Reinsurance clampdown
New solvency standards for life insurance business will make things tougher for those that rely on reinsurance to write new business.
Monday, January 5th 2015, 6:00AM
by Susan Edmunds
The Reserve Bank’s new standards came into effect on January 1. Its new reinsurance provisions come in over a phased transition period.
The standards mean reinsurance agreements that essentially work as a loan to the insurer with a low risk of ever being called in will now have to be reflected on the company’s balance sheet as a debt.
The new list of criteria for reinsurance arrangements will affect all life insurers but for most it will be a case of rewording or fixing the treaty to bring it in line with the new requirements.
But for Partners Life, which relies heavily on reinsurance to write new business, the changes may be more disruptive.
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.
Other, older companies have sufficient capital behind them to not have such a heavy reliance on reinsurance for new business.
An insurance industry source said Partners Life would struggle to fix their treaty wording to bring it in line with the requirements and might need to find other sources of capital.
The company is planning an IPO next year.
Naomi Ballantyne said Partners would have to make changes to its reinsurance treaty. “The standards require reinsurers to give away lots of the protections they used to have. There will be some changes.”
But she said reinsurers understood the changes and knew they would need to meet the requirements if they wanted to continue to do business in New Zealand.
Conditions of insurers’ licence will be amended throughout 2015 so that individual insurers will be required to calculate a solvency margin under the reissued solvency standards as at, and from, their 2015 balance date.
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