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RBNZ's latest paper on insurance causes concerns

Concern has been raised about the far-reaching implications for insurers’ solvency standards of one of the clauses in the Reserve Bank’s latest consultation paper.

Friday, June 14th 2013, 6:58AM

by Susan Edmunds

Submissions are being sought on the Reserve Bank’s solvency standards for insurance companies, relating to third-party guarantees and off-balance sheet exposures. It follows an earlier consultation paper that looked at insurers’ reinsurance arrangements.

If the proposals go ahead, they will increase the minimum solvency capital required for some insurers.

A clause that is causing concern says that insurers must disclose contingent liabilities that are reasonably identified “and give rise to a possibility, even if remote, of a net outflow of resources from the licensed insurer in the next three years”.

Industry sources said there was alarm at the potential breadth of that clause. It could include expenses such as building lease agreements.

The paper is largely clarifying issues around guarantees and exposures,  but makes other changes such as introducing limited use of short-term guarantees in assessing solvency standards. It proposes to limit the amount of reductions allowed on insurers’ Asset Risk Capital Charges due to guarantees.

It says the Bank is aware that some guarantees are being used to gain very large reductions in the charge but that all guarantees could give rise to risk.

“A guarantee will only be effective in mitigating risk if the guarantee is legally binding. The Reserve Bank considers that the provision of some further requirements in the solvency standards as to the requirements for legal certainty would be useful.”

Insurers would also have to hold capital against an amount that represented estimated likely payments to be made as a result of disputes in relation to unpaid claims over the next year.

“This is to recognise the risk that an insurer is likely to have an outflow of resources as a result of claims disputes, even if that outflow cannot be identified as attaching to a particular dispute.”

The paper says that some insurers have had difficulty working out which category off-balance sheet exposures fit into, and what constitutes an off-balance sheet exposure. It says it wants to clarify the rules.

A two-year transition period would be allowed if the changes went ahead.

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