 5 16% - 4% - - - 20% H 6 5% - 2% - - - 7% Insurer by main type of insurance Non-Life Solvency Standard Insurance Risk Capital Charge components (% of Net Assets) Insurer by main type of insurance Non-Life Solvency Standard Insurance Risk Capital Charge components (% of Net Assets)

105 19 October 2016 Non-Life SS Reinsurance Recovery Risk Capital Charge Figure A14 – Non-Life SS RI Recovery Risk Capital Charge components RI = reinsurance Outstanding Claims Deferred Reinsurance Expense Paid Claims Coinsurers and EQC Total General 2% 0% 0% 0% 3% G 1 - - 0% - 0% G 2 - - - - - G 3 1% - 1% - 2% G 4 - 1% - - 1% G 5 7% 2% 1% - 10% G 6 - 3% - - 3% G 7 - - - - - G 8 - - - - - G 9 0% - 0% - 0% G 10 - 0% - - 0% G 11 4% 2% 0% - 6% G 12 7% - - - 7% G 13 0% 0% 0% - 0% G 14 67% - - - 67% G 15 3% 1% 0% - 5% G 16 - - - - - G 17 2% 0% 0% 1% 3% G 18 4% - 1% - 5% G 19 0% 0% 0% - 0% G 20 3% 1% 0% - 4% G 21 1% 0% 0% - 1% G 22 - - - - - G 23 1% 0% 0% - 1% G 24 - - - - - G 25 - - - - - G 26 - - - - - G 27 - 1% - - 1% G 28 9% 2% 0% - 11% G 29 - 0% - - 0% G 30 - - - - - G 31 1% 0% 0% - 1% G 32 0% 5% - - 5% G 33 - - - - - G 34 - 0% - - 0% G 35 0% 1% - - 1% Insurer by Non-Life Solvency Standard RI Recovery Risk Capital Charge components (% of Net Assets) main type of insurance

106 19 October 2016 RI = reinsurance Outstanding Claims Deferred Reinsurance Expense Paid Claims Coinsurers and EQC Total Life - - - - - L 1 - - - - - L 2 - - - - - L 3 - - - - - L 4 - - - - - L 5 - - - - - L 6 - - - - - L 7 - - - - - L 8 - - - - - L 9 - - - - - L 10 - - - - - L 11 - - - - - L 12 - - - - - L 13 - - - - - L 14 - - - - - L 15 - - - - - L 16 - - - - - L 17 - - - - - L 18 - - - - - L 19 - - - - - L 20 - - - - - L 21 - - - - - Outstanding Claims Deferred Reinsurance Expense Paid Claims Coinsurers and EQC Total Health - - - - - H 1 - - - - - H 2 - - - - - H 3 - - - - - H 4 - - - - - H 5 - - - - - H 6 - - - - - Insurer by main type of insurance Non-Life Solvency Standard RI Recovery Risk Capital Charge components (% of Net Assets) Insurer by main type of insurance Non-Life Solvency Standard RI Recovery Risk Capital Charge components (% of Net Assets)

107 19 October 2016 Non-Life SS Asset Risk Capital Charge Figure A15 – Non-Life SS Asset Risk Capital Charge components Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Asset Concentration Risk Total General 5% 2% 7% 1% 0% 0% 15% G 1 6% 0% 1% 0% - - 8% G 2 2% 0% 7% - - - 9% G 3 5% - - - - 2% 7% G 4 1% 8% 1% - - - 10% G 5 1% - 0% - - 0% 1% G 6 6% 0% 3% 0% - - 9% G 7 4% 3% 9% 0% - 0% 16% G 8 4% 0% 2% - - - 6% G 9 3% 0% 4% 19% - - 26% G 10 4% 0% 1% 0% - - 5% G 11 2% 0% 2% 2% - 0% 6% G 12 5% 0% 2% 4% - - 11% G 13 2% 0% 1% - - - 3% G 14 - 18% - - - 6% 24% G 15 3% 1% 8% 0% - - 13% G 16 4% 2% 0% - - 0% 6% G 17 2% - 12% 0% - 4% 18% G 18 3% - 2% 1% - 0% 6% G 19 1% - - - - - 1% G 20 3% - - 53% - 2% 58% G 21 6% 8% 11% 0% 0% - 25% G 22 7% 2% 9% - - - 18% G 23 3% 26% 1% 17% - - 47% G 24 1% 3% 5% - - - 9% G 25 1% - 0% - - - 1% G 26 17% 2% 1% - - - 20% G 27 6% 4% 12% - - - 22% G 28 1% 1% 13% - - - 14% G 29 5% 5% 18% - - 1% 29% G 30 0% 0% 9% - - - 9% G 31 1% 2% 12% - - - 16% G 32 0% 13% - - - - 13% G 33 0% 0% 1% 1% - - 2% G 34 1% - 1% 8% - - 9% G 35 1% - 1% - - - 2% Insurer by Non-Life Solvency Standard Asset Risk Capital Charge components (% of Net Assets) main type of insurance

108 19 October 2016 Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Asset Concentration Risk Total Life 0% 0% 2% 0% - 1% 3% L 1 - - - - - - - L 2 - - - - - - - L 3 - - - - - - - L 4 - - - - - - - L 5 - - - - - - - L 6 - - - - - - - L 7 - - - - - - - L 8 1% 0% 22% - - 14% 38% L 9 - - - - - - - L 10 2% 0% 1% - - - 4% L 11 0% - 1% 0% - 0% 2% L 12 - - - - - - - L 13 - - - - - - - L 14 - - - - - - - L 15 - - - - - - - L 16 - - - - - - - L 17 - - - - - - - L 18 - - - - - - - L 19 - - - - - - - L 20 - - - - - - - L 21 - - - - - - - Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Asset Concentration Risk Total Health 2% 1% 2% 1% - 0% 7% H 1 3% - 1% - - 1% 4% H 2 3% 2% 1% 1% - - 7% H 3 2% - 2% 0% - - 4% H 4 2% 1% 7% 0% - - 9% H 5 1% 0% 8% - - 0% 8% H 6 1% 0% 0% 0% - 1% 2% Insurer by main type of insurance Non-Life Solvency Standard Asset Risk Capital Charge components (% of Net Assets) Insurer by main type of insurance Non-Life Solvency Standard Asset Risk Capital Charge components (% of Net Assets)

109 19 October 2016 Appendix – Life solvency standard Life SS Minimum Solvency Capital Figure A18 – Life SS Minimum Solvency Capital components Insurance Risk Capital Charge less Liabilities Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge effect of Minimum Zero Total General ( 0%) 0% 0% 0% 0% 0% G 1 - - - - - - G 2 - - - - - - G 3 ( 0%) 0% - 0% - 0% G 4 - - - - - - G 5 - - 0% 0% - 0% G 6 - - - - - - G 7 - - - - - - G 8 - - - - - - G 9 - - - - - - G 10 - - - - - - G 11 - - - - - - G 12 - - - - - - G 13 - - - - - - G 14 0% 0% - - - 0% G 15 - - - - - - G 16 - - - - - - G 17 - - - - - - G 18 - 1% - 0% - 2% G 19 0% 0% - 0% - 1% G 20 - - - - - - G 21 - - - - - - G 22 - - - - - - G 23 - - - - - - G 24 - - - - - - G 25 - - - - - - G 26 - - - - - - G 27 - - - - - - G 28 - - - - - - G 29 ( 6%) 2% - 3% 1% - G 30 - - - - - - G 31 - - - - - - G 32 - - - - - - G 33 - - - - - - G 34 - - - - - - G 35 - - - - - - Insurer by Life Solvency Standard Minimum Solvency Capital components (% of Net Assets) main type of insurance

110 19 October 2016 Insurance Risk Capital Charge less Liabilities Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge effect of Minimum Zero Total Life 53% 6% 0% 7% 0% 66% L 1 82% 2% 0% 0% - 84% L 2 ( 21%) 7% 0% 26% 8% 20% L 3 27% 12% 0% 9% - 49% L 4 10% 2% 0% 40% - 52% L 5 18% 19% 0% 10% - 48% L 6 ( 8%) 4% 0% 11% - 6% L 7 39% 4% 0% 27% - 71% L 8 70% 6% 1% 2% - 79% L 9 51% 4% 1% 8% - 64% L 10 74% 6% 0% 9% - 89% L 11 - - 45% 1% - 46% L 12 61% 4% 0% 2% - 67% L 13 0% 2% - 54% - 56% L 14 10% 5% 1% 7% - 23% L 15 65% 4% 0% 3% - 72% L 16 24% 3% - 26% - 53% L 17 0% 12% 2% 9% - 24% L 18 8% 0% - 52% - 60% L 19 48% 10% 1% 9% - 68% L 20 6% 1% 0% 8% - 16% L 21 15% 12% 1% 4% - 32% Insurance Risk Capital Charge less Liabilities Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge effect of Minimum Zero Total Health - - - - - - H 1 - - - - - - H 2 - - - - - - H 3 - - - - - - H 4 - - - - - - H 5 - - - - - - H 6 - - - - - - Insurer by main type of insurance Life Solvency Standard Minimum Solvency Capital components (% of Net Assets) Insurer by main type of insurance Life Solvency Standard Minimum Solvency Capital components (% of Net Assets)

111 19 October 2016 Figure A19 – Life SS implied average risk factors CEP = credit, equity & property Insurance Risk Capital Charge less Liabilities as % of Catastrophe Risk Capital Charge as % of Reinsurance Recovery Risk Capital Charge as % of CEP Capital Charge + Asset Concentration Risk Charge absolute value of Policy Liabilities Annual Gross Premium Reinsurance Assets

• reinsurance catastrophe exposure as % of Assets (excluding reinsurance & Deductions From Capital) General ( 13%) 0% 2% 2% G 1 - - - - G 2 - - - - G 3 - - - - G 4 - - - - G 5 ( 1%) 0% - 1% G 6 - - - - G 7 - - - - G 8 - - - - G 9 18% 0% - - G 10 - - - - G 11 - - - - G 12 - - - - G 13 - - - - G 14 - - - - G 15 - - - - G 16 - - - - G 17 - - - - G 18 9% 1% - 1% G 19 - - - - G 20 - - - - G 21 - - - - G 22 - - - - G 23 - - - - G 24 - - - - G 25 - 1% - 2% G 26 ( 18%) 4% - 3% G 27 - - - - G 28 - - - - G 29 - - - - G 30 - - - - G 31 - - - - G 32 - - - - G 33 - - 2% 1% G 34 - - - - G 35 - - - - Insurer by Life Solvency Standard implied average risk factors main type of insurance

112 19 October 2016 CEP = credit, equity & property Insurance Risk Capital Charge less Liabilities as % of Catastrophe Risk Capital Charge as % of Reinsurance Recovery Risk Capital Charge as % of CEP Capital Charge + Asset Concentration Risk Charge absolute value of Policy Liabilities Annual Gross Premium Reinsurance Assets

• reinsurance catastrophe exposure as % of Assets (excluding reinsurance & Deductions From Capital) Life 43% 9% 3% 4% L 1 136% 17% 2% 7% L 2 4% 3% - 19% L 3 114% 11% 2% 3% L 4 20% 4% 8% 2% L 5 224% 18% 2% 3% L 6 121% 12% 2% 3% L 7 ( 45%) 6% 2% 13% L 8 - - 2% 1% L 9 321% 16% 14% 4% L 10 121% 12% 2% 4% L 11 651% 8% 2% 16% L 12 706% 9% - 21% L 13 100% 4% 2% 1% L 14 4% 58% - 39% L 15 93% 10% 27% 3% L 16 34% 5% 3% 2% L 17 1% 18% 2% 7% L 18 3% 2% - 10% L 19 0% 6% 2% 5% L 20 113% 7% 4% 4% L 21 ( 11%) 2% 2% 5% Insurance Risk Capital Charge less Liabilities as % of Catastrophe Risk Capital Charge as % of Reinsurance Recovery Risk Capital Charge as % of CEP Capital Charge + Asset Concentration Risk Charge absolute value of Policy Liabilities Annual Gross Premium Reinsurance Assets
• reinsurance catastrophe exposure as % of Assets (excluding reinsurance & Deductions From Capital) Health - - - - H 1 - - - - H 2 - - - - H 3 - - - - H 4 - - - - H 5 - - - - H 6 - - - - Insurer by main type of insurance Life Solvency Standard implied average risk factors Insurer by main type of insurance Life Solvency Standard implied average risk factors

113 19 October 2016 Life SS Insurance Risk Capital Charge Figure A20 – Life SS Insurance Risk Capital Charge components CTV = Current Termination Value, Solv. Liab. = Solvency Liabilities RPG = Related Product Group. ∑ max of {CTV,Solv. Liab.} @ RPG Repayable Amount Adjustment Other Liabilities Insurance Risk Capital Charge Liabilities Insurance Risk Capital Charge less Liabilities General 0% - 0% 0% 0% ( 0%) G 1 - - - - - - G 2 - - - - - - G 3 - - - - - - G 4 - - - - - - G 5 4% - - 4% 4% 0% G 6 - - - - - - G 7 - - - - - - G 8 - - - - - - G 9 - - - - - - G 10 - - - - - - G 11 - - - - - - G 12 0% - - 0% 0% 0% G 13 - - - - - - G 14 - - - - - - G 15 - - - - - - G 16 - - - - - - G 17 0% - 0% 0% 0% ( 0%) G 18 - - - - - - G 19 - - - - - - G 20 1% - - 1% 1% - G 21 - - - - - - G 22 - - - - - - G 23 - - - - - - G 24 - - - - - - G 25 - - - - - - G 26 - - - - - - G 27 - - - - - - G 28 - - - - - - G 29 - - - - - - G 30 - - - - - - G 31 26% - - 26% 32% ( 6%) G 32 - - - - - - G 33 - - - - - - G 34 - - - - - - G 35 - - - - - - Insurer by Life Solvency Standard Insurance Risk Capital Charge - Liabilities components (% of Net Assets) main type of insurance

114 19 October 2016 CTV = Current Termination Value, Solv. Liab. = Solvency Liabilities RPG = Related Product Group. ∑ max of {CTV,Solv. Liab.} @ RPG Repayable Amount Adjustment Other Liabilities Insurance Risk Capital Charge Liabilities Insurance Risk Capital Charge less Liabilities Life 146% - 17% 163% 110% 53% L 1 45% - 6% 51% 12% 39% L 2 26% - 13% 39% 60% ( 21%) L 3 246% - 70% 316% 308% 8% L 4 8% - 8% 16% ( 54%) 70% L 5 311% - 34% 344% 293% 51% L 6 90% - 14% 104% 56% 48% L 7 20% - 11% 31% 21% 10% L 8 253% - 22% 275% 211% 65% L 9 21% - 6% 26% 2% 24% L 10 5% - 23% 28% 10% 18% L 11 40% - 9% 50% 49% 0% L 12 15% - 9% 24% ( 3%) 27% L 13 1% - 1% 3% 3% 0% L 14 - - - - - - L 15 134% - 24% 159% 85% 74% L 16 71% - 5% 76% 85% ( 8%) L 17 1,842% - 90% 1,933% 1,926% 6% L 18 292% - 3% 295% 285% 10% L 19 11% - 15% 26% 11% 15% L 20 0% - 11% 11% ( 71%) 82% L 21 11% - 4% 14% ( 46%) 61% ∑ max of {CTV,Solv. Liab.} @ RPG Repayable Amount Adjustment Other Liabilities Insurance Risk Capital Charge Liabilities Insurance Risk Capital Charge less Liabilities Health - - - - - - H 1 - - - - - - H 2 - - - - - - H 3 - - - - - - H 4 - - - - - - H 5 - - - - - - H 6 - - - - - - Insurer by main type of insurance Life Solvency Standard Insurance Risk Capital Charge - Liabilities components (% of Net Assets) Insurer by main type of insurance Life Solvency Standard Insurance Risk Capital Charge - Liabilities components (% of Net Assets)

115 19 October 2016 Life SS Reinsurance Recovery Risk Capital Charge Figure A21 – Life SS Reinsurance Recovery Risk Capital Charge components Outstanding Claims Policy Liabilities Reinsurance Premium Paid in Advance Paid Claims Catastrophe Risk Total General 0% - - - - 0% G 1 - - - - - - G 2 - - - - - - G 3 - - - - - - G 4 - - - - - - G 5 - - - - - - G 6 - - - - - - G 7 - - - - - - G 8 - - - - - - G 9 - - - - - - G 10 - - - - - - G 11 - - - - - - G 12 - - - - - - G 13 0% - - - - 0% G 14 - - - - - - G 15 - - - - - - G 16 - - - - - - G 17 - - - - - - G 18 - - - - - - G 19 - - - - - - G 20 - - - - - - G 21 - - - - - - G 22 - - - - - - G 23 - - - - - - G 24 - - - - - - G 25 - - - - - - G 26 - - - - - - G 27 - - - - - - G 28 - - - - - - G 29 - - - - - - G 30 - - - - - - G 31 - - - - - - G 32 - - - - - - G 33 - - - - - - G 34 - - - - - - G 35 - - - - - - Insurer by Life Solvency Standard Reinsurance Recovery Risk Capital Charge components (% of Net Assets) main type of insurance

116 19 October 2016 Outstanding Claims Policy Liabilities Reinsurance Premium Paid in Advance Paid Claims Catastrophe Risk Total Life 0% 0% 0% 0% 0% 0% L 1 0% 0% 0% 0% 1% 1% L 2 0% 0% - 0% 0% 1% L 3 0% 0% - 0% 1% 1% L 4 - 0% 0% 0% 1% 1% L 5 0% - - - 0% 0% L 6 0% - ( 0%) 0% 0% 0% L 7 - - - - - - L 8 0% 1% - 0% 0% 1% L 9 30% - - - 15% 45% L 10 - - - - - - L 11 0% - 0% 0% 0% 0% L 12 0% 0% - 0% 0% 0% L 13 0% - - - 0% 0% L 14 0% - 0% - 2% 2% L 15 - - - - 0% 0% L 16 0% - - 0% 0% 0% L 17 - - - - - - L 18 - - - - 0% 0% L 19 0% - - 0% 0% 0% L 20 0% - - - - 0% L 21 0% 0% - 0% 0% 0% Outstanding Claims Policy Liabilities Reinsurance Premium Paid in Advance Paid Claims Catastrophe Risk Total Health - - - - - - H 1 - - - - - - H 2 - - - - - - H 3 - - - - - - H 4 - - - - - - H 5 - - - - - - H 6 - - - - - - Insurer by main type of insurance Life Solvency Standard Reinsurance Recovery Risk Capital Charge components (% of Net Assets) Insurer by main type of insurance Life Solvency Standard Reinsurance Recovery Risk Capital Charge components (% of Net Assets)

117 19 October 2016 Life SS Asset Risk Capital Charge Figure A22 – Life SS Asset Risk Capital Charge components CEP = credit, equity & property; Solv. Liab. = Solvency Liability RRCC = Resilience Risk Capital Charge CEP Capital Charge Foreign Currency Risk Impact of Interest Rate Risk Solv. Liab. Resilience Impact effect of minimum zero RRCC Asset Concentration Risk Total General 0% - 0% 0% - - 0% G 1 - - - - - - - G 2 - - - - - - - G 3 - - - - - - - G 4 - - - - - - - G 5 - - - - - - - G 6 - - - - - - - G 7 - - - - - - - G 8 - - - - - - - G 9 - - - - - - - G 10 - - - - - - - G 11 0% - - 0% - - 0% G 12 - - - - - - - G 13 0% - 0% - - - 0% G 14 - - - - - - - G 15 - - - - - - - G 16 - - - - - - - G 17 - - - - - - - G 18 - - - - - - - G 19 - - - - - - - G 20 2% - 1% - - - 3% G 21 - - - - - - - G 22 - - - - - - - G 23 - - - - - - - G 24 - - - - - - - G 25 0% - - - - - 0% G 26 - - - - - - - G 27 - - - - - - - G 28 0% - 0% - - - 0% G 29 - - - - - - - G 30 - - - - - - - G 31 - - - - - - - G 32 - - - - - - - G 33 - - - - - - - G 34 - - - - - - - G 35 - - - - - - - Insurer by Life Solvency Standard Asset Risk Capital Charge components (% of Net Assets) main type of insurance

118 19 October 2016 CEP = credit, equity & property; Solv. Liab. = Solvency Liability RRCC = Resilience Risk Capital Charge CEP Capital Charge Foreign Currency Risk Impact of Interest Rate Risk Solv. Liab. Resilience Impact effect of minimum zero RRCC Asset Concentration Risk Total Life 6% 1% ( 4%) 4% - 0% 7% L 1 8% 2% 1% - - - 10% L 2 109% 7% ( 108%) ( 0%) - - 8% L 3 20% - 6% ( 0%) - - 26% L 4 2% 0% ( 4%) 8% - - 7% L 5 28% - - 12% - - 40% L 6 5% 1% 7% ( 3%) - - 9% L 7 8% 0% ( 6%) 7% - - 9% L 8 6% 1% ( 2%) 4% - - 8% L 9 43% 2% ( 10%) 17% - - 52% L 10 2% - 0% 0% - 0% 2% L 11 3% 0% ( 6%) 7% - 0% 3% L 12 24% 14% 0% 0% - 16% 54% L 13 3% - - - - 1% 4% L 14 1% - - - - - 1% L 15 0% - 0% 0% - - 0% L 16 9% - - - - - 9% L 17 6% - ( 1%) 6% - - 11% L 18 21% - 5% - - - 26% L 19 1% - ( 0%) 1% - - 2% L 20 19% 8% ( 3%) 4% - - 27% L 21 3% - 6% 0% - - 9% CEP Capital Charge Foreign Currency Risk Impact of Interest Rate Risk Solv. Liab. Resilience Impact effect of minimum zero RRCC Asset Concentration Risk Total Health - - - - - - - H 1 - - - - - - - H 2 - - - - - - - H 3 - - - - - - - H 4 - - - - - - - H 5 - - - - - - - H 6 - - - - - - - Insurer by main type of insurance Life Solvency Standard Asset Risk Capital Charge components (% of Net Assets) Insurer by main type of insurance Life Solvency Standard Asset Risk Capital Charge components (% of Net Assets)

119 19 October 2016 Life SS CEP Capital Charge Figure A23 – Life SS CEP Capital Charge components CEP = credit, equity & property Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Total General 0% 0% 0% 0% - 0% G 1 - - - - - - G 2 - - - - - - G 3 - - - - - - G 4 0% - - - - 0% G 5 - - - - - - G 6 - - - - - - G 7 - - - - - - G 8 1% 0% 1% - - 2% G 9 - - - - - - G 10 - - - - - - G 11 - - - - - - G 12 - - - - - - G 13 - - - - - - G 14 - - - - - - G 15 0% - - - - 0% G 16 - - - - - - G 17 - - - - - - G 18 - - - - - - G 19 - - - - - - G 20 - - - - - - G 21 - - - - - - G 22 0% - ( 0%) 0% - 0% G 23 - - - - - - G 24 - - - - - - G 25 - - - - - - G 26 - - - - - - G 27 - - - - - - G 28 - - - - - - G 29 - - - - - - G 30 0% - - - - 0% G 31 - - - - - - G 32 - - - - - - G 33 - - - - - - G 34 - - - - - - G 35 - - - - - - Insurer by Life Solvency Standard CEP Capital Charge components (% of Net Assets) main type of insurance

120 19 October 2016 CEP = credit, equity & property Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Total Life 1% 0% 4% 1% 0% 6% L 1 1% 28% - - - 28% L 2 1% - 0% - - 1% L 3 3% 1% 0% - - 5% L 4 2% 0% 5% 0% - 8% L 5 2% 0% 1% - - 3% L 6 3% - 17% - - 20% L 7 0% - 0% - - 0% L 8 1% - - - - 1% L 9 1% 0% 0% 0% - 2% L 10 1% 1% 5% 0% 0% 6% L 11 1% 0% 2% 0% - 3% L 12 2% 7% 0% 0% - 9% L 13 2% 0% 5% 0% - 8% L 14 1% 1% 17% - - 19% L 15 2% - 0% - - 3% L 16 1% - 1% ( 0%) - 2% L 17 1% - 0% 20% - 21% L 18 5% 8% 30% 0% - 43% L 19 0% - 15% 9% - 24% L 20 15% 0% 94% - - 109% L 21 3% 1% 3% - - 6% Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Total Health - - - - - - H 1 - - - - - - H 2 - - - - - - H 3 - - - - - - H 4 - - - - - - H 5 - - - - - - H 6 - - - - - - Insurer by main type of insurance Life Solvency Standard CEP Capital Charge components (% of Net Assets) Insurer by main type of insurance Life Solvency Standard CEP Capital Charge components (% of Net Assets)

121 19 October 2016 Appendix – Effective solvency requirement Figure A29 – Effective solvency requirement components Capital excluded Deductions From Capital Minimum Solvency Capital Licence Condition ∑ effective solvency requirement as reported adjusted for licence condition General 0% 32% 32% 16% 80% 214% 142% G 1 0% - 22% - 23% 445% 445% G 2 - 8% 40% 35% 82% 232% 124% G 3 - 0% 55% - 55% 181% 181% G 4 - - 74% - 74% 136% 136% G 5 - - 72% - 72% 139% 139% G 6 - 0% 71% - 71% 141% 141% G 7 - 45% 20% 30% 95% 282% 110% G 8 - - 24% - 24% 419% 419% G 9 - 5% 23% - 28% 416% 416% G 10 - 0% 44% - 44% 228% 228% G 11 0% 4% 48% - 53% 198% 198% G 12 0% 4% 28% - 32% 344% 344% G 13 0% 5% 65% - 70% 146% 146% G 14 - 0% 11% - 11% 945% 945% G 15 0% 8% 57% 13% 78% 163% 132% G 16 - 69% 15% - 84% 211% 211% G 17 - 6% 31% - 37% 302% 302% G 18 - 34% 48% - 81% 139% 139% G 19 - 9% 37% - 46% 245% 245% G 20 - - 28% - 28% 363% 363% G 21 0% 44% 40% - 84% 139% 139% G 22 - - 36% - 36% 277% 277% G 23 - 1% 64% - 65% 155% 155% G 24 - 1% 75% - 76% 132% 132% G 25 - - 17% - 17% 586% 586% G 26 - - 24% - 24% 410% 410% G 27 0% 42% 49% - 91% 119% 119% G 28 0% 35% 49% - 84% 133% 133% G 29 - 6% 61% - 67% 154% 154% G 30 - 46% 33% - 79% 163% 163% G 31 - 7% 85% - 92% 110% 110% G 32 - - 51% - 51% 198% 198% G 33 - 3% 19% - 21% 522% 522% G 34 - 0% 66% - 66% 152% 152% G 35 - 23% 92% - 115% 84% 84% Insurer by Solvency requirement components (% of Net Assets) Solvency Ratio (%) main type of insurance

122 19 October 2016 Capital excluded Deductions From Capital Minimum Solvency Capital Licence Condition ∑ effective solvency requirement as reported adjusted for licence condition Life 0% 9% 67% 1% 77% 136% 135% L 1 - 1% 89% - 90% 111% 111% L 2 ( 0%) - 46% - 46% 218% 218% L 3 - 6% 72% - 79% 129% 129% L 4 - 22% 64% - 86% 122% 122% L 5 - - 24% - 24% 425% 425% L 6 - 5% 84% - 90% 112% 112% L 7 - 2% 79% - 82% 123% 123% L 8 - 16% 69% - 86% 121% 121% L 9 - - 65% - 65% 154% 154% L 10 - - 53% - 53% 187% 187% L 11 - - 71% - 71% 140% 140% L 12 - 0% 49% - 49% 205% 205% L 13 0% 23% 68% - 91% 113% 113% L 14 - 9% 35% - 45% 257% 257% L 15 - 1% 48% - 50% 205% 205% L 16 - 13% 27% - 40% 325% 325% L 17 ( 0%) 16% 16% 38% 70% 541% 156% L 18 - 18% 62% - 79% 134% 134% L 19 - 19% 67% - 85% 122% 122% L 20 - 0% 56% - 56% 179% 179% L 21 2% 0% 60% - 62% 162% 162% Capital excluded Deductions From Capital Minimum Solvency Capital Licence Condition ∑ effective solvency requirement as reported adjusted for licence condition Health - 8% 19% - 27% 490% 490% H 1 - 5% 19% - 24% 497% 497% H 2 - 2% 32% - 34% 308% 308% H 3 - 2% 47% - 49% 208% 208% H 4 - 2% 20% - 21% 501% 501% H 5 - 45% 14% - 59% 395% 395% H 6 - 1% 10% - 11% 973% 973% Insurer by main type of insurance Solvency requirement components (% of Net Assets) Solvency Ratio (%) Insurer by Solvency Ratio (%) main type of insurance Solvency requirement components (% of Net Assets)

123 19 October 2016 Appendix – Movement in Solvency Margin Adjusted during 2014/15 Figure A31 – Movement in Solvency Margin Adjusted during 2014/15 Profit After Tax ∆ Capital Transactions (excl. Profit) ∆ Deductions From Capital ∆ Minimum Solvency Capital ∆ Licence Condition ∆ Solvency Margin Adjusted General ( 8%) 32% ( 9%) 25% ( 12%) 27% G 1 49% ( 62%) ( 0%) ( 2%) - ( 15%) G 2 ( 8%) ( 0%) 1% 6% - ( 1%) G 3 ( 10%) 0% - 8% - ( 2%) G 4 23% ( 32%) 2% 1% - ( 7%) G 5 9% ( 0%) 14% ( 24%) - ( 2%) G 6 8% 0% - - - 8% G 7 28% ( 27%) ( 5%) 1% - ( 3%) G 8 ( 50%) 87% ( 12%) 21% ( 29%) 17% G 9 14% - - - - 14% G 10 11% ( 0%) - ( 3%) - 7% G 11 3% ( 2%) ( 4%) - - ( 3%) G 12 3% ( 0%) ( 0%) 2% - 5% G 13 10% 0% - ( 9%) - 1% G 14 ( 1%) ( 19%) ( 3%) 3% - ( 19%) G 15 30% ( 33%) - ( 5%) - ( 7%) G 16 14% ( 0%) - 126% - 140% G 17 25% ( 69%) ( 3%) - - ( 47%) G 18 n/a G 19 9% ( 0%) ( 0%) ( 6%) - 3% G 20 21% ( 0%) 0% 3,670% - 3,691% G 21 15% ( 0%) 2% ( 0%) - 16% G 22 7% 0% 0% ( 2%) - 5% G 23 35% ( 24%) ( 12%) ( 2%) - ( 4%) G 24 9% - ( 0%) ( 3%) - 6% G 25 16% 37% ( 0%) ( 19%) - 33% G 26 34% ( 16%) ( 21%) 5% - 1% G 27 15% ( 0%) - - - 15% G 28 17% 0% ( 1%) - - 15% G 29 12% ( 14%) 0% ( 8%) - ( 10%) G 30 ( 17%) 0% - - - ( 17%) G 31 ( 6%) 0% ( 2%) - - ( 8%) G 32 3% ( 9%) ( 3%) ( 10%) - ( 18%) G 33 ( 2%) 19% - - - 17% G 34 17% ( 0%) ( 4%) 3% - 16% G 35 53% 20% 4% ( 42%) - 34% Insurer by main type of insurance ∆ in Solvency Margin Adjusted during 2014/15 financial year (% of start Capital)

124 19 October 2016 Profit After Tax ∆ Capital Transactions (excl. Profit) ∆ Deductions From Capital ∆ Minimum Solvency Capital ∆ Licence Condition ∆ Solvency Margin Adjusted Life 15% ( 13%) 3% ( 6%) - ( 1%) L 1 12% 0% 0% ( 7%) - 6% L 2 14% ( 23%) 12% ( 10%) - ( 7%) L 3 12% ( 16%) 9% ( 4%) - 1% L 4 12% ( 0%) - - - 12% L 5 12% ( 17%) 3% 8% - 6% L 6 33% ( 18%) - ( 15%) - 0% L 7 38% ( 25%) 2% ( 5%) - 9% L 8 29% 16% ( 3%) ( 30%) - 12% L 9 21% ( 35%) 0% ( 5%) - ( 19%) L 10 4% ( 0%) - ( 1%) - 4% L 11 5% ( 7%) 2% 2% - 2% L 12 5% 0% ( 0%) ( 23%) - ( 18%) L 13 14% ( 2%) ( 4%) ( 8%) - ( 0%) L 14 ( 1%) ( 15%) ( 15%) 0% - ( 30%) L 15 30% ( 31%) ( 16%) - - ( 16%) L 16 32% 58% 1% ( 69%) - 22% L 17 19% ( 5%) 0% ( 3%) - 11% L 18 8% 6% - 2% - 16% L 19 30% ( 32%) 3% - - 1% L 20 6% ( 7%) 8% - - 8% L 21 2% 29% - 22% - 53% Profit After Tax ∆ Capital Transactions (excl. Profit) ∆ Deductions From Capital ∆ Minimum Solvency Capital ∆ Licence Condition ∆ Solvency Margin Adjusted Health 7% ( 0%) ( 1%) ( 2%) - 3% H 1 16% ( 3%) ( 5%) ( 1%) - 7% H 2 33% ( 1%) ( 1%) - - 30% H 3 1% 0% ( 1%) ( 1%) - ( 0%) H 4 17% ( 1%) ( 2%) ( 4%) - 10% H 5 27% ( 0%) ( 0%) 0% - 26% H 6 8% ( 0%) 1% - - 8% Insurer by main type of insurance ∆ in Solvency Margin Adjusted during 2014/15 financial year (% of start Capital) Insurer by main type of insurance ∆ in Solvency Margin Adjusted during 2014/15 financial year (% of start Capital)

125 19 October 2016 Appendix – Capital target Solvency position relative to capital target Figure A35 – Solvency Margin/Ratio in excess of Capital target Solvency Ratio Adjusted Capital target in excess of Minimum Solvency Capital Adjusted Solvency Ratio Adjusted in excess of Capital target General 142% 29% 13% G 1 152% - 52% G 2 124% 19% 5% G 3 277% - 177% G 4 136% 15% 21% G 5 344% 120% 124% G 6 522% - 422% G 7 139% 33% 6% G 8 410% - 310% G 9 363% - 263% G 10 141% 32% 9% G 11 181% - 81% G 12 445% 280% 65% G 13 211% - 111% G 14 302% - 202% G 15 154% 50% 4% G 16 132% 33% ( 2%) G 17 119% 20% ( 1%) G 18 84% 20% ( 36%) G 19 146% 40% 6% G 20 245% 100% 45% G 21 163% 49% 14% G 22 139% 26% 13% G 23 110% 9% 1% G 24 416% 538% ( 221%) G 25 110% 25% ( 15%) G 26 133% 35% ( 2%) G 27 945% 50% 795% G 28 586% - 486% G 29 155% 35% 20% G 30 198% 108% ( 10%) G 31 419% - 319% G 32 228% 100% 28% G 33 198% 100% ( 2%) G 34 139% 40% ( 1%) G 35 132% 5% 27% Insurer by Solvency Ratio, Capital target and difference (% of Minimum Solvency Capital Adjusted) main type of insurance

126 19 October 2016 Solvency Ratio Adjusted Capital target in excess of Minimum Solvency Capital Adjusted Solvency Ratio Adjusted in excess of Capital target Life 135% 15% 20% L 1 205% 53% 52% L 2 162% 50% 12% L 3 122% 5% 17% L 4 154% - 54% L 5 111% 11% 1% L 6 187% 20% 67% L 7 134% 15% 19% L 8 112% 4% 9% L 9 156% 24% 33% L 10 425% - 325% L 11 179% - 79% L 12 218% - 118% L 13 257% - 157% L 14 113% 10% 3% L 15 121% 20% 1% L 16 325% 30% 195% L 17 205% 45% 60% L 18 140% 25% 16% L 19 129% 15% 14% L 20 122% 20% 2% L 21 123% 6% 17% Solvency Ratio Adjusted Capital target in excess of Minimum Solvency Capital Adjusted Solvency Ratio Adjusted in excess of Capital target Health 490% 274% 115% H 1 208% 62% 46% H 2 308% - 208% H 3 497% 373% 24% H 4 395% 108% 188% H 5 973% 400% 473% H 6 501% - 401% Insurer by main type of insurance Solvency Ratio, Capital target and difference (% of Minimum Solvency Capital Adjusted) Insurer by main type of insurance Solvency Ratio, Capital target and difference (% of Minimum Solvency Capital Adjusted)

127 19 October 2016 Appendix – Solvency projection Figure A36 – Projected Solvency Ratio Actual one year prior Actual financial year end date during 2015 Projected in one year's time Projected in two year's time Projected in three year's time Projected in four year's time General 108% 214% 210% 206% 202% 200% G 1 175% 146% 160% 161% 161% 161% G 2 145% 139% 130% 129% 127% 126% G 3 115% 136% 160% 184% 197% 234% G 4 106% 282% 267% 260% 250% 241% G 5 69% 586% 641% 676% 706% 731% G 6 125% 139% 130% 131% 133% 137% G 7 336% 419% 414% 420% #DIV/0! #DIV/0! G 8 #DIV/0! 945% 332% 214% 200% 231% G 9 225% 198% 208% 199% 201% 202% G 10 113% 110% 110% 113% 120% 126% G 11 175% 211% 228% 239% 253% 266% G 12 268% 245% 246% 286% 301% 325% G 13 154% 163% 158% 158% 160% 160% G 14 412% 445% 445% 445% 445% 445% G 15 140% 141% 138% 135% 133% 131% G 16 273% 277% 287% 297% 305% 313% G 17 277% 232% 301% 295% 284% 277% G 18 121% 139% 151% 159% 165% 176% G 19 1,268% 522% 286% 290% 294% 298% G 20 275% 344% 220% 220% 220% 220% G 21 211% 228% 227% 216% 215% 212% G 22 141% 119% 121% 121% 121% 121% G 23 190% 198% 199% 199% 199% 199% G 24 217% 181% 182% 184% 186% 187% G 25 259% 302% 303% 305% 307% 309% G 26 139% 155% 165% 159% 157% 158% G 27 289% 154% 176% 176% 176% 176% G 28 175% 163% 187% 194% 187% 185% G 29 426% 416% 416% 416% 416% 416% G 30 141% 133% 135% 135% 133% 133% G 31 183% 152% 111% #DIV/0! #DIV/0! #DIV/0! G 32 2% 84% 246% 241% 242% 248% G 33 469% 363% 342% 353% 363% 373% G 34 114% 132% 105% 105% 105% 105% G 35 360% 410% 460% 510% 560% 610% Insurer by Actual and Projected Solvency Ratio (%) main type of insurance

128 19 October 2016 Actual one year prior Actual financial year end date during 2015 Projected in one year's time Projected in two year's time Projected in three year's time Projected in four year's time Life 141% 136% 129% 128% 127% 126% L 1 149% 140% 134% 132% 131% 130% L 2 140% 122% 117% 117% 117% 117% L 3 114% 134% 174% 183% 194% 206% L 4 178% 179% 184% 188% 192% 197% L 5 110% 111% 111% 111% 110% 110% L 6 122% 218% 164% 141% 118% 109% L 7 358% 541% 582% 596% 606% 613% L 8 117% 129% 117% 117% 116% 116% L 9 269% 205% 172% 170% 169% 169% L 10 197% 205% 185% 181% 181% 182% L 11 104% 112% 108% 106% 106% 108% L 12 303% 325% 288% 249% 226% 190% L 13 240% 162% 182% 199% 230% 248% L 14 115% 123% 144% 140% 136% 134% L 15 165% 113% 111% 110% 110% 110% L 16 235% 257% 194% 161% 145% 138% L 17 144% 121% 146% 145% 150% 152% L 18 124% 122% 123% 117% 119% 117% L 19 416% 425% 435% 445% 454% 463% L 20 160% 187% 195% 205% 209% 201% L 21 138% 154% 155% 168% 183% 194% Actual one year prior Actual financial year end date during 2015 Projected in one year's time Projected in two year's time Projected in three year's time Projected in four year's time Health 505% 490% 482% 488% 496% 503% H 1 755% 973% 1,004% 1,038% 1,006% 959% H 2 159% 208% 221% 240% 265% 298% H 3 525% 497% 502% 508% 520% 531% H 4 379% 395% 262% 257% 250% 242% H 5 285% 308% 328% 348% 368% 388% H 6 544% 501% 507% 515% 524% 534% Insurer by main type of insurance Actual and Projected Solvency Ratio (%) Insurer by main type of insurance Actual and Projected Solvency Ratio (%)

129 19 October 2016 Appendix – Strength of solvency position Solvency position relative to size of insurer Figure A44 – Solvency Margin Adjusted relative to size Solvency Ratio Solvency Ratio Adjusted Solvency Margin Adjusted as % of Gross Annual Premium Solvency Margin Adjusted as % of Net Assets General 214% 142% 14% 20% G 1 133% 133% 7% 16% G 2 363% 363% 536% 72% G 3 139% 139% 5% 16% G 4 154% 154% 18% 33% G 5 146% 146% 7% 30% G 6 232% 124% 8% 18% G 7 945% 945% 817% 89% G 8 410% 410% 110% 76% G 9 141% 141% 103% 29% G 10 110% 110% 5% 8% G 11 302% 302% 488% 63% G 12 282% 110% 5% 5% G 13 198% 198% 28% 47% G 14 344% 344% 61% 68% G 15 152% 152% n/a 34% G 16 419% 419% n/a 76% G 17 445% 445% 76% 77% G 18 586% 586% 164% 83% G 19 139% 139% 22% 28% G 20 139% 139% 6% 19% G 21 84% 84% n/a ( 15%) G 22 416% 416% 142% 72% G 23 211% 211% 73% 16% G 24 163% 163% 11% 21% G 25 163% 132% 7% 22% G 26 198% 198% 19% 49% G 27 132% 132% 47% 24% G 28 136% 136% 23% 26% G 29 245% 245% 142% 54% G 30 119% 119% 51% 9% G 31 522% 522% 262% 79% G 32 228% 228% 53% 56% G 33 155% 155% 18% 35% G 34 277% 277% 155% 64% G 35 181% 181% 121% 45% Insurer by Solvency Ratio Solvency Margin Adjusted main type of insurance

130 19 October 2016 Solvency Ratio Solvency Ratio Adjusted Solvency Margin Adjusted as % of Gross Annual Premium Solvency Margin Adjusted as % of Net Assets Life 136% 135% 34% 23% L 1 162% 162% 498% 38% L 2 123% 123% 20% 18% L 3 121% 121% 9% 14% L 4 541% 156% 140% 30% L 5 218% 218% 2% 54% L 6 113% 113% 9% 9% L 7 154% 154% 54% 35% L 8 205% 205% 77% 51% L 9 111% 111% 19% 10% L 10 134% 134% 19% 21% L 11 179% 179% 1,699% 44% L 12 112% 112% 25% 10% L 13 325% 325% 109% 60% L 14 122% 122% 44% 15% L 15 129% 129% 24% 21% L 16 425% 425% 117% 76% L 17 257% 257% 73% 55% L 18 187% 187% 123% 47% L 19 205% 205% 46% 50% L 20 140% 140% 50% 29% L 21 122% 122% 14% 14% Solvency Ratio Solvency Ratio Adjusted Solvency Margin Adjusted as % of Gross Annual Premium Solvency Margin Adjusted as % of Net Assets Health 490% 490% 40% 73% H 1 973% 973% 84% 89% H 2 208% 208% 14% 51% H 3 308% 308% 167% 66% H 4 501% 501% 138% 79% H 5 395% 395% 17% 41% H 6 497% 497% 37% 76% Insurer by main type of insurance Solvency Ratio Solvency Margin Adjusted Insurer by main type of insurance Solvency Ratio Solvency Margin Adjusted

131 19 October 2016 Solvency position relative to risk charges Figure A45 – Solvency Margin Adjusted relative to risk charges Solvency Margin Adjusted impact of loss of small insurer exemption Insurance Risk Capital Charge (less Liabilities) Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge General 20% 0% 7% 5% 13% 17% G 1 18% - 16% 7% 16% 14% G 2 76% - 7% - 23% 1% G 3 72% - 17% - - 11% G 4 63% - 4% 5% - 22% G 5 64% - 12% - 1% 24% G 6 21% - 9% 10% 23% 9% G 7 49% - 19% 3% 53% 18% G 8 45% 38% 11% 31% 0% 13% G 9 35% - 19% 9% 3% 35% G 10 47% - 21% 13% 37% 7% G 11 28% - 34% 13% 27% 9% G 12 34% - 41% - 9% 2% G 13 ( 15%) - 6% - 335% 18% G 14 68% - 8% 4% 48% 7% G 15 5% - 0% 3% 6% 18% G 16 16% - 14% 10% 18% 21% G 17 72% 122% 1% - 0% 22% G 18 77% - - - 16% 2% G 19 76% - 2% - 7% 3% G 20 16% - 17% 8% 1% 15% G 21 30% - 27% 13% 30% 20% G 22 83% - 3% - 4% 13% G 23 19% - 16% 5% 0% 27% G 24 22% - 23% 5% 5% 27% G 25 79% 135% 4% 1% - 14% G 26 9% 638% 2% 46% - 1% G 27 26% - 10% 2% - 47% G 28 24% - ( 3%) 6% - 7% G 29 54% - 12% 1% - 8% G 30 29% - 5% 7% - 58% G 31 16% 64% 2% 4% 0% 9% G 32 8% - 9% 7% - 27% G 33 33% - 1% 1% - 10% G 34 89% - 3% 1% 1% 7% G 35 56% - 11% 13% 3% 19% Insurer by main type of insurance Solvency Margin Adjusted, and aggregate Capital Charges (% of Net Assets)

132 19 October 2016 Solvency Margin Adjusted impact of loss of small insurer exemption Insurance Risk Capital Charge (less Liabilities) Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge Life 23% 0% 53% 6% 2% 7% L 1 47% - 24% 3% - 26% L 2 21% - 65% 4% 2% 3% L 3 30% - 6% 1% 0% 8% L 4 55% - 15% 12% 7% 4% L 5 51% - 27% 12% 1% 9% L 6 50% - 18% 19% 2% 10% L 7 14% - 51% 4% 5% 8% L 8 10% - 82% 2% 1% 0% L 9 54% 127% - - 227% 1% L 10 9% - 48% 10% 4% 9% L 11 21% - ( 21%) 7% 1% 26% L 12 15% - 61% 4% 1% 2% L 13 35% - 16% 3% 0% 44% L 14 29% - 39% 4% 2% 27% L 15 14% - 5% 5% 1% 50% L 16 60% - 10% 7% 4% 9% L 17 38% - 8% 0% - 52% L 18 10% - 74% 6% 2% 9% L 19 18% - 70% 6% 6% 2% L 20 76% 321% 0% 12% 11% 9% L 21 44% 2% 0% 2% - 54% Solvency Margin Adjusted impact of loss of small insurer exemption Insurance Risk Capital Charge (less Liabilities) Catastrophe Risk Capital Charge Reinsurance Recovery Risk Capital Charge Asset Risk Capital Charge Health 73% - 9% 1% - 8% H 1 89% - 7% 0% - 3% H 2 51% - 20% 6% - 5% H 3 41% - 8% 1% - 5% H 4 76% - 11% 0% - 8% H 5 79% - 3% 2% - 14% H 6 66% - 2% 2% - 14% Insurer by main type of insurance Solvency Margin Adjusted, and aggregate Capital Charges (% of Net Assets) Insurer by main type of insurance Solvency Margin Adjusted, and aggregate Capital Charges (% of Net Assets)