RBNZ ponders re-insurance clampdown
Insurance companies funded by re-insurers could incur a big new debt on their books depending on the outcome of a review of reinsurance funding arrangements being carried out by the Reserve Bank.
Tuesday, March 12th 2013, 9:30AM 
7 Comments
by Susan Edmunds
Some insurance companies, such as Partners Life, are backed by re-insurance. When a policy is sold, the re-insurer pays a proportion of the associated sales and issue costs. In return, they receive that same proportion of the premiums, less an expense allowance, and pay the same proportion of claims.
Re-insurers use their substantial capital bases to fund insurers who would otherwise have to raise significant amounts of capital.
But the Reserve Bank has asked for submissions on whether there is a real risk transfer involved, or whether the deal is a loan and should be reflected in insurance companies’ accounts as such.
Some insurance companies are believed to keep a tally so that when the initial contribution by a reinsurer has been paid back, plus interest, the re-insurer’s interest in the policy ceases or is significantly reduced. This has many of the hallmarks of a loan rather than a life reinsurance contract.
The Reserve Bank says: “These are not precluded from being counted as capital under the current insolvency standards. However, there is the potential for the risk transfer component of a financial reinsurance treaty to be unclear or difficult to establish, leading to an overestimation of the risks that have been transferred.”
It says that raises questions on whether New Zealand’s solvency standards should treat financial reinsurance differently for regulatory capital purposes.
“The primary question is whether components of financial reinsurance arrangements can be considered as essentially debt-like arrangements… arrangements that are to a large extent effectively debt-like raise policy questions about their potential effects on an insurer’s solvency position.”
The Reserve Bank says solvency standards should explicitly address financial reinsurance. “Leaving the current standards unchanged is not seen as a viable option.”
It is seeking stakeholders’ views.
Partners Life chief financial officer Sean Kam said his firm had made a submission. “The RBNZ has not finalised any policy and the submission period has just closed. So it’s not possible to determine if there will be any impact on Partners or any other insurers at this time.”
He said the Partners Life reinsurance arrangements, a form of modified co-insurance, met the current regulatory requirements for capital.
Kam said the Reserve Bank was most concerned about finite agreements, where there was only limited risk transfer. Partners Life’s system involved genuine risk transfer, he said.
“If changes were made to the solvency rules that have an impact on any individual insurers, there would be an appropriate transition period during which those companies can restructure to meet the new RBNZ requirements.”
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Comments from our readers
There's nothing wrong with funding arrangements, but the RBNZ, as the overseer, should be looking at this, and separate out real re-insurance from other types. We don't want another AMI.
For the industry the related problem is that is that once bureaucrats like the RBNZ get involved they can't help but impose higher costs and rules (maybe unnecessary), which will follow through into higher premiums and lower coverage rates, at a time when coverage rates need to be drastically increased.
In the early days at Sovereign, there was an immunity against lapse clawback payments to the reinsurer for a specified period or until a specific portfolio value was reached. This is a legitimate and commercially sensible method of providing financial support to a fledgling company.
The key issue with any reinsurance arrangement is the impact on the writing company to honour its obligations to policyholders.
There is no suggestion that any Life Office in NZ is in any danger of failing to meet these obligations due to inappropriate reinsurance arrangements. Quite the opposite, in my experience, as the reinsurance organisations are global, and have far greater financial capacity than their NZ clients.
The AMI reference is, with respect, spurious. This was a general insurer with inadequate levels of catastrophe reinsurance cover - nothing whatsoever to do with risk transfer on individual, or even Group, reinsurance arrangements.
The comments on cost are well made, and represent an inevitable impost that goes along with regulation, but it would nevertheless, be desirable to develop a study on the benefit to consumers of the regulatory regime. A cost/benefit analysis would help put the whole issue in perspective and establish whether or not the regime was worthwhile.
You may have seen yesterday’s article in Good Returns magazine regarding the RBNZ consultation process relating to Financial Reinsurance.
Partners Life is strongly supportive of a robust regulatory frame-work which protects the interests of policyholders whilst encouraging a strong and efficient insurance industry.
We have participated in the RBNZ consultation process, providing information on global regulatory approaches to this matter as well as in depth details of our own specific reinsurance treaty. We have appreciated the opportunity the RBNZ has provided us to be involved in their consideration of this issue, given our extensive experience and knowledge of how financial reinsurance has historically been used to create the current New Zealand life insurance market.
The submission period has now closed and we anticipate that it may be some months before the RBNZ announces its final policy in this regard.
Until that time there will be some uncertainty around what, if any, impact the RBNZ policy decision might have on the insurance industry and on individual companies, including Partners Life.
We expect that once final regulation regarding this issue has been decided those insurers who may be impacted by any changes to current regulations can expect an appropriate transition period during which to restructure their arrangements to meet the new RBNZ regulations.
The Partners Life executive team has an extensive history of success in the New Zealand life insurance market and as a result, enjoys very strong support from our Global reinsurer SCOR, as well as from our shareholders. We are confident that we have the knowledge, experience and financial capability to successfully reshape our strategy, if necessary, in reaction to any regulatory changes.
We will welcome the market returning to a level of regulatory certainty in the not too distant future and we look forward to continuing to provide you and your clients with market leading products over many years ahead.
Unbeknown to the client, B’s published ratio doesn’t allow for the implicit debts of financial reinsurance. Suppose the environment becomes adverse and B is required to pay back such financial reinsurance debts. It can no longer pay claims and becomes insolvent.
This situation could actually eventuate under the current solvency standard. As prudential regulator of insurance the Reserve Bank is quite right to want to address this state of affairs. It would be a sad news story indeed if the these contingent liabilities on the balance sheet remain “hidden” and such members of the public suddenly find their insurer is unable to pay claims.
The public has a right to not to have such material information concealed from them – the debts of financial reinsurance need to be reflected in the current standards with all due speed.
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