Guarantee rules tweaked

The Reserve Bank has mooted minor changes to its proposed tweaks of the insurance solvency standards as they relate to guarantees.

Tuesday, February 11th 2014, 6:00AM

by Susan Edmunds

But the changes should not make much difference to this country's insurance companies.

The RBNZ has issued a consultation paper on the standards, for which submissions close at the end of February.

It is the second version of the consultation around the treatment of guarantees, seeking to ensure the level of credit risk mitigation received by licensed insurers from the use of guarantees is appropriate.

The June 2013 consultation paper proposed recognition of guarantees with a term of less than the underlying asset, subject to haircutting the value of the guarantee recognised. Guarantees with a term of less than a year receive no recognition and guarantees of demand loans would be haircut based on the length of the guarantee and assumed maturity of the demand loan.

This version has not changed much from the first edition. The Reserve Bank had proposed a 15% limit on the amount that the asset risk capital charge could be reduced by way of a guarantee. This has been dropped.

It also introduces a small extra risk charge on assets that are guaranteed rather than owned outright.

Insurance companies will be more concerned about proposed changes to reinsurance. The Reserve Bank had suggested that one form of reinsurance would be allowed but another would be classed as debt, which could cause solvency problems.

The way the distinction was being made was reliant on seemingly subjective criteria, according to sources, who said if reinsurance was only ever to be repaid out of future cashflow, it should not be a solvency issue.

Any change would be an issue for several New Zealand insurers, who were expected to have submitted heated proposals on the suggestions.

Submissions on the proposals had to be in before Christmas.

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