Consultation Paper on Insurance Solvency Standards Reissue 2014

Consultation Paper
Solvency Standard Reissue 2014
The Reserve Bank invites submissions on this Consultation Paper by 3 November Submissions and enquiries about this consultation should be addressed to:
Felicity Barker
Adviser
Prudential Supervision Department
Reserve Bank of New Zealand
PO Box 2498 Wellington 6140
Email: felicity.barker@rbnz.govt.nz
Please note that a summary of submissions may be published. If you think any part of your submission should properly be withheld on the grounds of commercial sensitivity or for any other reason, you should indicate this clearly. September 2014 Ref #5759732

Solvency Standard Reissue 2014
Part 1: Introduction

1. The Reserve Bank has undertaken extensive consultation on the Insurance Solvency
   Standards over the recent past; including the issuance of the following consultation papers:

• the quality of capital and regulatory treatment of financial reinsurance
  (December 2012);
• guarantees and off-balance sheet exposures (June 2013);
• financial reinsurance (October 2013);
• guarantees (December 2013);
• financial reinsurance (May 2014).

2. This consultation paper brings together all these various strands of work and
   proposes amendments to the following Standards to give effect to these changes: the Solvency Standard for Life Insurance Business (“Life Standard”), the Solvency Standard for Non-life Insurance Business (“Non-Life Standard”), the Solvency Standard for Captive Insurers Transacting Non-life Insurance Business, the Solvency Standard for Non-life Insurance Business in Run-off and the Solvency Standard for Civic Assurance (collectively “the Standards”). Aside from the changes proposed to the Life Standard for reinsurance, in the main, equivalent changes are made across each Standard, however where this is not the case, and the difference is substantive, this is highlighted in this consultation paper.

3. Exposure drafts of the proposed new Standards have been released with this
   consultation paper. The exposure drafts incorporate the Reserve Bank’s final view on the proposals contained in the consultation papers listed above and some new material. The significant new material is some additional changes to improve clarity (particularly in relation to the Asset Risk Capital Charge); changes required due to the passage of the Financial Reporting Act 2013 and related legislative changes (including a shortening of reporting timeframes consistent with those changes), changes to the determination of counterparty grades and enhanced disclosure requirements. There are also consequential changes to give effect to the transition arrangements and to apply the Standards.

4. The purpose of this consultation is to provide interested parties with the opportunity
   to comment on the technical workability of the proposals as a whole and an opportunity to comment on the new material. It is intended that the new Solvency Standards will commence in January 2015. However, the re-issued Standards are intended to take effect for a specific insurer, through conditions of license, as at and from each insurers’ 2015 balance date. A longer transition applies in relation to the proposed changes to the Life Standard for reinsurance, as discussed in Part 4.

5. It is intended that the Solvency Standard for Non-life Insurance Business – AMI
   Insurance Limited and the Solvency Standard for Captive Insurers Transacting Life Insurance Business be revoked, as discussed in Part 3.

6. The Reserve Bank is also currently considering a number of other issues in relation
   to the Solvency Standards, such as the treatment of related product groups and, going forward, will examine a number of other issues in relation to the Solvency Standards, such as the treatment of taxation. There is no change proposed in respect of these issues in this round of proposals.

7. The Reserve Bank invites submissions on this consultation paper. The deadline for
   submissions is 3 November 2014.
   Part 2: Summary of proposed changes

8. The changes to the Solvency Standards fall into the following main categories:

• Asset Risk Capital Charge;
• A revised definition of capital;
• Interest Rate and Foreign Currency Capital Charge;
• Reinsurance;
• Financial Reporting Act motivated changes;
• Disclosure;
• Determination of counterparty grades;
• Technical clarifications (minor technical clarifications are not necessarily
  commented on in this paper).
  Asset Risk Capital Charge

9. The significant changes proposed to be made to the Asset Risk Capital Charge
   (ARCC) requirements are:

• changes to provide a clearer and more consistent structure;
• introduction of the requirements for guarantees;
• changes to clarify the treatment of off-balance sheet exposures;
• changes to the Asset Concentration Risk Charge to clarify its application;
• changes to the related party asset exemption to improve clarity;
• changes to the determination of counterparty grades (paragraph 61).
  Structure of the Asset Risk Capital Charge (ARCC)

10. This consultation proposes structural changes to the ARCC in order to clarify how the
    components of the charge inter-relate and to improve the alignment between the Life and Non-Life Standards. Although there is now closer alignment between the Standards, the structure of the ARCC is not fully aligned between the Life and the Non-Life Standards. The Reserve Bank’s main concern is to ensure that the outcome in terms of the amount of capital that must be held is broadly the same for the same exposure whichever Standard is used, unless differences are justified by differences in business type. The Reserve Bank does not consider that this requires further alignment of the structure at this stage.
11. It is proposed that Section 3.3 of the Non-life Standard be amended to provide that
    the ARCC is the sum of the:

• Risk Weighted Exposures Charge (RWE);
• Derivatives Capital Charge; and
• Asset Concentration Risk Charge (ACC).

12. In the Life Standard the ARCC is the sum of the:

• Resilience Risk Capital Charge, being the:
  o Credit Equity and Property Risk Charge, being the:
   Risk Weighted Exposures Charge (RWE); and
   Derivatives Capital Charge; o interest rate risk impact; o Foreign Currency Risk Charge; and o Solvency Liability Resilience Impact; and

• Asset Concentration Risk Charge (ACC).

13. The Risk Weighted Exposures Charge is a new term but it does not create a new
    charge. It is calculated by assigning each of the insurer’s assets and contingent liabilities to the relevant Exposure Class in Table 2 and multiplying that amount by the appropriate capital factor and summing those amounts.
14. The Reinsurance Recovery Risk Capital Charge will be explicitly included as an
    element of the Total Solvency Requirement under Section 3 of the Life Standard, rather than as part of the ARCC.
15. These changes are not a change in substance but more explicitly set out the
    components of the relevant charges in a more consistent manner. It is also proposed that the terminology in Table 2 and relevant text be amended to apply to “exposures” and “resilience capital factors”, rather than “assets” and “asset risk capital factors”, given that liabilities may be within these concepts.
16. A further issue that has been addressed is that the total capital charge in relation to a
    given exposure can exceed the value of the exposure. The Reserve Bank considers that the total capital required to be held in respect of the Risk Weighted Exposures Charge and the ACC should not exceed the value of the exposure. This is because these charges are intended to reflect the potential capital reduction arising from credit risk on these exposures, which cannot exceed the value of the exposure.
17. A provision has also been added to clarify that an asset included in the Reinsurance
    Recovery Risk Capital Charge is not included in any element of the ARCC (Non-Life) or the CEP Charge and ACC (Life). Currently both Standards provide that any asset that is a deduction from capital is not included in the Asset Risk Capital Charge. However as the interest rate impact and the Foreign Currency Risk Charge are part of the Asset Risk Capital Charge in the Life Standard but not the Non-Life Standard the outcome is different. The Standards have been amended to ensure that deductions from capital are not included in the Interest Rate Charge and Foreign Currency Risk Charge under both Standards. Guarantees
18. The Reserve Bank has consulted twice on the treatment of guarantees in the
    Solvency Standards (June 2013, December 2013). The purpose of the proposed changes for guarantees is to:

• allow for the recognition of guarantees of assets with a shorter duration than
  the guaranteed assets;
• ensure that guarantees that are recognised for solvency purposes are legally
  robust;
• ensure that the residual risks of guarantees are appropriately recognised; and
• provide clarity as to the treatment of guarantees of demand loans.

19. The proposal in the exposure drafts in relation to guarantees is largely the same as
    that consulted on in December 2013. The capital factor applying to a guaranteed asset will be the capital factor applicable as if the guarantor were the counterparty plus an additional charge of 2%. This additional charge is intended to reflect residual risks that may arise in relation to guarantees, such as the risk of non-renewal or documentation risks. Guarantees of shorter maturity than the guaranteed asset may be recognised subject to a hair cut based on the relative maturity of the asset and guarantee.

20. One issue which submitters have commented on is the treatment of guaranteed
    demand loans. Demand loans have no contractual maturity date and hence their treatment is not currently explicitly provided for under the Standards. The December 2013 consultation proposed a deemed residual maturity of 3 years for demand loans, in order to determine the amount of the guarantee recognised. Some submitters considered this too long and argued that it would result in asset charges not reflecting the relative risks of different asset classes. It was argued that such a treatment would result in other more risky assets, such as equities, being subject to a lesser charge than some guaranteed loans. However, in this comparison both the asset type and the counterparty have changed (related party/unrelated party). An equity investment in a related party is subject to an effective 100% charge as it is a deduction from capital. The Reserve Bank considers that a deemed residual maturity of 3 years will result in an appropriate amount of capital being held in relation to guaranteed demand loans. However, given the maturity of the loan has been deemed to be 3 years, a change has been made such that the maturity of the guarantee is deemed to be the initial maturity. This will ensure that the capital required in relation to a guaranteed demand loan does not increase over time.

21. Table 1 below compares risk charges for different asset types to illustrate the relative
    risk weightings implied by the policy.

Table 1: Comparison of asset risk charges (ignoring additional risk factor)
Asset Description RWE Charge
Loan to a related party 100%
Equity investment in related party Effective 100% Demand loan with a related party covered by an annually renewing guarantee from an AA rated party (Life) 84% Demand loan with a related party covered by a 2 year guarantee from an AA rated party 35% Equities 25% Debt obligation (>1 year) with counterparty rating of Grade 1 or 2 2% Demand loan with a related party covered by a 3 year guarantee from an AA rated party 2%
22. Consequential changes to the Foreign Currency Risk Capital Charge and the Interest
Rate Capital Charge to clarify the treatment of guaranteed assets are proposed. These changes are as previously consulted on.
23. Another issue raised by submissions is the interaction of the ACC with the guarantee
rules. The Reserve Bank has amended the requirements in relation to the ACC to provide that, where an asset is guaranteed, the guarantor may be substituted for the direct counterparty in determining the ACC. The current exposure draft clarifies that the total value of the guarantee can be accounted for in the ACC, whether or not the value of the guarantee recognised for the purpose of calculating other components of the ARCC has been reduced. This recognises that the dual obligation created by guarantees reduces concentration risk. Off-balance sheet exposures
24. The Reserve Bank consulted on off-balance sheet exposures in June 2013.

25. The September 2014 exposure draft incorporates some changes to the treatment of
    off-balance sheet exposures; not all of the changes that were proposed in June 2013 have been included. Under the proposal, rather than treating a contingent liability like an asset, the text has been revised to explicitly provide that contingent liabilities must be included in the Risk Weighted Assets Charge and the ACC. Clarification has been provided on how to determine which exposure class a contingent liability falls into under Table 2.
26. An issue on which the Reserve Bank has consulted previously is which contingent
    obligations an insurer must include for solvency purposes. The Standard directs the insurer that all known contingent liabilities must be accounted for, hence the range of obligations is wider than what is disclosed for accounting purposes. Rather than defining the boundary in the Standards, the Standards have been revised to require that the appointed actuary must, as part of the Financial Condition Report, comment on whether the insurer is exposed to any material off-balance sheet exposures that have not been disclosed in the financial statements.
27. The Reserve Bank previously consulted on whether off-balance sheet exposures for
    solvency purposes should include an allowance for disputed claims amounts. Following industry feedback the Reserve Bank is not including this requirement.
28. A key change in relation to off-balance sheet exposures is in relation to the ACC. In
    the Non-Life Standard contingent liabilities must be included in the calculation of the ACC. However, this has not clearly been the case in the Life Standard. The exposure draft ensures that it is clear that all contingent liabilities must be included in the calculation of the ACC for all Standards. Asset Concentration Risk Charge (ACC)
29. As well as clarifying that contingent liabilities must be included in the ACC, it has also
    been clarified that asset derivative positions must be included in the ACC. The net position vis-a-vis a counterparty may only be used if the insurer has a legally binding netting agreement. These changes are as previously consulted upon.
30. Wording changes are proposed to the ACC to clarify its calculation. It is clarified that
    where more than one resilience capital factor can apply to the same counterparty a weighted average is applied. As discussed the ACC can be reduced if the sum of the Risk Weighted Exposures Charge and the ACC for a particular asset exceeds the value of the asset. Related party asset exemption
31. Under the Solvency Standards certain assets where the counterparty is a related
    party are not treated as related party assets for the purpose of the Solvency Standards. This section has been revised (and moved to the general provisions
    section) to improve clarity and consistency, the main changes being that:

• the application has been clarified as being to determine whether a deduction
  is required for related party investments, classifying assets under Table 2 and determining the exposure class for a contingent liability;
• for the Non-Life Standard the reference to assets of a captive insurer has
  been removed, as these entities are dealt with under the Captive Standard (this change will not be made to the Captive Standard);
• the reference to assets that are included in the Reinsurance Recovery Risk
  Capital Charge has been removed as a more general statement has been

included such that reinsurance recovery assets need not be included in the ARCC calculation (Non-life) or the CEP and ACC charges (Life). Revised definition of capital
32. The Reserve Bank consulted on a revised definition of capital to be included within
the Solvency Standards in December 2012. The revised definition of capital includes general requirements that must be met together with qualifying criteria for each type of capital instrument included within an insurer’s capital for solvency purposes. The purpose of including these additional requirements within the definition of capital is to clarify the Reserve Bank’s expectations in respect of the quality of capital and ensure that licensed insurers’ capital is of sufficient high quality across the industry. High quality capital instruments are important because only such instruments will provide the most effective financial protection to policy holders and other unsubordinated creditors in the event that an insurer incurs unexpected financial losses. Effective financial protection is only provided by capital instruments that demonstrate appropriate characteristics, for example sufficient permanence and the ability to absorb losses. Further details are provided within the revised definition of capital.
33. Readers may also wish to refer to the paper titled “Response to submissions
received on the consultation on the quality of capital and other revisions to the solvency standards”, released with this consultation paper. This paper provides information on the Reserve Bank’s response to submissions received during the consultation exercise undertaken in respect of the definition of capital. Interest Rate and Foreign Currency Capital Charge
34. Some minor changes are proposed to the Interest Rate Capital Charge (interest rate
impact in the Life Standard) and the Foreign Currency Capital Charge to better align the wording of the Life and Non-life Standards. Additionally, the Non-Life Standard has been amended to include the same requirements as the Life Standard in relation to the shock to be applied to nominal and real interest rate instruments; namely a 175 basis point shock must be applied to nominal interest rate instruments and a 60 basis point shock must be applied to real interest rate instruments. Changes in relation to guarantees were discussed previously. Reinsurance
35. The changes to the reinsurance requirements only apply to the Life Standard. The
Reserve Bank has already undertaken three rounds of consultation on these requirements (December 2012, October 2013, May 2014).
36. The changes in respect of reinsurance have three purposes:

• ensuring that where the benefit of a reinsurance agreement is recognised in
  the calculation of the Insurance Risk Capital Charge or the Catastrophe Risk Capital Charge there is a sufficient level of certainty that the insurer will in fact receive that benefit;
• requirements to provide a reinsurance statement to the Reserve Bank in
  order to improve risk management and Reserve Bank oversight;
• a requirement to hold capital in relation to arrangements considered to be
  financing reinsurance arrangements; that is where the reinsurance arrangement gives rise to debt like obligations (’repayable amounts’).

37. Following the May 2014 consultation a number of technical changes have been
    made to these requirements. The policy is however substantially the same as consulted on in May. The transition period has not changed from that previously consulted on (see Part 4). The main submission points and the Reserve Bank’s response are summarised below. Termination in insurer insolvency
38. Under the May 2014 exposure draft it was proposed that the benefit of reinsurance
    would not be recognised if the reinsurer had the unilateral right to terminate the agreement in relation to existing reinsured business, unless one of the specified exceptions was met. A right to terminate in the event of insurer insolvency was not one of the exceptions.
39. Some submitters considered that the existence in a reinsurance agreement of a
    unilateral right for the reinsurer to terminate the agreement on insolvency of the insurer should not mean that the agreement is de-recognised, when it is an asset, in solvency calculations (different arguments were provided in relation to the recognition in the Insurance Risk Capital Charge and the Catastrophe Risk Capital Charge).
40. The Reserve Bank continues to hold the view that it is important that a reinsurer be
    liable for claims incurred past the point of insolvency of the insurer, in relation to business reinsured at the point of insolvency, in order for the benefit of that agreement to be recognised in solvency calculations. The Reserve Bank considers that this is important to protect policy holders and to ensure that if an insurer is insolvent cancellation of reinsurance does not further weaken its solvency position.
41. One party considered that it was inconsistent that an agreement would be recognised
    if the reinsurer could unilaterally cancel for non payment of premiums but was not able to be recognised if the agreement could be unilaterally cancelled on insolvency. Although this may result in some inconsistency the Reserve Bank considers that there is not a one:one correspondence between these events. An insurer may be insolvent but may still be making reinsurance premium payments. Materiality
42. One party considered that the proposed requirements should not apply to
    reinsurance agreements with an insignificant reinsurance balance. The Reserve Bank agrees and has allowed immaterial agreements to be excluded. Specified event test
43. Some submitters considered that the specified event test should not apply to
    terminations initiated by the insurer. The Reserve Bank does not agree with this point and is concerned with all termination events which could result in the crystallisation of a liability for the insurer. In order to provide greater clarity in the drafting, the exposure draft has been amended so that the safe harbours in relation to termination events are all grouped together and are explicitly articulated in paragraph 11 of Appendix E. Mutually agreed terminations where the recapture fee is a commercially negotiated amount at the time of termination continue to be included in the safe harbours. In respect of other termination events, a new paragraph 11(d)B provides for the circumstances under which an amount may be repayable in the event of termination (irrespective of who terminates). These are:

• substantial fraud, misrepresentation or material non-disclosure of a fact by a
  party other than the reinsurer at the time the agreement was entered into;

• the performance of the agreement is rendered impossible including by reason
  of war or civil unrest; or

• the insurer takes steps which result in the reinsurer no longer receiving
  amounts under the agreement, as long as the amount payable is based on the loss of future profit to the reinsurer.

44. This list of exceptions is narrower than those included in the May 2014 exposure
    draft by reference to paragraph 63. The Reserve Bank considers that in the case of material default of the insurer under the agreement, including failure to pay premiums, the reinsurer could rely on remedies such as damages or removal of the obligation to pay claims. The provisos that were paragraphs 63(iii)(d) (reinsurer is prevented from making a payment) and (g) (expiry of all underlying contracts) are not relevant in the context of the specified event test. Embedded obligations test
45. Some submitters considered that the safe harbours in the specified event test should
    be applied to the embedded obligations test. The Reserve Bank has clarified that the embedded obligations test does not apply to termination events (as these are covered by the specified event test) and that the non-termination safe harbours in the specified event test also apply to the embedded obligations test. Overlap with contingent liability requirements
46. One party submitted that if an amount meets the safe harbours specified in the
    specified event test then it should also be specifically excluded from the requirements regarding contingent liabilities in the Solvency Standard. The Reserve Bank disagrees with this point. The purpose of the exclusion of repayable amounts from contingent liabilities is to avoid double counting. If an amount is not a repayable amount but the amount is a contingent liability then it must be treated as a contingent liability (the provision providing that a repayable amount should not be treated as a contingent liability has been moved to the main body of the Standard). Director certification
47. One party commented that there should be stronger director certification
    requirements and that insurers should have to provide evidence that agreements have been signed by authorised persons. The Reserve Bank does not consider that a separate director certification requirement is needed, as directors must currently certify that the insurer has systems in place to ensure compliance with the Standards. The Reserve Bank has however included a requirement that reinsurance contracts must be signed by authorised persons to be recognised for solvency purposes. Approvals
48. Some parties reiterated that they considered a formal approvals regime should be
    implemented. The Reserve Bank does not intend to implement a formal approvals regime at this stage, but as previously stated insurers may submit agreements to the Reserve Bank for the Reserve Bank to provide an assessment against the Standard. Stress testing
49. Some parties submitted that stress testing of reinsurance agreements should be
    based on an inception basis in all cases (that is from the start of the agreement).

The Reserve Bank agrees with this point and has provided for this in Section 6.3 of the Solvency Standard. The requirement to provide annual stress tests if there has been a change in the level of risk transferred under the agreement has been removed. In undertaking stress tests, text has been added to clarify that the appointed actuary should make appropriate assumptions as to the exercise of discretions under the agreement (Appendix E). Stop loss treaties
50. One submitter queried how the transition rules apply to stop loss treaties that cover
both new and existing business. A reinsurance agreement for which the reinsurer is liable where the insurer’s loss exceeds a certain amount in relation to both new business written and existing business will be required to meet the new rules after 1 year. Automatic cancellation in later years
51. One submitter considered that there may be some arrangements that cancel cover
on policies on a particular event in the later years of the policy, but which do not materially change the risk transfer. To address this point we previously added an exception that an arrangement may automatically terminate if all the underlying policies have expired. In all other cases insurer consent is required to recognise the benefit as an asset. Technical changes
52. A number of other technical changes have been made to the reinsurance policy
including clarifying the requirements as to an assessment of when an agreement is legally binding and clarifying that the requirements do not require agreements to be perpetual. Not all submission points have been discussed in this summary. Readers are referred to the Life Standard (Appendix E, Section 1.3, Section 3.1 and Section 6.3) for the proposed final requirements. Financial Reporting Act changes
53. A number of changes are needed to the Solvency Standards to address the
revocation of the Financial Reporting Act 1993 (“FR Act 1993”). The main changes are summarised below. In order to give effect to the revocation of the FR Act 1993 changes will also need to be made to insurer’s conditions of licence and to exemption notices. These changes will be consulted on separately.
54. The most significant change is the alignment of the dates for the provision of financial
information under the Standards to the dates required under the relevant legislation for the registration of financial statements. Under the proposed changes the annual solvency return, financial condition report (FCR) and accompanying information will be required to be supplied to the Reserve Bank within 4 months of the reporting date. The Reserve Bank considers that this provides a reasonable timeframe to prepare solvency information and accompanying information and considers there are benefits in aligning these dates. Half yearly solvency information will also be required within 4 months of the half-year balance date.
55. Small insurers are not required to provide financial statements to the Reserve Bank
under the Act. However, small insurers are subject to the Solvency Standard and hence do have to provide solvency returns and FCRs. It is proposed that for small insurers the annual and half-yearly reporting dates remain aligned to those of other

insurers, so a 4 month period will also apply to small insurers at their annual and half￾yearly balance dates.
56. A number of changes are proposed to be made to the Standards to ensure that the
terminology used is consistent with that of the new legislation. This includes the references to legislation, changes to definitions and ensuring that the Standards provide correct references to insurer specific or group financial statement requirements.
57. Under the new legislation some small insurers may not be required to prepare
financial statements, and in some instances financial statements are not required to be prepared at the same level of consolidation as under the Solvency Standards. To address this, a new definition of “Alternative Financial Information” has been added to the Standards. Where insurers are not required under the legislation to prepare financial statements at the level of assessment required by the Standard an insurer is directed to use Alternative Financial Information to make the assessment. Disclosure
58. The Solvency Standards contain requirements to ensure the public disclosure of an
insurer’s Solvency Margin within the annual financial statements and on an insurer’s website (if any).
59. The minimum disclosure requirements are proposed to be expanded to include the
Actual Solvency Capital, Minimum Solvency Capital, Solvency Margin and Solvency Ratio in respect of each Solvency Standard applicable to an insurer and an aggregate disclosure of these measures in respect of the insurer’s total business. Financial statement disclosure must include a comparative to the prior financial year.
60. For an overseas insurer, the appropriate disclosure may be included within the New
Zealand branch financial statements only.
Counterparty Grades
61. A number of capital charges within the Standards require the determination of a
counterparty grade; either in respect an insurer’s investment assets or in respect of counterparties (including reinsurers). The counterparty grades are proposed to be established by reference to short and long term issue ratings in respect of investment assets and issuer ratings in certain specified instances. Insurers continue to be required to maintain and apply a policy on the selection of counterparty grades. Technical clarifications
62. A number of technical changes have been made including:

• clarifying the deduction from capital relating to overseas branches;
• clarification of the tax treatment of numerical factors;
• clarification of the prescribed solvency assumption margin for disability
  income IBNR claims in the Life Standard;
• clarification that the catastrophe risk capital change is subject to a minimum
  of zero in the Life Standard;
• clarification that all Solvency Standards require a report from the appointed
  actuary that meets the requirements of section 78 of the Act to be submitted in conjunction with the annual solvency return submitted to the Bank;
• additional definitions have been added to provide increased clarity.

63. The Solvency Standard for Non-life Insurance Business in Run-off and the Solvency
    Standards for Captive Insurers Transacting Non-Life Business have been restructured such that rather than being full Standards they now reference the Non￾Life Standard and explicitly provide for when there are differences in regards to that Standard. This change has been made to reduce the administrative burden in updating Standards. In addition the following changes are also made to these Standards:

• clarification of the application of the capital factors within the Solvency
  Standard for Captive Insurers Transacting Non-life Insurance Business;
• clarification that the probability of sufficiency is increased to 90% from 75%
  across all relevant risk margins.

64. The application/general provisions sections of the Standards has been amended to
    improve clarity or to improve consistency between the Standards. The main changes are to provide that:

• all assets and liabilities of the licensed insurer must be considered within the
  calculations of the solvency margin (or such restricted pool of assets and liabilities set out in the conditions of licence);
• financial information consistent with NZ GAAP forms the starting point for the
  calculations (the Standard may require alternative treatment);
• life insurers need to establish life funds (as defined) and determine solvency
  margins in respect of each life fund and maintain actual solvency capital within each statutory fund to maintain required solvency margins;
• licensed insurers are required to ensure that the minimum solvency capital is
  subject to a minimum amount (the Fixed Capital Amount) at an entity level.

65. Certain sections of the Standards that outline requirements of the Act (e.g. current
    1.6 , 5.1 (Life), 1.7, 4.1 (Non-life)) have been removed to avoid any potential
    confusion with the requirements of the Act. Consideration will be given to providing an overview of the key provisions of the Act in an alternative form, such as a guidance note or on the Bank’s website.
    Part 3: Revocation of standards
66. It is proposed that the following Standards be revoked:

• Solvency Standard for Non-life Insurance Business – AMI Insurance Limited;
• Solvency Standard for Captive Insurers Transacting Life Insurance Business.

67. These Standards no longer apply to any licensed insurers. Maintaining the Standards
    incurs administrative costs to the Reserve Bank and potential confusion to the public.
    Part 4: Transition
68. It is intended that the Standards will come into force in January 2015, except for
    certain provisions in relation to reinsurance discussed below.
69. A particular Standard will apply to an insurer that is required to maintain a solvency
    margin under that Standard. Conditions of license will be amended throughout 2015 so that individual insurers will be required to calculate a solvency margin under the reissued Standards as at and from their 2015 balance date. This means that the requirement to maintain a solvency margin in accordance with the reissued Standards applies from the 2015 balance date (i.e. last day of the 2014-2015 financial year) for each insurer, with reporting, as at balance date, due four months

after that date. Exemptions for overseas insurers will continue to apply; however it is intended that the exemption notices will be amended to ensure consistency, for example in respect of disclosure.
70. For a period of a year or so, more than one version of each Standard will be in force
at the same time. The existing Standards will be revoked once all insurers have transitioned to the new ones. To dis-apply the old Standards from the time the new Standard applies to an insurer the old Standards will be amended to provide that it does not apply to insurers who under their condition of license must calculate a solvency margin under one or more of the reissued Standards.
71. For the requirements in respect of reinsurance, the reporting requirements will
commence at the same time as the rest of the Standard (throughout 2015). The requirements relating to the recognition of reinsurance benefits will commence 1 year after the Standard has commenced (January 2016) and the requirement to hold capital against a repayable amount will commence 1 year following commencement (January 2016) in respect of insurance business written post the relevant date in January 2016 and 4 years following commencement in respect of all other insurance business.
72. In the Life Standard the reinsurance transition is applied through the commencement
section (1.3) and through the definition of repayable amount in Appendix E.