Guide to Completing the Insurer Solvency Return

Guide to Completing the Insurer Solvency Return Insurance Oversight Prudential Supervision Department V2 (20 November 2013) Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 2 of 32 Purpose of this guide

1. The purpose of this document is to assist insurers in completing the Reserve Bank of New Zealand’s (the “Reserve Bank”) insurer solvency return.
2. This document is not a guide to interpreting any solvency standard or solvency￾related condition of licence.
3. This guide may be updated from time to time. The Reserve Bank’s insurance website (http://www.rbnz.govt.nz/regulation_and_supervision/insurers/) has the latest version.
4. Nothing in this guide overrides the provisions of the Insurance (Prudential Supervision) Act, Regulations, Solvency Standards or Guidelines.
5. Current version: Guide Solvency return Solvency standards V2 (20 November 2013) V2 (20 November 2013) As at 20 November 2013
6. Prior versions: Guide Solvency return Solvency standards Not applicable V1 (31 January 2012) As at 31 January 2012 Contact details for Insurance Oversight
7. Phone +64 4 471 3951 Email insurance@rbnz.govt.nz Secure upload https://sup.rbnz.govt.nz/send/ (please select subject of “Insurer Reporting & Returns”) Or contact your supervisor. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 3 of 32 Key 8. In this guide key tips and instructions are highlighted by a box around the relevant paragraph, as shown in this paragraph. 9. In this guide references to sheets in the solvency return are shown with the sheet name bolded in white, and shaded the same as the tab colour in the spreadsheet. For example ALL Insurer Details. The colour coding used is green for all insurers, blue for life insurers, purple for non-life insurers and red for administrative sheets. The life insurer sheets are used for all life insurers no matter which life insurance solvency standard is applied. The non-life insurer sheets are used for all non-life insurers no matter which non-life insurance solvency standard is applied. Introduction 10. The current version of the solvency return is designed to cater for all insurers providing the results of their solvency calculations. However it is possible there could be unusual circumstances or new developments for which the solvency return does not cater, or there could be errors in the solvency return spreadsheet. Please contact us if there are these issues. 11. The insurer solvency return does not provide a means to properly calculate solvency requirements, and nor did the QIS spreadsheets provided during the initial development of some solvency standards. Solvency calculation workings may be submitted to the Reserve Bank separate to the return, but if doing so please clearly label and annotate so the workings can be easily followed. 12. Requested explanations or comments may be provided either in the solvency return or in supporting documents that are submitted to the Reserve Bank at the same time as the solvency return (or that were previously submitted), for example in the Financial Condition Report or a workings file. If other documents are used, please provide a reference in the solvency return to the relevant file including section, page or paragraph so the information can be easily found. 13. Insurers that have one or more insurance subsidiaries (located in New Zealand or elsewhere) must provide both solo and consolidated solvency returns. 14. Please enter all monetary amounts in whole dollars, in New Zealand dollar values. (E.g. enter 2 million as 2,000,000 not 2 or 2,000.) Rounding may be applied where appropriate. 15. The solvency return must be submitted in excel format so the Reserve Bank can read in figures. Insurers may optionally submit an additional pdf copy if they require a locked signed off copy of the solvency return. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 4 of 32 16. The Reserve Bank has limited resources and takes a risk-based approach to insurance supervision. A lack of response should not be interpreted as confirmation that the Reserve Bank has no questions, comments, or concerns about a solvency return or any other information submitted. 17. Inputs and figures shown in screenshots or examples given in this document are not necessarily indicative of reasonable or anticipated values. 18. To assist insurers to complete the solvency return and reduce follow up questions by the Reserve Bank, we have provided tips for some of the requested information. All these tips are of necessity general in nature and may not be applicable for all circumstances. 19. If an insurer or actuary is uncertain on the correct interpretation of a component of the solvency calculations, please contact the Reserve Bank to clarify the requirements before finalising the solvency return. In addition, a brief comment in the solvency return on the issue that is subject to interpretation will assist the Reserve Bank to provide feedback and, if necessary, to consider whether further guidance or amendment to solvency standards is warranted. 20. If figures provided seem unexpected (“do not look right”) or are obviously unusual (well outside norms), please provide an explanation in the relevant comment box(es) to reduce the need for the Reserve Bank to ask questions. 21. The ALL Additional Information sheet is unlocked to allow free-form comments or workings. Alternatively these can be supplied in a separate file. If the unlocked sheet (or a separate file) is being used, please provide references on the ALL Requested Comments sheet in the relevant comment spaces. 22. The solvency margin at balance date required to be disclosed in financial statements and on an insurer’s website must match the solvency margin submitted to the Reserve Bank. Therefore, if an insurer has not completed the auditor’s review of the solvency return at the time of finalising their full year financial statements, this can result in a need to restate financial statements and update the solvency disclosures. The end-to-end process for solvency returns must be factored into full-year and half-year reporting processes. COVER PAGE and READ ME FIRST 23. There are no inputs on these sheets. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 5 of 32 ALL Insurer Details 24. The “Solvency return type” input has the following list available for selection: � full year with auditor review, � half year no auditor review, and � other – please explain on the ALL Requested Comments sheet (e.g. the as at date is not full year or half year). 25. The “Relevant exemption(s)” input has the following list available for selection: � no relevant exemptions, � regulations 9 & 11 minimum capital & statutory fund - i.e. a small insurer with life insurance business, � regulations 9 & 11 statutory fund - i.e. an insurer with small life insurance business and also not small non-life insurance business, � regulations 9 & 11 minimum capital - i.e. a small insurer without life insurance business, � s59 solvency & s119 statutory fund - i.e. a life insurer in an approved jurisdiction, and � s59 solvency - i.e. a non-life insurer in an approved jurisdiction. The last 2 options are for solvency exempt branch insurers when a return is requested on the New Zealand solvency standards. Please contact us if there isn’t an option for your relevant exemption. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 6 of 32 26. The “Solvency standard(s)” input below “LIFE” has the following list available for selection: � not applicable, � life, and � life captive. 27. The “Solvency standard(s)” input below “NON-LIFE” has the following list available for selection: � not applicable, � non-life, � non-life captive, and � non-life run-off. 28. At the time this version of the solvency return was prepared, no insurer had more than one life solvency standard applying or more than one non-life solvency standard applying. Please contact us if there isn’t an option for your solvency standard or combination of solvency standards. 29. At least one life solvency standard or one non-life solvency standard must be selected. An error message is given if this rule is not met. 30. For insurers with more than one solvency standard applying, the apportionment of assets and liabilities between life and non-life components needs to be clear. Please describe on the ALL Requested Comments sheet. 31. For solvency purposes some insurers need to adjust the balance sheet from their financial statements (e.g. if the financial statements have grouped or netted offsetting items that need to be separate for solvency purposes, or due to consolidated solvency calculations excluding non-insurance subsidiaries that are consolidated for financial statements). Please describe the adjustments on the ALL Requested Comments sheet. The ALL Reconciliations sheet has the total figures that need reconciling if adjustments have been made. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 7 of 32 ALL Requested Comments – LIFE section 32. All life insurers are requested to provide commentary on various specific topics in the ALL Requested Comments sheet, as follows: � treatment of tax (e.g. if components of solvency calculations have different tax assumptions or treatment, tax impacts of stresses in the solvency calculations, recoverability of tax balances at balance date & in the stressed calculations, use of tax offsets with other companies in a tax group, offsets between tax assets and liabilities), � allocation of business to Statutory Fund(s) and the Life Fund outside Statutory Funds, � related product groups (including an explanation of any differences to product groupings used for financial statements) , � hypothecation of assets, and � treatment of any discretions. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 8 of 32 LIFE Capital 33. Please clearly describe the adjustments to balance sheet capital (e.g. for non￾qualifying components) on the ALL Requested Comments sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 9 of 32 LIFE Insurance & Cat Risks 34. Some comments on the calculations of Insurance Risk and Catastrophe Risk Capital Charges are requested on the ALL Requested Comments sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 10 of 32 LIFE Resilience Risks 35. The “Direction of interest rate ∆” input has the following list available for selection – please select the option that gives rise to the highest charge: � not applicable, � rate increase, and � rate decrease. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 11 of 32 LIFE CEP Risk workings Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 12 of 32 36. Some comments on the treatment of certain types of assets are requested on the ALL Requested Comments sheet. 37. The weighted average CEP risk charge is calculated in the “check factors” table at the bottom of the sheet. If any of these figures are different to the relevant factor in table 2 of the solvency standard, shown on the sheet to the right of this table for convenience, please explain on the ALL Requested Comments sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 13 of 32 LIFE Reinsurance Risk 38. A breakdown of the reinsurance risk capital charge and reinsurance asset exposures by type is requested. Please explain any offsets of reinsurance liabilities, and material (as defined for the solvency calculation) concentrations with individual reinsurer(s) in the ALL Requested Comments sheet. 39. The weighted average reinsurance risk charge factor is calculated to give a broad measure of the quality of reinsurers that the insurer is exposed to. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 14 of 32 LIFE << Results >> 40. Minimum Capital (also referred to as Fixed Capital and Minimum Capital Requirement) applies to the insurer as a whole. This is in contrast with (the risk-based) solvency requirements which apply at a fund level (i.e. each Statutory Fund, the Life Fund outside Statutory Funds, non-life insurance business if any). This guide and the solvency return generally use the term “Minimum Capital” as shorthand rather than listing out all the various ways this is described as at the date of issue of this version. 41. This sheet summarises the solvency calculations for life insurance. Note that adjustments (if any) for Minimum Capital apply at insurer level, and so are not included in this sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 15 of 32 ALL Requested Comments – NON-LIFE section 42. All non-life insurers are requested to provide commentary on various specific topics in the ALL Requested Comments sheet, as follows: � treatment of tax (e.g. if components of solvency calculations have different tax assumptions or treatment, tax impacts of stresses in the solvency calculations, recoverability of tax balances at balance date & in the stressed calculations, use of tax offsets with other companies in a tax group, offsets between tax assets and liabilities). Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 16 of 32 NON-LIFE Capital 43. Please clearly describe the adjustments to balance sheet capital (e.g. for non￾qualifying components) on the ALL Requested Comments sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 17 of 32 NON-LIFE Insurance & Cat Risks 44. Non-life captive insurers input figures in the top part of the sheet, and 0 or “n/a” in the bottom part of the sheet. Other non-life insurers should input “n/a” in the top part of the sheet and figures in the bottom part of the sheet. The top and bottom parts are above and below the yellow highlighted rows. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 18 of 32 45. The premium liability assessment period for some insurers (particularly health insurers) differs from the period used for accounting purposes for unexpired risk or liability adequacy test. Please justify the assessment period that is used for solvency calculations. The period in which premiums and benefits cannot in practice be adjusted needs to consider more than just the rights of the insurer (policy terms and conditions). It should also include practical matters such as system limitations, notice period requirements, decision making processes, time for preparing communications, lead time for negotiations (e.g. for group schemes), etc. Please comment on the ALL Requested Comments sheet. 46. The “Catastrophe method” input has the following list available for selection: � not applicable, � extreme event (at full level) - i.e. insurer is not utilising transition provisions, � extreme event (in transition) – i.e. insurer is currently utilizing transition provisions, � 2 x largest net cost – i.e. twice largest net retention method instead of extreme event exposure method, and � other – please explain on the ALL Requested Comments sheet. 47. Insurers with extreme event exposures must explain (at a high level) how their catastrophe requirements have been assessed and how the reinsurance has been allowed for in the solvency calculation. This includes: � the use of models, � selection of model output, � use of expert judgment, � allowance for relevant unmodelled losses, � allowance for future portfolio changes during the period until the next catastrophe reinsurance purchase, and � any other part of the method that materially affects the assessment. Please comment on the ALL Requested Comments sheet. 48. Insurers without extreme event exposures must explain how the requirements have been assessed including what catastrophic scenarios (involving aggregation of losses) have been considered. This applies regardless of whether or not the twice largest net retention method has been used. Please comment on the ALL Requested Comments sheet. 49. Catastrophe risk charge covers projected losses for a future event. Therefore any changes to catastrophe reinsurance or the calibration of extreme event exposure that apply after the as at date of the solvency calculation must be considered for both current and projected solvency calculations. E.g. solvency calculations at the end of a financial year must allow for any catastrophe reinsurance cover change that applies from the next day (the first day of the next financial year). Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 19 of 32 NON-LIFE Resilience Risks 50. The “Direction of interest rate ∆” input has the following list available for selection – please select the option that gives rise to the highest charge: � not applicable, � rate increase, and � rate decrease. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 20 of 32 NON-LIFE Asset Risk workings Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 21 of 32 51. Some comments on the treatment of certain types of assets are requested on the ALL Requested Comments sheet. 52. The weighted average asset risk charge (excluding concentration risk) is calculated in the “check factors” table at the bottom of the sheet. If any of these figures are different to the relevant factor in table 2 of the solvency standard, shown on the sheet to the right of this table for convenience, please explain on the ALL Requested Comments sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 22 of 32 NON-LIFE Reinsurance Risk 53. A breakdown of the reinsurance risk capital charge and reinsurance asset exposures by type is requested. Please explain any offsets of reinsurance liabilities, and material (as defined for the solvency calculation) concentrations with individual reinsurer(s) on the ALL Requested Comments sheet. 54. The weighted average reinsurance risk charge factor is calculated to give a broad measure of the quality of reinsurers that the insurer is exposed to. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 23 of 32 NON-LIFE << Results >> 55. Minimum Capital (also referred to as Fixed Capital and Minimum Capital Requirement) applies to the insurer as a whole. This is in contrast with (the risk-based) solvency requirements which apply at a fund level (i.e. non-life insurance business, and if there is life insurance business also each Statutory Fund and the Life Fund outside Statutory Funds). This guide and the solvency return generally use the term “Minimum Capital” as shorthand rather than listing out all the various ways this is described as at the date of issue of this version. 56. This sheet summarises the solvency calculations for non-life insurance. Note that adjustments (if any) for Minimum Capital apply at insurer level, and so are not included in this sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 24 of 32 ALL Reconciliations 57. If the balance sheet from the financial statements is adjusted for solvency purposes, it may be unclear whether capital for solvency purposes is correctly adjusted, or whether all assets have had an appropriate risk charge applied. Similarly, it may be unclear how life policy liabilities or non-life insurance liabilities have been adjusted for solvency purposes. Please comment on any reconciliation differences on the Archived ALL Requested Comments sheet.

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 25 of 32 ALL s24 3-year solvency test Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 26 of 32 58. The solvency projections for monitoring s24 requirements need to be sufficiently detailed to enable the insurer to confirm each solvency requirement is met at all times during the projection period. Each fund (i.e. each Statutory Fund, the Life Fund outside Statutory Funds, non-life insurance business if any) is required to have a positive solvency margin and comply with any applicable condition of licence. Therefore each applicable fund needs to be projected separately. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 27 of 32 59. Minimum Capital (also referred to as Fixed Capital and Minimum Capital Requirement) applies to the insurer as a whole. This is in contrast with (the risk-based) solvency requirements which apply at a fund level. This guide and the solvency return generally use the term “Minimum Capital” as shorthand rather than listing out all the various ways this is described as at the date of issue of this version. Minimum Capital requirements are also generally relevant during the projection period. There is an input for any applicable adjustment for Minimum Capital (i.e. the difference between risk-based charges and Minimum Capital if the risk-based charges are lower and insurer is not exempted). 60. Optimistic solvency projections are not sufficient for ensuring s24 compliance, or for appropriate risk management, because a range of realistic experience outcomes must be considered. Please briefly describe the projection basis on the ALL Requested Comments sheet. 61. Dates for actual and projected solvency are now de-linked from the as at date of the solvency return, to allow insurers to use dates directly from their projections. Note this does not affect the continuous requirement for compliance with solvency and minimum capital requirements including the s24 3-year forward-looking solvency assessment. Please comment on how the assessment considers all future times within the 3-year period given projections typically are for discrete time intervals (e.g. quarterly), and also how the continuous forward-looking obligation is managed, on the ALL Requested Comments sheet. 62. The results of at least 2 years of past solvency returns must be entered. If no solvency return exists for part or all of this period (e.g. for a new insurer, or if the date precedes the requirement to submit solvency returns), then please enter “n/a” and explain on the ALL Requested Comments sheet. An error message is shown if less than 2 years are included. 63. Please enter the results of projected solvency for at least 4 years from the as at date of the solvency return. This allows for the 3 year period set out in s24, plus the period between the as at date of the solvency return and when it is submitted, plus an approximate allowance for the period between submission of the solvency return and when the next update to the solvency projections will be completed. An error message is shown if less than 4 years are included. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 28 of 32 ALL Capital Management 64. A summary of the insurer’s capital target and solvency licence conditions provides context for the solvency calculation results. The Reserve Bank does not recommend any particular capital target method or type as this is a decision for each insurer’s Board. An absence of an insurer’s method or type from the lists, does not necessarily have negative connotations. 65. The “Target method” input has the following list available for selection: � solvency margin $, � solvency ratio %, � solvency hybrid ($ & %) - please describe, and � other (please describe). 66. Target type options available for selection are: � minimum (i.e. the insurer expects to be above this level at all times), � range (i.e. the insurer expects to be within this range at all times), � average (i.e. the insurer expects to be about this level), � ladder (i.e. a combination of minimum and average), and � other – please describe. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 29 of 32 67. Solvency licence conditions refer to either the general requirement to comply with solvency standards (i.e. a minimum solvency margin of $0 or equivalently a minimum solvency ratio of 100%), or a higher requirement for some insurers. For the latter please state if it is a requirement for the insurer as a whole or for certain fund(s) (e.g. applies to the Statutory Fund only). 68. Please comment on how the continuous requirement to comply with minimum solvency is monitored on the ALL Requested Comments sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 30 of 32 ALL << Results >> 69. Minimum Capital (also referred to as Fixed Capital and Minimum Capital Requirement) applies to the insurer as a whole. This is in contrast with (the risk-based) solvency requirements which apply at a fund level (i.e. each Statutory Fund, the Life Fund outside Statutory Funds, non-life insurance business if any). This guide and the solvency return generally use the term “Minimum Capital” as shorthand rather than listing out all the various ways this is described as at the date of issue of this version. 70. This sheet summarises the solvency calculations for the insurer as a whole, including the Minimum Capital test for non-exempt insurers. The application of Minimum Capital uses the methodology set out in the non-life solvency standards (at the date of issue of this guide the life solvency standard has an inconsistent method which will be corrected by amendment as per industry consultation). 71. If the solvency results are lower than, or near to, solvency licence conditions; or if solvency results are not consistent with the insurer’s own capital targets; appropriate commentary is required on the ALL Requested Comments sheet. Archived

Guide to Completing the Insurer Solvency Return - V2 (20 November 2013) 31 of 32 ALL Ratios 72. This sheet calculates some simple ratios for risk charge components as a percentage of capital and as a percentage of relevant exposures to identify the most significant solvency requirements. Great care is needed in interpreting these ratios as there are situations where the ratios may be distorted. 73. Please comment on any ratios that appear to be unusual, or require an explanation in order to be understood, on the ALL Requested Comments sheet. Ends Archived

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Website http://rbnz.govt.nz/finstab/insurance/ Email insurance@rbnz.govt.nz Telephone +64 471 3951 Mail Reserve Bank of New Zealand Prudential Supervision – Insurance Oversight PO Box 2498 WELLINGTON 6140 Archived