Reserve Bank tempers reinsurance standard

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.