Article

A new Solvency Standard is on the horizon

Key differences of note for insurers

On July 22 2021 the Reserve Bank of New Zealand (RBNZ) released an exposure draft of the Interim Solvency Standard. The interim standard is planned to take effect in early 2022 and will be in force until a final solvency standard supersedes it following an amendment to the Insurance Prudential Supervision Act (2010) planned for 2024. Along with the draft standard, RBNZ issued an explanatory note that provides useful context and invites comments on the draft.

The interim standard is a single document intended to replace the five solvency standards that currently exist. It has been drafted to reflect the revised insurance accounting standard, IFRS17, and to embody the review principles that were shared with the industry in late 2020.

This exposure draft completes stage one of a three-year review, and RBNZ has targeted recalibration as a primary task for stage 2 of the review.

There are some significant differences between the existing solvency standards and the draft Interim Solvency Standard. RBNZ welcomes feedback on areas of ambiguity and unintended impacts.

Some of the unintended impacts arise from the more subtle differences in wording and we have mapped the draft Interim Solvency Standard against the existing Life Insurance Standard and Non-Life Insurance Standard (used by General Insurers and Health Insurers) to help Insurers to focus in on these changes.

These detailed mapping documents provide a quick reference for all insurers when reviewing their current returns against the new standard.

Some of the key issues for the industry are highlighted below:

Tight timeframe and misalignment with IFRS17 timeline

Consultation closes on 1 October 2021 with a proposed implementation date of 1 January 2022. The draft standard requires use of some IFRS17 elements that may not yet be available to insurers as the IFRS17 implementation date is in 2023. The timeline is a key concern for many in industry.

Increase in Capital Requirement

The explanatory note indicates that the draft standard “is not primarily designed to alter capital requirements but will have some implications for capital”. However, in the same note, the expected impacts on insurers all appear to be neutral or require an increase in capital (for example the new operational risk charge of at least 3% of Gross Written Premium).

As recalibration is targeted for Stage 2 of the solvency review, this may have the result of temporarily increasing the capital required even if this capital can be released when the standard is finalised. Should additional capital be required, the timeline does not allow sufficient time for normal strategic planning for capital raising or other activities.

Health Insurance measured as a long term risk

Short term insurance contracts are now defined under the standard, with one of the criteria being that the contract does not include a guarantee of future insurability. Currently health insurance is measured as a short term contract under the Non-Life Insurance Standard by Health Insurers and a long term contract under the Life Insurance Standard by Life Insurers that also offer health cover. Regardless of the capital impact of this change, this will create a significant implementation challenge with new projection models required.

Some other changes that may have unintended impacts

For Life Insurers, the inclusion of risk adjustment without recalibration of adverse stress factors results in a higher overall stress from the best estimate cash flows.

The interest rate risk is applied before rather than after the Current Termination Value over-ride so adding a “going concern” stress to a “gone concern” stress. This change will alter the impact of any Asset-Liability matching currently applied to capital requirements.

There is new guidance around reinsurance risk transfer testing that may result in most commercial reinsurance arrangements failing the test and being treated as debt, again increasing capital requirements.

Our team of experts can help you to understand the changes in the standard, assess the impact on your capital requirements, assist you in preparing a response to the consultation, and work with your business to accelerate your response to the changes.

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