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Reserve Bank tempers reinsurance standard

The Reserve Bank has issued a much tamer third consultation paper as part of its review of reinsurance funding arrangements.

Friday, May 16th 2014, 6:00AM

by Susan Edmunds

Some insurance companies 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.

The Reserve Bank raised hackled last year when it asked for submissions on whether there was a real risk transfer involved or whether the deal was a loan that should be reflected in companies’ accounts as such.

It is working through the process of making amendments to the Solvency Standard for Life Insurance Business, which will now include restrictions on when reinsurance can be recognised for the purpose of the insurer calculating its solvency capital requirement;  a rule requiring that whenever a reinsurance agreement gives rise to a repayable amount, that amount must be recognised in the insurer’s Solvency Margin; and requirements to report to the Reserve Bank.

The latest version of the amendments has been welcomed as a much more workable solution and less likely to cause significant problems for insurers than earlier versions, which would have landed some of them with significant debts on their books.

The Reserve Bank said it had taken into account the submissions received on last year’s consultations and used the feedback to make changes.

“The requirements have been restructured such that in the body of the standard there is a requirement that the Insurance Risk Capital Charge (IRCC) include any amount that is a repayable amount. An appendix to the standard has been created to more fully define a repayable amount. The intent is to provide greater clarity and guidance as to when a reinsurance agreement will be considered to contain a repayable amount and how that amount should be valued.”

Submissions on the latest consultation paper close on June 6. The Reserve Bank says it wants comment on the technical workability of the text.

It is now proposing a four-year transition period before the new requirements take effect.

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