Insights from New Zealand solvency returns for the 2015 financial year

Transcription

1 Insights from New Zealand solvency returns for the 2015 financial year COLE, R 1 and ALLOTT, A 1 Abstract A review the regulatory solvency returns provided to RBNZ by licensed New Zealand insurers has been made for 2015 financial year reporting. The industry s solvency results and components solvency requirements are analysed and presented in aggregate form as well as with comparisons between insurers. We comment on some the issues that have been identified as well as some other aspects that may be interest. Policy considerations and supervisory responses are out scope for this paper. 1 Reserve Bank New Zealand

2 2 This page is deliberately left blank.

3 3 Contents List figures 5 Executive summary 7 Introduction 11 Regulatory framework for solvency 12 Data for analysis 14 Terminology 15 Part One New Zealand solvency requirements 16 Overview New Zealand solvency requirements 16 Solvency standards 16 Fixed Capital Amount 17 Licence conditions 17 Consolidation 17 Multiple solvency requirements 17 Effective solvency requirement 18 Solvency standards 20 Fixed Capital Amount 21 Non-solvency exempted branches 21 Licence conditions 22 Consolidation 23 Multiple solvency requirements 24 Capital 26 Deductions From Capital 27 Aggregate Minimum Solvency Capital 29 Minimum Solvency Capital 30 Non-Life solvency standards 31 Non-Life SS Minimum Solvency Capital 32 Non-Life SS Insurance Risk Capital Charge 34 Non-Life SS Catastrophe Risk Capital Charge 36 Non-Life SS Re Recovery Risk Capital Charge 38 Non-Life SS Asset Risk Capital Charge 39 Non-Life SS Foreign Currency Risk Capital Charge 40 Non-Life SS Interest Rate Risk Capital Charge 41 Life solvency standard 42 Life SS Minimum Solvency Capital 43 Life SS Insurance Risk Capital Charge 45 Life SS Catastrophe Risk Capital Charge 46 Life SS Re Recovery Risk Capital Charge 47 Life SS Asset Risk Capital Charge 48 Life SS CEP Capital Charge 49 Life SS Foreign Currency Risk Capital Charge 50 Life SS Impact Interest Rate Risk 51 Effective solvency requirement 52 Movement in Solvency Margin Adjusted during 2014/15 55 Capital target 57 Capital target measure 57 Capital target level 58 Solvency position relative to capital target 59 Solvency projection 61 Appointed Actuary 62 Auditor 65

4 4 Feedback on Solvency Return 69 Strength solvency position 79 Solvency position relative to size insurer 80 Solvency position relative to risk charges 81 Part Two Home jurisdiction solvency requirements 84 Insurers subject to Australian solvency requirements 86 Feedback on Solvency Exempt Return 87 Part Three Conclusion 89 Appendices 90 Appendix Schedule insurers 91 Appendix Capital 93 Appendix Deductions From Capital 95 Appendix Aggregate Minimum Solvency Capital 97 Appendix Non-Life solvency standards 99 Non-Life SS Minimum Solvency Capital 99 Non-Life SS Insurance Risk Capital Charge 103 Non-Life SS Re Recovery Risk Capital Charge 105 Non-Life SS Asset Risk Capital Charge 107 Appendix Life solvency standard 109 Life SS Minimum Solvency Capital 109 Life SS Insurance Risk Capital Charge 113 Life SS Re Recovery Risk Capital Charge 115 Life SS Asset Risk Capital Charge 117 Life SS CEP Capital Charge 119 Appendix Effective solvency requirement 121 Appendix Movement in Solvency Margin Adjusted during 2014/ Appendix Capital target 125 Solvency position relative to capital target 125 Appendix Solvency projection 127 Appendix Strength solvency position 129 Solvency position relative to size insurer 129 Solvency position relative to risk charges 131

5 List figures 5 Figure 1 Jurisdiction applicable solvency requirements 13 Figure 2 Simplified diagram NZ solvency requirements (Fund level) 18 Figure 3 Simplified diagram NZ solvency requirements (insurer level) 19 Figure 4 NZ solvency standards applied 20 Figure 5 Fixed Capital Amount requirement 21 Figure 6 Multiple solvency requirements 25 Figure 7 Capital components 26 Figure 8 Deductions From Capital as % Net Assets 27 Figure 9 Deductions From Capital components 28 Figure 10 Aggregate Minimum Solvency Capital components 29 Figure 11 Non-Life SS Minimum Solvency Capital components 32 Figure 12 Non-Life SS implied average risk factors 33 Figure 13 Non-Life SS Insurance Risk Capital Charge components 34 Figure 14 Non-Life SS Catastrophe Risk Capital Charge method 36 Figure 15 Non-Life SS RI Recovery Risk Capital Charge components 38 Figure 16 Non-Life SS Asset Risk Capital Charge components 39 Figure 17 Non-Life SS direction interest rate risk 41 Figure 18 Life SS Minimum Solvency Capital components 43 Figure 19 Life SS implied average risk factors 43 Figure 20 Life SS Insurance Risk Capital Charge components 45 Figure 21 Life SS Catastrophe Risk Capital Charge method 46 Figure 22 Life SS Re Recovery Risk Capital Charge components 47 Figure 23 Life SS Asset Risk Capital Charge components 48 Figure 24 Life SS CEP Capital Charge components 49 Figure 25 Life SS direction interest rate risk 51 Figure 26 Simplified diagram NZ solvency requirements (insurer level) 52 Figure 27 Effective solvency requirement as % net assets 53 Figure 28 Solvency Ratio Adjusted 53 Figure 29 Effective solvency requirement components 54 Figure 30 Movement in Solvency Margin Adjusted during 2014/15 financial year 55 Figure 31 Movement in Solvency Margin Adjusted during 2014/15 55 Figure 32 Capital target measure 57 Figure 33 Capital target level as % Minimum Solvency Capital Adjusted 58 Figure 34 Solvency position relative to capital target 59 Figure 35 Solvency Margin/Ratio in excess Capital target 60 Figure 36 Projected Solvency Margin/Ratio 61 Figure 37 Appointed Actuary solvency task by main type 62 Figure 38 Appointed Actuary solvency task by size insurer 63 Figure 39 Appointed Actuary solvency task by employment status 64 Figure 40 Auditor solvency task by main type 65 Figure 41 Auditor solvency task by size insurer 66 Figure 42 Auditor solvency task by audit firm type 67 Figure 43 Audit firm type by size insurer 68 Figure 44 Solvency Margin Adjusted relative to size 80 Figure 45 Solvency Margin Adjusted relative to risk charges 82 Figure 46 Jurisdiction applicable solvency requirements 84 Figure 47 Solvency ratio under home jurisdiction solvency requirements 85 Figure 48 Australian Solvency Ratio Adjusted for 19 insurers 86 Figure A1 Schedule insurers 91 Figure A7 Capital components 93

6 6 Figure A9 Deductions From Capital components 95 Figure A10 Aggregate Minimum Solvency Capital components 97 Figure A11 Non-Life SS Minimum Solvency Capital components 99 Figure A12 Non-Life SS implied average risk factors 101 Figure A13 Non-Life SS Insurance Risk Capital Charge components 103 Figure A14 Non-Life SS RI Recovery Risk Capital Charge components 105 Figure A15 Non-Life SS Asset Risk Capital Charge components 107 Figure A18 Life SS Minimum Solvency Capital components 109 Figure A19 Life SS implied average risk factors 111 Figure A20 Life SS Insurance Risk Capital Charge components 113 Figure A21 Life SS Re Recovery Risk Capital Charge components 115 Figure A22 Life SS Asset Risk Capital Charge components 117 Figure A23 Life SS CEP Capital Charge components 119 Figure A29 Effective solvency requirement components 121 Figure A31 Movement in Solvency Margin Adjusted during 2014/ Figure A35 Solvency Margin/Ratio in excess Capital target 125 Figure A36 Projected Solvency Ratio 127 Figure A44 Solvency Margin Adjusted relative to size 129 Figure A45 Solvency Margin Adjusted relative to risk charges 131 The numbering for figures in the appendices has been set to align with the corresponding number the figure with totals that is in the body this paper. This means there are some missing figure numbers in the appendices.

7 Executive summary 7 Risk-based solvency requirements, such as the Reserve Bank New Zealand ( RBNZ ) solvency standards, require a minimum amount capital to be held that is calculated with respect to the main types financial risks that insurers face. This paper reviews the regulatory solvency returns provided to RBNZ by licensed New Zealand insurers as at their financial year end date during There were 62 licensed New Zealand insurers subject to New Zealand solvency requirements and 34 subject to home jurisdiction solvency requirements (with Australia being the most common). The paper has separate parts for New Zealand solvency requirements and home jurisdiction solvency requirements, with much more detail on the New Zealand requirements. Unless otherwise stated, comments are in respect insurers that are subject to New Zealand solvency standards. New Zealand solvency requirements RBNZ has issued six solvency standards that are currently in effect. The analysis groups the four non-life solvency standards and the two life solvency standards. Insurers are required to maintain a solvency margin or solvency ratio in excess a minimum figure specified by licence condition (generally $0) in respect each solvency standard that has been applied (for each Life Fund for life insurers). There are nine insurers with two solvency standards applied. Insurers are also subject to a minimum capital amount $1 million (captives), $3 million (non-life) or $5 million (life), except for eight insurers which qualify for an exemption. There are 18 insurers with minimum capital amount exceeding the solvency requirement that would otherwise apply in the absence a minimum capital amount. Net Assets 6,953 Capital 6,952 Actual Solvency Capital 5,524 Solvency Margin 2,397 Solvency Margin Adjusted 1,812 Solvency Margin Adjusted 1,812 NQCI < 0.5 Deductions From Capital 1,428 Aggregate Minimum Solvency Capital 3,127 Licence Condition 585 Amounts are in $ million. is the sum across all applicable funds. Aggregate Minimum Solvency Capital is the greater Fixed Capital Amount & MSC. Effective Solvency Requirement 5,141 The effective solvency requirement for each insurer is the sum amounts specified in solvency standards for non-qualifying capital instruments (NQCI), Deductions From Capital, Minimum Solvency Capital, and the impact minimum capital amount; plus the impact (if any) licence condition(s) specifying minimum solvency margin or minimum solvency ratio.

8 Main components 8 In total for all insurers, Deductions From Capital is $1.4 billion or 21% net assets. This is most significant for general insurers (32% net assets) and least significant for specialist health insurers (8% net assets) and life insurers (9% net assets). The largest components are deferred tax assets ($0.6 billion) and goodwill & other intangible assets ($0.6 billion). In total for all insurers, Minimum Solvency Capital is $3.1 billion or 45% net assets. This is most significant for life insurers (67% net assets) and least significant for specialist health insurers (19% net assets). In total for general insurers, Minimum Solvency Capital is $1.1 billion or 32% net assets. The largest components are Asset Risk Capital Charge ($0.5 billion), Insurance Risk Capital Charge ($0.2 billion) and Catastrophe Risk Capital Charge ($0.2 billion). Some insurers have a significant negative Outstanding Claims Adjustment within Insurance Risk Capital Charge due to their risk margins being set at greater than the required 75% probability sufficiency. In total for specialist health insurers, Minimum Solvency Capital is $0.11 billion or 19% net assets. The largest components are Insurance Risk Capital Charge $0.06 billion and Asset Risk Capital Charge $0.04 billion. In total for life insurers, Minimum Solvency Capital is $1.9 billion or 67% net assets. The largest component is Insurance Risk Capital Charge less Liabilities $1.5 billion. Generally insurers have relatively low risk assets and use highly rated reinsurers. However, there are exceptions some insurers have significant investments in higher risk assets and/or with substantial concentration, and some insurers use unrated reinsurers.

9 Results 9 There is considerable variation in reported solvency ratios, adjusted for licence conditions. The median is 171% with upper and lower quartiles 307% and 133% respectively. For about a quarter insurers, the difference between solvency margin in excess licence conditions at the start and end the financial year during 2015 was small (within ± 4% start year capital). For about a quarter insurers there was a material reduction in solvency margin and about half there was a material increase. The solvency return collects information on target capital. A variety measures are used for target capital. The levels have been compared to Minimum Solvency Capital (adjusted for licence condition). The median is 33% with upper and lower quartiles 53% and 20%. Converted into the equivalent solvency ratio terms, this means insurers are generally targeting a minimum solvency ratio (adjusted for licence condition) between 120% and 153%. About a quarter insurers did not provide information on their capital target, or it was unclear. At financial year end during 2015 insurers generally reported a solvency position at or above their target level. The median difference between reported solvency position and target capital, as a % Minimum Solvency Capital (adjusted for licence condition) was +14%, with upper and lower quartiles +33% and +1%. Feedback on solvency returns The analysis has identified some issues that are relevant generally to insurers as well as some issues that are specific to some individual insurers. RBNZ is in the process providing feedback through multiple channels as appropriate (i.e. discussions with insurers, industry newsletter, publications, guidance, etc.).

10 10 Home jurisdiction solvency requirements There are nine different jurisdictions for licensed New Zealand insurers that are subject to home jurisdiction solvency requirements. This includes Australia (20 insurers), three EU countries (seven insurers), three US states (three insurers) and two Asian countries (four insurers). There is a wide range methods and presentations for solvency requirements across these jurisdictions, which makes comparisons difficult. This paper includes a very brief, and simple, analysis 19 insurers subject to Australian solvency requirements (one insurer was in the middle restructuring at their financial year end date during 2015 and is excluded). There is considerable variation in reported solvency ratios. For the licensed New Zealand insurers that are subject to Australian solvency requirements, the median is 184% with upper and lower quartiles 242% and 118% respectively. Some generalised feedback on common issues and queries from a review the 2015 solvency exempt returns is included.

11 Introduction 11 Solvency refers to the ability an insurer to meet its obligations to policyholders when they fall due. The nature is that financial outcomes are uncertain indeed the primary purpose is to transfer financial risk away from policyholders in return for a premium. Solvency requirements are important for insurer soundness, and for maintaining public confidence in the sector. This is because the minimum requirements are intended to ensure that insurer obligations to policyholders and other creditors will be met in full with a reasonably high probability (but there are no guarantees). Without solvency requirements, some insurers may have chosen to hold less capital with the consequence a greater risk obligations not being met. Risk-based solvency requirements, such as the Reserve Bank New Zealand ( RBNZ ) solvency standards, require a minimum amount capital to be held that is calculated with respect to the main types financial risks that insurers face. This paper reviews the regulatory solvency returns provided to RBNZ by licensed New Zealand insurers as at their financial year end date during An overview solvency requirements for licensed New Zealand insurers is provided, although details are omitted. Interested readers are referred to the solvency standards for the detail these requirements 2. This paper provides an analysis solvency results, components solvency calculations, and some other information reported in solvency returns across all insurers that are licensed in New Zealand. Commentary and generalised feedback is provided on some aspects these. However, policy considerations and supervisory responses are out scope for this paper. For some insurers there have been material changes (positive or negative) to their solvency position and/or their circumstances since their 2015 financial year end date. Readers should not rely on information and comments in this paper for the current solvency position any insurer. Unlike some jurisdictions, New Zealand legislation permits insurers to fer more than one type (i.e. life and general, life and health, etc.). Solvency calculation and reporting is not necessarily separated by type for example due to composite policies and the absence a solvency standard specific to health. In practice almost all the insurers that provide more than one type have a predominant type, with a very small percentage their from other types. Our analysis by type classifies every insurer based on their main type. The figures in the appendices contain anonymised information by insurer, in order to present the distribution amounts (in percentage terms) across insurers. Dollar amounts are not shown by insurer. The order insurers in each figure has been randomised independently all other tables. This means rows in a table do not correspond to the same rows in any other table, other than for totals. 2

12 12 Regulatory framework for solvency Insurers licensed in New Zealand are subject to various solvency requirements under the Insurance (Prudential Supervision) Act 2010 ( IPSA ) and Insurance (Prudential Supervision) Regulations 2010 ( IPSR ). The solvency requirements apply continuously and there is also a three-year forward looking solvency assessment required by section 24 IPSA. Licensed insurers that are domiciled in New Zealand are subject to solvency standards issued by RBNZ, as the prudential supervisor insurers. Relevant solvency standards are applied by licence conditions which generally specify a minimum solvency margin $0. Effectively this sets a risk-based minimum capital requirement for the insurer as a whole, or for portions the insurer. In addition, there is a minimum level capital for the insurer as a whole, unless exempted. This is referred to as minimum capital in IPSA, but to reduce confusion with other capital requirements (which are minimums) for this paper we refer to as Fixed Capital Amount. This is the terminology used in the solvency standards from 2014 versions onwards. Fixed Capital Amount acts as a floor to the risk-based calculations. For some licensed insurers with special circumstances the solvency standards do not adequately reflect the risks being borne by the insurer and a non-standard licence condition increases the effective capital requirement. The condition either requires a minimum solvency margin for a specified amount that is greater than $0, or requires a minimum solvency ratio for a specified level that is greater than 100%. Foreign insurers are licensed for the insurer as a whole not just for the New Zealand branch. Most licensed insurers that operate as branches in New Zealand are subject to solvency requirements their home supervisor. An exemption notice may be issued under section 59 IPSA if certain requirements are met. One these requirements may be satisfied if the foreign insurer is domiciled in a jurisdiction prescribed by regulation 5 IPSR. Three branch insurers are subject to New Zealand solvency standards in respect their New Zealand business because they are not domiciled in a prescribed jurisdiction for the purposes statutory funds requirements (subpart 3 part 2 IPSA). One insurer in liquidation and on a provisional licence is not subject to any insurer solvency requirements.

13 13 Insurers with New Zealand solvency exemptions at financial year end date during 2015 are based in certain approved jurisdictions Australia, European Union (three countries), United States America (three states), and Asia (two countries). Figure 1 Jurisdiction applicable solvency requirements A schedule setting out jurisdictions and some other aspects solvency requirements by insurer are shown in the Appendices as figure A1. Some these other aspects are discussed in later sections this paper. All insurers are required to report their solvency position to RBNZ at financial year end and half year using either a solvency return or solvency exempt return template provided on the website 3. Immediate notification is required for any breach solvency requirements, or any likely breach within the next 3 years under section 24 IPSA. 3

14 Data for analysis 14 This paper analyses solvency reporting for financial year end dates during The reporting dates vary by insurer between 20 February and 31 December Most insurers have a financial year end date that is the end a calendar year quarter. By number insurers the most common date is 31 December, but weighted by size insurer the most common date is 30 June. Financial year end reporting has been chosen because there is more information available to aid interpretation than at half year. Financial statements are more detailed, there is a financial condition report at financial year end, and insurers that are subject to New Zealand solvency standards are required to have a review by their auditor the financial year end solvency return. Most solvency data included in this paper is as reported by insurers in their solvency return or solvency exempt return. Some factual information has been adjusted for example, where the relevant solvency standards and exemptions have been entered incorrectly in the returns we have used corrected data. There are some figures where the solvency standards do not appear to have been applied correctly (see feedback section). These have not been corrected, in part because we do not always have enough information to quantify the impacts and in part because some issues are identifiable as issues but there is subjectivity over the correct amounts. The 62 insurers that are subject to New Zealand solvency requirements are discussed in Part One, while the 35 insurers that are subject to home jurisdiction solvency requirements are discussed in Part Two. The Appendices contain tables and graphs for individual insurers (anonymously in the public version). One insurer was licensed during 2015 but did not have a financial year end date during 2015, and is excluded from the analysis. Another insurer was undergoing a restructuring on their 2015 balance date and had two licensed insurers on this date but is treated as one insurer for this analysis.

15 Terminology 15 This paper generally uses terms defined in IPSA or in the solvency standards. However, in some cases the ficial terminology may not be consistent or may cause confusion for example where a term means different things in different solvency standards. We have attempted to clarify or use an alternative term or description in those cases. Reference to insurer includes all forms insurer (reinsurer, direct insurer, captive insurer) unless explicitly stated otherwise. Fund is used to describe the portion an insurer to which a solvency standard applies. This could be the whole insurer, the New Zealand business a foreign insurer, the non-life business an insurer with life and non-life solvency standards applied, a statutory fund, etc. Reference to Non-Life solvency standard includes all the solvency standards for non-life business (including run-f, captive and NZLGIC), except where there is mention a specific solvency standard. SS is used as short-hand for solvency standard in figures.

16 16 Part One New Zealand solvency requirements Overview New Zealand solvency requirements Solvency standards At financial year end dates during 2015 there were 62 licensed insurers subject to New Zealand solvency requirements. Solvency standards are issued by RBNZ and published on the website 4. The solvency standards that were in effect for financial year end dates during are: Life Insurance Business Variable Annuity Business Non-Life Insurance Business Non-Life Insurance Business in Run-Off NZLGIC Captive Insurers Transacting Non-Life Insurance Business The solvency standard for Variable Annuity Business 2015 was issued during 2015 but was not in effect at any insurer s financial year end date during This solvency standard applies to one insurer but they were licensed during 2015 and did not have their first financial year end date until March There is one solvency standard, NZLGIC 2014, which is specific to an individual insurer to cater for a particular circumstance. Otherwise, solvency standards are generic and are intended to be applied to all relevant insurers (in similar circumstances). There are four non-life solvency standards the generic one, in runf, NZLGIC, and captive. The run-f and captive solvency standards have some higher and lower factors respectively - to allow for reduced risk diversification during run-f, and the special relationship between a captive and sole policyholder. Solvency standards are applied by way licence condition under section 21 IPSA. Insurers also have a licence condition requiring RBNZ to be advised if circumstances change so that additional solvency standards need to be applied. Solvency standards specify calculations for: Solvency Margin ( SM ) Solvency Ratio ( SR ) = ASC MSC = ASC MSC where ASC MSC = Actual Solvency Capital = Capital - Deductions From Capital = Minimum Solvency Capital = calculation based on risk capital charges All these solvency standards remain in effect at time writing.

17 Fixed Capital Amount 17 Solvency standards also specify a Fixed Capital Amount the minimum capital required by the licensed insurer as a whole, unless exempted. If more than one solvency standard applies, the greatest Fixed Capital Amount applies (not the sum Fixed Capital Amounts). Licence conditions Licence conditions specify a minimum solvency margin or a minimum solvency ratio for each Fund. The standard licence condition is a minimum solvency margin $0. For some insurers with special circumstances the solvency standards do not adequately reflect the risks borne and additional requirements have been applied by non-standard licence condition under section 21 IPSA. The non-standard licence conditions require a minimum solvency margin a specified amount greater than $0 or a minimum solvency ratio a specified level that is greater than 100%. Since insurers are required to comply with the licence conditions, RBNZ calculates the insurer s position relative to the requirements as follows: Solvency Margin Adjusted ( SMA ) Solvency Ratio Adjusted ( SRA ) = ASC (MSC + LC) = ASC (MSC + LC) where ASC MSC LC LC, if minimum solvency margin LC, if minimum solvency ratio = Actual Solvency Capital = Capital - Deductions From Capital = Minimum Solvency Capital = calculation based on risk capital charges = $ impact licence condition for minimum solvency margin or minimum solvency ratio = LC$ = (LC% - 100%) MSC Consolidation Complicating matters slightly, some insurers have subsidiaries which conduct business (whether in New Zealand or overseas). For these insurers solvency standards and licence conditions apply in respect the licensed insurer on a solo basis, and also in respect the consolidation the licensed insurer and all its subsidiaries which conduct business (other subsidiaries are not consolidated). Multiple solvency requirements Each solvency standard applies to a Fund (all the business that is subject to that solvency standard), or in the case life business to each Life Fund (there may be more than one). If there is more than one Fund, assets and liabilities are allocated to the relevant Funds by the insurer.

18 Effective solvency requirement 18 The effective solvency requirement in respect each Fund: Effective solvency requirement = NQCI + DFC + MSC + LC where NQCI = allocated non-qualifying capital instruments 6 DFC MSC LC LC, if minimum solvency margin LC, if minimum solvency ratio = Deductions From Capital = Minimum Solvency Capital = calculation based on risk capital charges = $ impact licence condition for minimum solvency margin or minimum solvency ratio = LC$ = (LC% - 100%) MSC Figure 2 Simplified diagram NZ solvency requirements (Fund level) Net Assets Capital Actual Solvency Capital Solvency Margin Solvency Margin Adjusted Solvency Margin Adjusted Licence Condition Minimum Solvency Capital NQCI Deductions From Capital Effective Solvency Requirement The effective solvency requirement for the insurer as a whole is the sum requirements in respect each Fund but subject to the Fixed Capital Amount as a minimum for Aggregate Minimum Solvency Capital. 6 The solvency standards only permit qualifying capital instruments to be counted as Capital.

19 Figure 3 Simplified diagram NZ solvency requirements (insurer level) 19 Net Assets 6,953 Capital 6,952 Actual Solvency Capital 5,524 Solvency Margin 2,397 Solvency Margin Adjusted 1,812 Solvency Margin Adjusted 1,812 NQCI < 0.5 Deductions From Capital 1,428 Aggregate Minimum Solvency Capital 3,127 Licence Condition 585 Amounts are in $ million. is the sum across all applicable funds. Aggregate Minimum Solvency Capital is the greater Fixed Capital Amount & MSC. Effective Solvency Requirement 5,141 The Solvency Margin Adjusted must not be less than zero for every Fund, including on a consolidated basis if applicable.

20 Solvency standards 20 Solvency standards are applied by licence condition based on the nature the business undertaken and other circumstances the insurer. With the current solvency standards that have been issued (and not revoked), in theory an insurer could have up to three solvency standards applied. 53 insurers are subject to one solvency standard, nine insurers are subject to two solvency standards, and no insurers are subject to three solvency standards, as shown in figure 4 below. At financial year end dates during 2015 there were no insurers subject to the Variable Annuity Business 2015 solvency standard. Figure 4 NZ solvency standards applied

21 Fixed Capital Amount 21 Eight insurers had an exemption under regulation 9(1)(b) IPSR ( small insurer exemption ). For these insurers the Fixed Capital Amount is effectively $0 (as no solvency standard permits a negative figure for Minimum Solvency Capital). The other 54 insurers are subject to a Fixed Capital Amount, being the greatest amount specified in the applied solvency standards: Life 2014 Variable Annuity 2015 Non-Life 2014 Non-Life Run-Off 2014 NZLGIC 2014 Captive Non-Life 2014 = $5 million = $5 million = $3 million = $3 million = $3 million = $1 million Of the 54 insurers subject to a Fixed Capital Amount, for 36 insurers there is no effect because the Aggregate Minimum Solvency Capital (i.e. the sum risk capital charges) is larger than the specified Fixed Capital Amount. This is shown in figure 5 below. The impact Fixed Capital Amount is to increase Aggregate Minimum Solvency Capital by between $0.026 million and $4.3 million; and is $22 million in total (an average $1.3 million for the 18 impacted insurers). Figure 5 Fixed Capital Amount requirement Non-solvency exempted branches The three branches that are subject to New Zealand solvency standards are not exempted from minimum capital requirements.

22 Licence conditions 22 Licence conditions specify a minimum solvency margin or a minimum solvency ratio for each Fund. A Fund is the portion the insurer (or the whole insurer) to which a solvency standard is applied. The standard licence condition is a minimum solvency margin $0. For some insurers with special circumstances the solvency standards do not adequately reflect the risks borne and additional requirements have been applied by non-standard licence condition under section 21 IPSA. The non-standard licence conditions require a minimum solvency margin a specified amount greater than $0 or a minimum solvency ratio a specified level that is greater than 100%. RBNZ is required to consult with insurers before applying or varying a licence condition. There is a regular review (typically annually) all non-standard licence conditions to ensure the condition remains appropriate for the circumstances. At financial year end dates during 2015 there were four insurers with a non-standard solvency-related licence condition. In all cases the licence condition specifies a higher solvency margin, rather than specifying a higher solvency ratio. Since insurers are required to comply with the licence conditions, RBNZ calculates the insurer s position relative to the requirements as follows: Solvency Margin Adjusted ( SMA ) Solvency Ratio Adjusted ( SRA ) = ASC (MSC + LC) = ASC (MSC + LC) where ASC MSC LC LC, if minimum solvency margin LC, if minimum solvency ratio = Actual Solvency Capital = Capital - Deductions From Capital = Minimum Solvency Capital = calculation based on risk capital charges = $ impact licence condition for minimum solvency margin or minimum solvency ratio = LC$ = (LC% - 100%) MSC

23 Consolidation 23 Insurers with subsidiaries that conduct business (whether in New Zealand or overseas) have solvency requirements that apply on a solo basis as well as on a consolidated basis (including only subsidiaries). While there were previously several licensed insurers with subsidiaries conducting business, by financial year end dates during 2015 there were only two instances. One those insurers has two insurer subsidiaries domiciled in New Zealand (i.e. insurers which are subject to New Zealand solvency requirements in their own right as well as through consolidation). Accordingly it is not a surprise that for this insurer the solvency margin at financial year end date during 2015 is lower on a solo basis than on a consolidated basis. The other insurer has multiple foreign-domiciled insurer subsidiaries (i.e. insurers which are not themselves subject to New Zealand solvency requirements other than through the consolidation). For this insurer the solvency margin at financial year end date during 2015 is lower on a solo basis than on a consolidated basis, due to strongly capitalised subsidiaries. However, in future the most onerous solvency requirement could instead be on a consolidated basis, if the subsidiaries become weakly capitalised. There are other insurers with related insurers. However, none the other related insurers are subsidiaries the insurer that is licensed in New Zealand, and therefore for these insurers there are no consolidated solvency requirements in effect in New Zealand.

24 Multiple solvency requirements 24 For this paper, a solvency requirement means a minimum capital requirement, a minimum solvency margin requirement or a minimum solvency ratio requirement. The number solvency requirements is a function the nature the business (hence the solvency standards that have been applied), the number Life Funds for life insurers, any subsidiaries conducting business, and Fixed Capital Amount requirements (if not exempted). The large number different combinations solvency requirements reflects: The permissive nature the regime (insurers can provide more than one type whereas as in some jurisdictions they cannot). The principle avoiding unnecessary compliance costs (section 4(h) IPSA) by provision various exemptions. Choices made by insurers (some life insurers opt to have a Life Fund outside their Statutory Fund when they could have a Statutory Fund covering their entire business). For financial year end dates during 2015 there were eight insurers with an exemption to Fixed Capital Amount requirements under regulation 9(1)(b) IPSR ( small insurer exemption ). Of these insurers, seven have a single solvency standard applied and one has two solvency standards applied. The remaining 54 insurers have one or more solvency standards applied and a Fixed Capital Amount requirement. There are 28 insurers that have only a Non-Life solvency standard applied and two insurers have only a Non-Life solvency standard applied but have subsidiaries that conduct business (thus have solo and consolidated requirements). There is one insurer has only the Life solvency standard applied but has a Statutory Fund exemption under regulation 9(1)(a) IPSR ( small life insurer exemption ). This insurer has the small life insurer exemption but does not have a small insurer exemption because the combined life and health premium does not qualify under regulation 9(1)(b) IPSR, and health can be covered under either Life or Non-Life solvency standards. There are four insurers that have only the Life solvency standard applied and have elected to have no funds outside the Statutory Fund. Eleven insurers have only the Life solvency standard applied and are required to have a Life Fund outside the Statutory Fund (due to having health business and no general business) or alternatively have elected to have a Life Fund outside the Statutory Fund (to provide greater flexibility for capital management). There are eight insurers that have the Life solvency standard and one the Non-Life solvency standards applied. Five insurers have a Statutory Fund exemption under regulation 9(1)(a) IPSR ( small life insurer exemption ). Three insurers have elected to have no Life Fund outside the Statutory Fund.

25 25 Figure 6 Multiple solvency requirements consol. = consolidated, SF = Statutory Fund, o/s = outside In theory there could be insurers with different arrangements than the combinations that are in effect, as described above. Life insurers could create multiple Statutory Funds none the life insurers that are subject to New Zealand solvency standards have chosen to do so. Insurers could be subject to three solvency standards, although there are none currently. None the insurers that are subject to both Life and Non-Life solvency standards and not exempted from Statutory Fund requirements have chosen to have a Life Fund outside the Statutory Fund (perhaps because the desired capital flexibility is available through the Non-Life solvency standard which does not have the additional Statutory Fund restrictions). There are currently no licensed life insurers with non-life insurer subsidiaries or vice versa.

26 Capital 26 For solvency purposes, Capital includes high quality capital instruments, reserves (other than for assessed likelihood loss), retained earnings and non-controlling interests. Qualifying capital instruments must be permanent, loss absorbing, not impose an unavoidable service charge, and rank behind policyholders and other creditors upon wind-up. Figure 7 Capital components Main type qualifying Shares qualifying Perpetual & Credit Union qualifying Reserves Retained Earnings Mutual Members' Funds Head Office Balance All 5, ( 226.0) ,952.2 General 4, ( 235.5) ( 749.1) - - 3,494.2 Life 1, , ,853.4 Health Main type qualifying Shares qualifying Perpetual & Credit Union Capital components ($ million) Capital components (% Net Assets) qualifying Reserves Retained Earnings Mutual Members' Funds Head Office Balance All 85% 0% ( 3%) 8% 8% 3% 100% General 128% 0% ( 7%) ( 21%) % Life 49% 0% 0% 44% 1% 6% 100% Health 5% - 0% 11% 84% - 100% Capital components by insurer are shown in the Appendices as figure A7. At financial year end dates during 2015 there was only one insurer using a lower figure for Capital than their net assets. In this case non-qualifying capital instruments comprised about 2% net assets due to being a restricted reserve (not freely available to absorb losses). By value, most the Capital amount relates to shares or other instruments, as opposed to reserves. In part this is due to the substantial negative retained earnings for some general insurers with large losses arising from the Canterbury earthquakes. There are some insurers which recorded all their Capital under qualifying shares even though they actually have non-zero retained earnings or are a mutual insurer thus retained earnings and mutual members funds are slightly understated and qualifying shares are slightly overstated in figure 7 below. Head fice balance refers to branch insurers. Total Total

27 Deductions From Capital 27 Deductions From Capital comprises assets that in full or in part are not readily available to meet liabilities in a high stress situation. The components Deductions From Capital are: Goodwill and other intangible assets. Deferred tax assets. Equity and subordinated loans in related parties. Equity and subordinated loans in financial institutions (in excess limits). Assets with fair value limited reliability (for own credit risk or for not being based on an active market). Defined benefit scheme surplus. Declared but unpaid dividends and capital repayments. Deferred acquisition costs unsupported by a prescribed liability adequacy test. Restricted branch net assets. The median Deductions From Capital is 3% Net Assets. The upper and lower quartiles are <1% and 12% respectively. Figure 8 Deductions From Capital as % Net Assets

28 28 By value, approximately 40% Deductions From Capital relate to goodwill, 40% to deferred tax assets, and the rest is mostly unpaid declared dividends and related party equity or subordinated debt. Figure 9 Deductions From Capital components Main type Goodwill & Intangible Deferred Tax Assets Deductions From Capital components ($ million) Related Party Declared Dividends Deferred Acquisition Cost excess Other All ,428.5 General ,109.8 Life Health Main type Goodwill & Intangible Deductions From Capital components (% Net Assets) Related Party Declared Dividends Other Deferred Tax Assets Deferred Acquisition Cost excess All 8% 9% 1% 2% 0% 0% 21% General 11% 16% 2% 3% 0% 0% 32% Life 5% 2% 2% 0% - 0% 9% Health 4% 2% - - 2% - 8% Deductions From Capital components by insurer are shown in the Appendices as figure A9. About half the insurers have zero or very low Deductions From Capital (2% or less net assets). However, for some insurers the Deductions From Capital amount is a material proportion net assets with a maximum 69% and eight insurers having at least 30%. Total Total

29 29 Aggregate Minimum Solvency Capital Most insurers are subject to only one solvency standard. There are three insurers with mainly life business with some general business and six insurers with mainly general business with some life business. Figure 10 Aggregate Minimum Solvency Capital components Main type effect Fixed Capital Amount Non-Life SS Minimum Solvency Capital Life SS Minimum Solvency Capital Variable Annuity SS Minimum Solvency Capital Aggregate Minimum Solvency Capital All , , ,126.7 General , ,112.1 Life , ,901.5 Health Main type effect Fixed Capital Amount Aggregate Minimum Solvency Capital components ($ million) Aggregate Minimum Solvency Capital components (% Net Assets) Non-Life SS Minimum Solvency Capital Life SS Minimum Solvency Capital Variable Annuity SS Minimum Solvency Capital Aggregate Minimum Solvency Capital All 0% 18% 27% - 45% General 0% 31% 0% - 32% Life 0% 0% 66% - 67% Health 0% 18% % Aggregate Minimum Solvency Capital components by insurer are shown in the Appendices as figure A10. For insurers with more than one solvency standard applying, the Minimum Solvency Capital requirement under the primary solvency standard (i.e. for the main type ) is generally much greater (typically > 10 times) the Minimum Solvency Capital requirement under the secondary solvency standard. There is one exception an insurer with mainly life business has a much larger requirement for their general business. The insurers for which the Fixed Capital Amount has the effect increasing solvency requirements includes some insurers in run-f, some captive insurers, some recent new entrants, and several insurers in other circumstances that are not small enough to be exempted from the minimum capital requirement. The effect Fixed Capital Amount is generally less than 20% net assets. There are four insurers with the effect Fixed Capital Amount between 42% and 64% net assets.

30 Minimum Solvency Capital 30 Minimum Solvency Capital effectively comprises the sum various risk capital charges. The solvency standards contain risk capital charges in respect Insurance Risk, Catastrophe Risk, Asset Risk, Foreign Currency Risk, Interest Rate Risk, Asset Concentration Risk, Re Recovery Risk, and Variable Annuities. There are some differences between solvency standards in the way the risk charges are constructed, the components included, and some the factors. Examples differences include: To improve comparability across the various solvency standards, our analysis in respect Insurance Risk Capital Charge subtracts the value liabilities for Life solvency standards (this is actually subtracted from the sum risk charges but the liability value is included within Insurance Risk Capital Charge only). The Asset Risk Capital Charge for the Life solvency standard includes Foreign Currency Risk and Interest Rate Risk, whereas these are separated in Non-Life solvency standards. The Insurance Risk Capital Charge for the Captive Non-Life solvency standard caters for Catastrophe Risk. In the Variable Annuity solvency standard, Insurance Risk and Asset Risk are combined in order to allow for dynamic hedging.

31 Non-Life solvency standards 31 Despite some differences in the detail requirements, for analysis purposes the various Non-Life solvency standards (Non-Life, Non-Life Run-Off, NZLGIC, Non-Life Captive) are grouped together since they are reasonably comparable.

32 32 Non-Life SS Minimum Solvency Capital Figure 11 Non-Life SS Minimum Solvency Capital components Main type Insurance Risk Capital Charge RI = re Catastrophe Risk Capital Charge RI Recovery Risk Capital Charge Asset Risk Capital Charge Currency Risk Capital Charge Interest Rate Risk Capital Charge All ,216.9 General ,096.5 Life Health Main type Insurance Risk Capital Charge Non-Life Solvency Standard Minimum Solvency Capital components ($ million) Catastrophe Risk Capital Charge RI Recovery Risk Capital Charge Asset Risk Capital Charge Currency Risk Capital Charge Interest Rate Risk Capital Charge Non-Life Solvency Standard Minimum Solvency Capital components by insurer are shown in the Appendices as figure A11. Minimum Solvency Capital under the Non-Life solvency standards is made up approximately 50% for Asset Risk Capital Charge, 25% for Insurance Risk Capital Charge, and the rest other. A reason that Insurance Risk Capital Charge is not larger is because the Non-Life solvency standards provide a credit for risk margins 7 in excess 75% probability sufficiency (90% for Non-Life Run-Off and NZLGIC solvency standards). This is shown as a negative value for Outstanding Claims Adjustment and was large at financial year end dates during For health insurers the Underwriting Risk Capital Charge may be significantly understated due to the use a short period for Premium Liabilities. Currency Risk Capital Charge and Interest Rate Risk Capital Charge are small in total reflecting the generally conservative approach to investments used by general and health insurers, including matching to liabilities. There are seven insurers with Non-Life Minimum Solvency Capital components at least 30% net assets for one the Insurance Risk Capital Charge, Catastrophe Risk Capital Charge or Re Recovery Risk Capital Charge components. Total Non-Life Solvency Standard Minimum Solvency Capital components (% Net Assets) Total All 6% 5% 2% 14% 0% 2% 29% General 6% 5% 3% 15% 0% 2% 31% Life 1% 1% - 3% 0% 0% 6% Health 9% 1% - 7% 0% 2% 18% 7 Risk margin is the portion the balance sheet liability that is in excess the best estimate. NZ IFRS 4 appendix D accounting standard requires a risk margin for non-life accounting methods. RBNZ solvency standards specify a requirement for the risk margin to be calculated (for solvency purposes) at 75% probability sufficiency (or 90% for certain solvency standards). Probability sufficiency is the probability that the best estimate plus risk margin is at least as great as the ultimate cost the liability.

33 33 Four the Non-Life solvency standard Minimum Solvency Capital components are expressed relative to a suitable measure exposure to provide an implied average risk factor, shown in figure 12 below. Figure 12 Non-Life SS implied average risk factors Main type Insurance Risk Capital Charge as % Premium Liabilities + Net Outstanding Claims Liabilities Non-Life Solvency Standard implied average risk factors Catastrophe Risk Capital Charge as % Re Recovery Risk Capital Charge as % Asset Risk Capital Charge as % Annual Gross Premium Re Assets Assets (excluding re & Deductions From Capital) All 6% 3% 3% 6% General 6% 4% 3% 6% Life 30% 2% - 7% Health 15% 0% - 5% Non-Life Solvency Standard implied average risk factors by insurer are shown in the Appendices as figure A12. Currency Risk is excluded from this figure because the Currency Risk Capital Charge is fixed at 22% the sum net open exposures. Interest Rate Risk Capital Charge is excluded because a suitable exposure amount is not available for all insurers while interest-bearing assets are generally identifiable in the solvency returns, it is not always clear which liabilities have been discounted and which have not. For most insurers, the implied average risk factor for Insurance Risk Capital Charge is the weighted average the factors for Run-Off Risk and Underwriting Risk set out in the solvency standard. However some insurers have adjustments for risk margins not equal to the prescribed probability sufficiency (generally negative adjustment for higher risk margins), and some insurers have an additional charge for Long-Term Risks. There are seven insurers with Catastrophe Risk Capital Charge at least 10% annual gross premium, although a few are much larger. Re Recovery Risk Capital Charge is almost always between 2% and 4% re assets, reflecting limited use unrated or poorly rated reinsurers. Asset Risk Capital Charge as a percentage applicable assets varies considerably across insurers. There are some with implied average risk factor only 1% (indicating most assets are cash or government securities), while four insurers have an implied average risk factor more than 15% (and up to 44%).

34 34 Non-Life SS Insurance Risk Capital Charge Figure 13 Non-Life SS Insurance Risk Capital Charge components Main type Underwriting Risk (before adj.) Non-Life Solvency Standard Insurance Risk Capital Charge components ($ million) Captive Total Premium Liabilities Adjustment Run-Off Risk (before adj.) Outstanding Claims Adjustment Long-Term Risk All ( 243.5) General ( 242.8) Life Health ( 0.7) Main type Non-Life Solvency Standard Insurance Risk Capital Charge components (% Net Assets) Captive Total Underwriting Risk (before adj.) Premium Liabilities Adjustment Run-Off Risk (before adj.) Outstanding Claims Adjustment Long-Term Risk All 6% - 6% ( 6%) 0% 0% 6% General 6% - 7% ( 7%) 0% 0% 6% Life 1% - 0% % Health 7% - 2% ( 0%) - - 9% Non-Life Solvency Standard Insurance Risk Capital Charge components by insurer are shown in the Appendices as figure A13. No insurers have reported a Premium Liabilities Adjustment. This appears to be a consequence non-life insurers generally forecasting their current premiums to be adequate (at 75% probability sufficiency). The few insurers which forecast a premium deficiency all have a longer period for unearned premiums in their financial statements than the assessment period for Premium Liabilities, and as a consequence have a nil adjustment despite the premium deficiency. For general insurers in aggregate, the Underwriting Risk Capital Charge is smaller than the Run-Off Risk Capital Charge before adjustment. However, there is a large negative adjustment for net outstanding claims reserves that are in excess minimum requirements (i.e. risk margins 8 are in excess 75% or 90% probability sufficiency). For those insurers net assets reflect a more conservative provision than required. In aggregate the adjusted Run-Off Risk Capital Charge is near zero. For health insurers in aggregate, the Underwriting Risk Capital Charge is considerably greater than the Run-Off Risk Capital Charge. The reason for the low Run-Off Risk Capital Charge is that for most health insurers the vast majority claims costs are paid within a month or so occurrence the exception is one health insurer which does not cover surgery. There are also two insurers with a small negative figure for Outstanding Claims Adjustment. 8 Risk margin is the portion the balance sheet liability that is in excess the best estimate. NZ IFRS 4 appendix D accounting standard requires a risk margin for non-life accounting methods. RBNZ solvency standards specify a requirement for the risk margin to be calculated (for solvency purposes) at 75% probability sufficiency (or 90% for certain solvency standards). Probability sufficiency is the probability that the best estimate plus risk margin is at least as great as the ultimate cost the liability.

35 35 Only one insurer has recorded an additional charge for Long-Term Risk. There are several insurers which appear to have some non-life business with longterm characteristics but which have nil additional charge for Long-Term Risk. The Insurance Risk Capital Charge for captives is shown separately since it is the nature a Catastrophe Risk Capital Charge. One the five captive insurers has a nil charge due to nil claim retention.

36 36 Non-Life SS Catastrophe Risk Capital Charge Catastrophe Risk Capital Charge in the Non-Life solvency standards is calculated based on Extreme Events (being calibrated return period net losses), No Extreme Events (being twice maximum net retention), or an Alternative Method (recommended by the appointed actuary). The solvency standards specify whether Extreme Event or No Extreme Event methods apply depending on the circumstances the insurer. The Alternative Method provides an option for the appointed actuary to recommend a different method when circumstances warrant it in their opinion, but subject to RBNZ agreement. Figure 14 Non-Life SS Catastrophe Risk Capital Charge method Non-Life Solvency Standard Catastrophe Risk Capital Charge method by insurer is shown in the Appendices as figure A14. From the solvency returns there are 20 insurers using Extreme Events method, nine insurers using No Extreme Events method, and seven insurers using Alternative Methods. Under the Extreme Events method, a component the calculation (calibrated return period for New Zealand earthquake losses) is in transition through to the start the financial year that commences on or after 8 September The transition requirements are set out in a policy position paper published by RBNZ. However, by the end the financial year during 2015 most insurers were not eligible to utilise this transition because the component is not applicable to them or else the limited backsliding provision in the solvency standard applies.

37 37 In addition to the seven insurers that have reported using an Alternative Method in the solvency return, there are some other insurers where it appears the Appointed Actuary has either recommended or endorsed the use a method other than the default one specified by the solvency standards. I.e. the number insurers using an Alternative Method in figure 14 appears to be understated. There is no Catastrophe Risk Capital Charge for the five captive insurers (this risk is recorded under Insurance Risk Capital Charge instead). Insurers in run-f have no exposure to catastrophe once all their policies are expired or cancelled, which was the case at financial year end date during 2015 for the three relevant insurers. The Catastrophe Risk Capital Charge includes an element for net losses as well as for the cost reinstating re. Only six insurers have reported a cost re reinstatement for these insurers the reinstatement cost varies from about 25% to 200% the cost net loss. Other insurers have reported no cost re reinstatement because they have no catastrophe re or the reinstatement is fully pre-paid up to the required level.

38 38 Non-Life SS Re Recovery Risk Capital Charge Figure 15 Non-Life SS RI Recovery Risk Capital Charge components Main type Outstanding Claims RI = re Non-Life Solvency Standard RI Recovery Risk Capital Charge components ($ million) Paid Claims Coinsurers and EQC Total Deferred Re Expense All General Life Health Main type Non-Life Solvency Standard RI Recovery Risk Capital Charge components (% Net Assets) Outstanding Claims Deferred Re Expense Paid Claims Coinsurers and EQC Total All 2% 0% 0% 0% 2% General 2% 0% 0% 0% 3% Life Health Non-Life Solvency Standard Re Recovery Risk Capital Charge components by insurer are shown in the Appendices as figure A15. Health insurers and general insurers which specialise in consumer credit and/or pet typically have no re. Therefore for those insurers there is no Re Recovery Risk Capital Charge. Generally at financial year end dates captive insurers do not have a Re Recovery Risk Capital Charge, since most the time there are no outstanding recoveries and deferred re premiums are zero at this point in time (assuming re renewals are aligned to financial years which is usually the case). The Re Recovery Risk Capital Charge is small, typically under 1% net assets. There are 11 insurers with Non-Life Re Recovery Risk Capital Charge at least 3% net assets mostly arising from considerable Canterbury earthquake re recoveries (with capital charge between 3% and 10% net assets). Comparing the implied average risk factor in respect outstanding claims recoveries and deferred re expense, these are generally the same or similar. However, there are three insurers with an implied average risk factor for outstanding claims recoveries that is at least 0.5% higher than for deferred re expense i.e. they are using higher rated reinsurers for future cover than for past cover (their remaining exposure for outstanding and paid claims). There is one insurer where the opposite is true one the reinsurers they use is unrated but there are no or very low outstanding recoveries from this reinsurer and thus the implied average risk factor for deferred re expense is over 30% compared to a more typical 4% for outstanding claims recoveries. Only one insurer reports a charge for coinsurer or EQC recoveries in respect claims that have been paid by the insurer for which the coinsurer or EQC is liable.

39 39 Non-Life SS Asset Risk Capital Charge Figure 16 Non-Life SS Asset Risk Capital Charge components Main type Assets with factor 0.5% to 5% Non-Life Solvency Standard Asset Risk Capital Charge components ($ million) Asset Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Concentration Risk All General Life Health Main type Assets with factor 0.5% to 5% Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk Non-Life Solvency Standard Asset Risk Capital Charge components by insurer are shown in the Appendices as figure A16. The Asset Risk Capital Charge under the Non-Life solvency standards is comprised the sum charges for risk weighted exposures, Derivatives Risk and Asset Concentration Risk. Re assets and assets that are subject to a Deduction From Capital are excluded. There are 14 Exposure Classes, and the Solvency Return further subdivides some these to collect data on 21 Exposure sub-classes. For the purpose analysis, the Exposure Classes and sub-classes have been grouped based on the factor level low (0.5% to 5%), medium (6% to 15%), high (20% to 40%) and full (100%). The majority assets ($8.2 billion out $9.9 billion total assets that are subject to Asset Risk Capital Charge) have a low factor between 0.5% and 5%. These include cash, government securities, highly rated fixed interest, unpaid premiums less than six months overdue, and qualifying deferred acquisition costs. Overall, about half the Asset Risk Capital Charge corresponds to the high and full factor Exposure Classes. These include contingent liabilities, equities, property, any other assets (i.e. not elsewhere classified), and related party assets. The Exposure Class with a factor at least 20% that has the largest Exposure amount is any other asset with $0.4 billion (40% factor applies). There is considerable variation in the size and composition Asset Risk Capital Charge across insurers, reflecting a wide range approaches to managing investments and other assets. There is one insurer with a small Derivatives Risk Capital Charge. There are other insurers with derivatives that have nil Derivatives Risk Capital Charge. There are 15 insurers with an Asset Concentration Risk Capital Charge, mostly 2% net assets or less. Total Non-Life Solvency Standard Asset Risk Capital Charge components (% Net Assets) Asset Total Concentration Risk All 4% 2% 6% 1% 0% 0% 14% General 5% 2% 7% 1% 0% 0% 15% Life 0% 0% 2% 0% - 1% 3% Health 2% 1% 2% 1% - 0% 7%

40 40 Non-Life SS Foreign Currency Risk Capital Charge The Foreign Currency Risk Capital Charge is 22% the sum the absolute value net open currency exposures. For most non-life insurers, this is generally the smallest component Minimum Solvency Capital, ignoring any components that are not applicable. Many non-life insurers have no Currency Risk and most others partially match their foreign liabilities with foreign assets denominated in the same currencies. Of the 21 insurers with a Non-Life solvency Foreign Currency Risk Capital Charge, it exceeds 4% net assets (equivalent to a total net open currency exposure more than about 20% net assets) for only three insurers.

41 41 Non-Life SS Interest Rate Risk Capital Charge The Interest Rate Risk Capital Charge is the largest adverse net impact on capital prescribed upshock and downshock movements in interest rates. The Interest Rate Risk Capital Charge is a small component Minimum Solvency Capital for almost all non-life insurers. Figure 17 Non-Life SS direction interest rate risk There are 15 non-life insurers that report nil net exposure to interest rates all liabilities are undiscounted and there are no interest-bearing assets. There are 23 non-life insurers with greater impact from an upshock than a downshock, compared with only 6 non-life insurers with greater impact from a downshock than an upshock. The predominance upshock impacts is not surprising many non-life insurers have undiscounted liabilities (since they are all or mostly expected to be paid within 12 months) but have considerable interest-bearing investments. The largest Non-Life solvency Interest Rate Risk Capital Charge as a percentage net assets is between 3% and 6% for six insurers.

42 Life solvency standard 42 There are currently two Life solvency standards (Life, Variable Annuities). As at financial year end dates during 2015 there were no insurers with the Variable Annuities solvency standard applied, and so there is no need to group these solvency standards for analysis purposes in this paper.

43 Life SS Minimum Solvency Capital 43 Figure 18 Life SS Minimum Solvency Capital components Main type Insurance Risk Capital Charge less Liabilities Catastrophe Risk Capital Charge Life Solvency Standard Minimum Solvency Capital components by insurer are shown in the Appendices as figure A18. Approximately 80% the Minimum Solvency Capital under the Life solvency standard is comprised the excess Insurance Risk Capital Charge over Liabilities, where Liabilities is the sum Policy Liabilities and Other Liabilities. Asset Risk Capital Charge and Catastrophe Risk Capital Charge are each about 10%, with negligible amounts for other components. There are 11 insurers with Life Minimum Solvency Capital components at least 40% net assets for one Insurance Risk less Liabilities, Re Recovery Risk or Asset Risk. Four the Life solvency standard Minimum Solvency Capital components are expressed relative to a suitable measure exposure to provide an implied average risk factor, shown in figure 19 below. Figure 19 Life SS implied average risk factors CEP = credit, equity & property Re Recovery Risk Capital Charge Asset Risk Capital Charge effect Minimum Zero All 1, ,887.4 General ( 0.4) Life 1, ,887.2 Health Main type Insurance Risk Capital Charge less Liabilities Life Solvency Standard Minimum Solvency Capital components ($ million) Catastrophe Risk Capital Charge Re Recovery Risk Capital Charge Asset Risk Capital Charge effect Minimum Zero Life Solvency Standard implied average risk factors by insurer are shown in the Appendices as figure A19. Total Life Solvency Standard Minimum Solvency Capital components (% Net Assets) Total All 32% 3% 0% 4% 0% 40% General ( 0%) 0% 0% 0% 0% 0% Life 53% 6% 0% 7% 0% 66% Health Main type Insurance Risk Capital Charge less Liabilities as % absolute value Policy Liabilities Life Solvency Standard implied average risk factors Catastrophe Risk Capital Charge as % Annual Gross Premium Re Recovery Risk Capital Charge as % Re Assets + re catastrophe exposure CEP Capital Charge + Asset Concentration Risk Charge as % Assets (excluding re & Deductions From Capital) All 43% 4% 3% 4% General ( 13%) 0% 2% 2% Life 43% 9% 3% 4% Health

44 44 For some insurers Policy Liabilities are negative in the balance sheet. The Insurance Risk Capital Charge is the greater stressed liabilities (which may be positive or negative) and Current Termination Value (which may be zero or positive), for each Related Product Group. Pure risk ten has negative Policy Liabilities and a nil Current Termination Value. Therefore it is not unusual to have an Insurance Risk Capital Charge in excess Liabilities whilst also having negative value for Policy Liabilities. This is why the absolute value Policy Liabilities is used as the exposure measure in our analysis. However, for some insurers there may still be a distortion due to some Related Product Groups having negative Policy Liabilities and some Related Product Groups having positive Policy Liabilities while only the net figure is recorded in the solvency return. This situation arises for life insurers with a mixture traditional and pure risk products. For about half the life insurers, the excess Insurance Risk Capital Charge over Liabilities is large (over 90%) relative to the absolute value Policy Liabilities. For the other half, the excess is either negative or small (up to 34%) relative to the absolute value Policy Liabilities. This suggests there is a wide range in the level margins in Policy Liabilities, relative to the stresses set out in the Life solvency standard or Current Termination Values. Compared with non-life insurers, the Catastrophe Risk Capital Charge is much more significant for life insurers, typically 5% to 20% annual gross premium. This is perhaps due to generally less use re protecting against catastrophes by life insurers. One insurer has a much higher charge due to pandemic exposure that is not reinsured. The Re Recovery Risk Capital Charge is almost always between 2% and 4% re assets, reflecting the limited use unrated or poorly rated reinsurers. To aid comparison with non-life insurers, the sum the CEP Risk Charge and Asset Concentration Risk Charge have been compared with applicable asset values. Other components Asset Risk Capital Charge (Currency Risk and Interest Rate Risk) are excluded. There is considerable variability in the implied average factor for these Asset Risk components, with several insurers under 5%, while four insurers have an implied average risk factor at least 15% (and up to 39%).

45 45 Life SS Insurance Risk Capital Charge Figure 20 Life SS Insurance Risk Capital Charge components Main type max {CTV,Solv. RPG Life Solvency Standard Insurance Risk Capital Charge - Liabilities components ($ million) Liabilities Repayable Amount Adjustment Other Liabilities Insurance Risk Capital Charge CTV = Current Termination Value, Solv. Liab. = Solvency Liabilities RPG = Related Product Group. Insurance Risk Capital Charge less Liabilities All 4, , , ,519.3 General ( 0.4) Life 4, , , ,519.7 Health Main type Life Solvency Standard Insurance Risk Capital Charge - Liabilities components (% Net Assets) max Repayable Other Insurance Risk Liabilities Insurance Risk {CTV,Solv. RPG Amount Adjustment Liabilities Capital Charge Capital Charge less Liabilities All 89% - 10% 99% 67% 32% General 0% - 0% 0% 0% ( 0%) Life 146% - 17% 163% 110% 53% Health Life Solvency Standard Insurance Risk Capital Charge components by insurer are shown in the Appendices as figure A20. In order to be comparable with other components solvency requirements, in our analysis Liabilities have been subtracted from the Insurance Risk Capital Charge. Liabilities are the sum Policy Liabilities and Other Liabilities. This then provides the excess stressed amounts over reserved amounts. No insurers have reported a Repayable Amounts Adjustment. This means there are no new re arrangements that are subject to a charge, because existing re arrangements have a transition period that produces nil charge for financial year end dates during There are four insurers with Life solvency Insurance Risk Capital Charge slightly less than Liabilities two are insurers with mainly life business, and two are insurers with mainly general business. All four have reserved amounts in excess stressed amounts, with the two life insurers having large margins in their Policy Liabilities and the two general insurers using general accounting methods including risk margin. There are two insurers with Life solvency Insurance Risk Capital Charge equalling Liabilities one is a reinsurer with 100% retrocession 9 and the other is an insurer with mainly general business with immaterial life. Of the remaining life insurers, there are seven insurers with Life Insurance Risk Capital Charge less Liabilities at least 40% net assets. This includes all the largest life insurers that are subject to New Zealand solvency standards. 9 Retrocession is re a reinsurer s business.

46 46 Life SS Catastrophe Risk Capital Charge The Catastrophe Risk Capital Charge in the Life solvency standard is calculated based on the greatest net cost for Pandemic or Other Extreme Events. Figure 21 Life SS Catastrophe Risk Capital Charge method Life Solvency Standard Catastrophe Risk Capital Charge method by insurer is shown in the Appendices as figure A21. From the solvency returns there are 23 insurers using Pandemic, two insurers using Other Extreme Events, and two insurers using a mixture Pandemic and Other Extreme Events. Where a mixture is used, the method in respect the Statutory Fund is Pandemic and the method in respect Life Funds outside the Statutory Fund is Other Extreme Events.

47 47 Life SS Re Recovery Risk Capital Charge Figure 22 Life SS Re Recovery Risk Capital Charge components Main type Life Solvency Standard Re Recovery Risk Capital Charge components ($ million) Outstanding Claims Policy Liabilities Re Premium Paid in Advance Paid Claims Catastrophe Risk Total All General Life Health Main type Life Solvency Standard Re Recovery Risk Capital Charge components (% Net Assets) Outstanding Claims Policy Liabilities Paid Claims Catastrophe Risk Total Re Premium Paid in Advance All 0% 0% 0% 0% 0% 0% General 0% % Life 0% 0% 0% 0% 0% 0% Health Life Solvency Standard Re Recovery Risk Capital Charge components by insurer are shown in the Appendices as figure A22. Re Recovery Risk Capital Charge is very small, typically under 0.5% net assets. A significant exception is a reinsurer with 100% retrocession. Based on the implied average risk factors, there are at least two life insurers using an unrated or poorly rated reinsurer. The most common implied average risk factor is 2%, which is a lower factor than for non-life insurers.

48 Life SS Asset Risk Capital Charge 48 Figure 23 Life SS Asset Risk Capital Charge components Main type CEP Capital Charge Life Solvency Standard Asset Risk Capital Charge components ($ million) Asset Foreign Currency Risk Impact Interest Rate Risk Solv. Liab. Resilience Impact effect minimum zero RRCC CEP = credit, equity & property; Solv. Liab. = Solvency Liability RRCC = Resilience Risk Capital Charge Concentration Risk All ( 106.2) General Life ( 106.3) Health Main type CEP Capital Charge F. Currency Risk Capital Charge Impact Interest Rate Risk Solv. Liab. Resilience Impact effect minimum zero RRCC Life Solvency Standard Asset Risk Capital Charge components by insurer are shown in the Appendices as figure A23. The Asset Risk Capital Charge under the Life solvency standard is comprised the sum charges for Credit, Equity & Property Risk (CEP which covers risk weighted Exposures and Derivatives Risk), Foreign Currency Risk, net Interest Rate Risk, and Asset Concentration Risk. Re assets and assets that are subject to a Deduction From Capital are excluded from the calculation charges for CEP and Asset Concentration Risk, but are included for Foreign Currency Risk and Interest Rate Risk. The impact Interest Rate Risk on assets and the Solvency Liability Resilience Impact together make up the charge for net Interest Rate Risk. The charge for net Interest Rate Risk is generally small (under 2% net assets). There are five life insurers with material net exposure to Interest Rate Risk. There are also very limited risk charges for Foreign Currency Risk and Asset Concentration Risk about 90% Asset Risk Capital Charge arises from CEP. There are four insurers with a Life solvency standard Asset Concentration Risk Capital Charge, generally less than 2% net assets. Total Life Solvency Standard Asset Risk Capital Charge components (% Net Assets) Asset Total Concentration Risk Charge All 4% 0% ( 2%) 2% - 0% 4% General 0% - 0% 0% - - 0% Life 6% 1% ( 4%) 4% - 0% 7% Health

49 Life SS CEP Capital Charge 49 Figure 24 Life SS CEP Capital Charge components Main type Assets with factor 0.5% to 5% Assets with factor 6% to 15% CEP = credit, equity & property Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk All General Life Health Main type Assets with factor 0.5% to 5% Life Solvency Standard CEP Capital Charge components ($ million) Life Solvency Standard CEP Capital Charge components (% Net Assets) Assets with factor 6% to 15% Assets with factor 20% to 40% Assets with factor 100% Derivatives Risk All 1% 0% 2% 0% 0% 4% General 0% 0% 0% 0% - 0% Life 1% 0% 4% 1% 0% 6% Health Life Solvency Standard CEP Capital Charge components by insurer are shown in the Appendices as figure A24. There are 15 Exposure Classes, and the Solvency Return further subdivides some these to collect data on 22 Exposure sub-classes. For the purpose analysis, the Exposure Classes and sub-classes have been grouped based on the factor level low (0.5% to 5%), medium (6% to 15%), high (20% to 40%) and full (100%). The majority assets ($3.2 billion out $4.3 billion total assets subject to CEP Capital Charge) correspond to the low factor Exposure Classes. These include cash, government securities, and highly rated fixed interest, unpaid premiums less than six months overdue, residential mortgages, and secured unpaid premiums & loans. Overall about 70% the CEP Capital Charge corresponds to the high and full factor groups Exposure Classes. These include contingent liabilities, equities, property, any other assets (i.e. not elsewhere classified), related party assets. The largest Exposure Class is equities with $0.8 billion. Only one insurer reports a charge for Derivatives Risk, and this was very small. There are other insurers with derivatives that have nil Derivatives Risk Capital Charge. There is considerable variation in the size and composition the CEP Capital Charge across insurers, reflecting a wide range approaches to managing investments and other assets. Total Total

50 50 Life SS Foreign Currency Risk Capital Charge The Foreign Currency Risk Capital Charge is 22% the sum the absolute value net open currency exposures. For most life insurers, this is a small component Asset Risk Capital Charge. Many life insurers have no currency risk and most others partially match their foreign liabilities with foreign assets denominated in the same currencies. Of the ten insurers with a Life solvency Foreign Currency Risk Capital Charge, it exceeds 4% net assets (equivalent to a total net open currency exposure more than about 20% net assets) for only three insurers.

51 Life SS Impact Interest Rate Risk 51 The Impact Interest Rate Risk is the largest adverse net impact on capital prescribed upshock and downshock movements in interest rates. The Impact Interest Rate Risk is a small component Minimum Solvency Capital for almost all life insurers. Figure 25 Life SS direction interest rate risk SF = Statutory Fund There are five life insurers that report nil net exposure to interest rates. There are nine life insurers with greater impact from an upshock than a downshock, compared with eight life insurers with greater impact from a downshock than an upshock. There are five insurers with mixed interest rate impacts the Statutory Fund being impacted more by a downshock and the Life Fund outside the Statutory Fund being impacted more by an upshock. The Life solvency Impact Interest Rate Risk exceeds 3% net assets for eight insurers. There is one insurer with a negative Impact Interest Rate Risk, and this is a very large negative amount which largely fsets a large positive CEP Capital Charge.

52 Effective solvency requirement 52 The effective solvency requirement for the insurer as a whole is the sum requirements in respect each Fund (non qualifying capital instruments, Deductions From Capital, Minimum Solvency Capital, impact licence condition), but subject to the Fixed Capital Amount as a minimum for Aggregate Minimum Solvency Capital. Figure 26 Simplified diagram NZ solvency requirements (insurer level) Net Assets 6,953 Capital 6,952 Actual Solvency Capital 5,524 Solvency Margin 2,397 Solvency Margin Adjusted 1,812 Solvency Margin Adjusted 1,812 NQCI < 0.5 Deductions From Capital 1,428 Aggregate Minimum Solvency Capital 3,127 Licence Condition 585 Amounts are in $ million. is the sum across all applicable funds. Aggregate Minimum Solvency Capital is the greater Fixed Capital Amount & MSC. Effective Solvency Requirement 5,141 The Solvency Margin Adjusted must not be less than zero for every Fund, including on a consolidated basis if applicable.

53 53 Figure 27 Effective solvency requirement as % net assets There is considerable variation in effective solvency requirement relative to net assets. The median effective solvency requirement is 64% net assets with upper and lower quartiles 81% and 38% respectively. Figure 28 Solvency Ratio Adjusted There is also considerable variation in solvency ratio adjusted. The median solvency ratio adjusted is 171% with upper and lower quartiles 307% and 133% respectively.

54 54 There is one insurer in breach solvency requirements (as reported), and a further six insurers that have a small buffer above requirements (Solvency Ratio Adjusted between 110% and 119%). The six insurers with a small buffer are in a range circumstances and appear to be targeting a high return on equity. There are 26 insurers with a Solvency Ratio Adjusted 200% or higher. These include five captive insurers (which generally aren t subject to shareholders demanding a high return on capital) and 10 mutually owned general or health insurers (which require larger buffers due to the lack a parent to provide support). Some the remaining 11 insurers have special circumstances requiring larger buffers (e.g. rapid growth or being in run-f). Health insurers have a much larger buffer compared with general insurers and life insurers (weighted average Solvency Ratio Adjusted 490% compared with 142% and 135% respectively). This reflects the strategy the dominant mutually owned health insurer. Figure 29 Effective solvency requirement components Main type Capital excluded Deductions From Capital Minimum Solvency Capital Licence Condition effective solvency requirement Solvency Margin ($ million) as reported adjusted for licence condition All 0.5 1, , , , ,812.0 General 0.0 1, , , , Life , , Health Main type Capital excluded Solvency requirement components ($ million) Solvency requirement components (% Net Assets) Solvency Ratio (%) Deductions From Capital Licence Condition as reported Minimum Solvency Capital effective solvency requirement adjusted for licence condition All 0% 21% 45% 8% 74% 177% 149% General 0% 32% 32% 16% 80% 214% 142% Life 0% 9% 67% 1% 77% 136% 135% Health - 8% 19% - 27% 490% 490% Effective solvency requirement components by insurer are shown in the Appendices as figure A29. The largest component effective solvency requirements is Minimum Solvency Capital ($3.1 billion out $5.1 billion total). Deductions From Capital are also large at $1.4 billion.

55 Movement in Solvency Margin Adjusted during 2014/15 55 Figure 30 Movement in Solvency Margin Adjusted during 2014/15 financial year The movement in Solvency Margin Adjusted in the financial year that ended during 2015 has been analysed. The median movement was an increase 5% Capital at the start the financial year, with upper quartile an increase 14% and lower quartile a decrease 3%. Figure 31 Movement in Solvency Margin Adjusted during 2014/15 Main type Capital at start financial year Prit After Tax Capital Deductions Transactions From Capital (excl. Prit) Minimum Solvency Capital Licence Condition Solvency Margin Adjusted All 6, ( 178.4) ( 350.0) General 2,832.4 ( 236.9) ( 263.8) ( 350.0) Life 2, ( 367.9) 92.8 ( 175.9) - ( 22.2) Health ( 2.4) ( 7.4) ( 8.9) Main type in Solvency Margin Adjusted during 2014/15 financial year ($ million) in Solvency Margin Adjusted during 2014/15 financial year (% Capital at start financial year) Prit After Tax Capital Deductions Transactions From Capital (excl. Prit) Minimum Solvency Capital Licence Condition Solvency Margin Adjusted All 4% 9% ( 3%) 9% ( 6%) 12% General ( 8%) 32% ( 9%) 25% ( 12%) 27% Life 15% ( 13%) 3% ( 6%) - ( 1%) Health 7% ( 0%) ( 1%) ( 2%) - 3% Movement in Solvency Margin Adjusted during 2014/15 financial year by insurer are shown in the Appendices as figure A31.

56 56 Across all insurers there was an increase $0.8 billion (+12% Capital at the start the financial year), with a relatively large increase for general insurers (+27%), a small increase for health insurers (+3%) and a small decrease for life insurers (-1%). A significant portion the overall increase arises from one insurer. By component, capital transactions (i.e. injections less dividends and return capital) and reduced Minimum Solvency Capital (i.e. risk charges) each contributed about $0.5 billion to the improvement in Solvency Margin Adjustment. Prit was almost fset by an increased Deductions From Capital (mostly increased deferred tax assets for insurers that reported losses), and increases to licence conditions also reduced the movement in Solvency Margin Adjustment. Some insurers experiencing or planning rapid growth have had made capital injections that were large compared with capital at the start the financial year, to fund the costs that growth as well as to maintain their solvency position (given solvency requirements generally increase along with growth in business). The few insurers reporting a substantial loss in the financial year ended during 2015 generally made a significant capital injection to restore their solvency position. While it is good that this has occurred, it is some concern that some insurers appear to rely upon just in time parental capital injections rather than having a suitable buffer above solvency requirements to manage adverse experience. For the more usual case insurers that reported prits, the capital movement has a timing mismatch with prits because part or all the capital transactions are dividends set based on the previous financial year s prits. For some insurers, dividends or a return capital was used to substantially reduce capital (i.e. the amounts were large compared with prits) and to improve the rate return on equity. There were eight insurers with a net effect prit, capital transactions, and change in Deductions From Capital (generally a movement in deferred tax assets or declared unpaid dividends) resulting in a decrease in Solvency Margin Adjusted at least 10% the Capital at start financial year. There were nine insurers with a net effect changes in Minimum Solvency Capital and licence condition resulting in a decrease in Solvency Margin Adjusted at least 10% the Capital at start financial year.

57 Capital target 57 The solvency return collects summary information on insurers capital target(s), including measures used in the target (e.g. solvency margin or solvency ratio), the nature the target (e.g. minimum or range), and the calibration the target level. The appropriate capital target is highly dependent on the circumstances the insurer and their risk appetite. Capital target measure Figure 32 Capital target measure About a quarter insurers have either no capital target or no explicit capital target. This suggests that, for those insurers, there may be an undue reliance upon regulatory requirements instead proper consideration their own capital needs. Insurers that are subject to multiple solvency requirements generally have separate capital targets for each requirement. This paper uses the capital target for the insurer in total. While some insurers have reported (in their Solvency Return) a capital target that is a range or an average level over time, most insurers have expressed their capital target as a minimum level. About half have chosen a Solvency Margin (i.e. $ amount) and half a Solvency Ratio (i.e. % amount). There are some unusual cases. Two insurers have a target for Actual Solvency Capital this is relatively insensitive to risk and thus may be less appropriate than alternative measures for capital target. Two insurers have a target Solvency Margin that is expressed as a percentage annual premiums. One insurer has a target that is a minimum Solvency Ratio plus a minimum dollar amount above this. Three insurers have a capital target that incorporates minimums for both Solvency Margin and Solvency Ratio (e.g. capital target is the greater each sub-target).

58 Capital target level 58 Figure 33 Capital target level as % Minimum Solvency Capital Adjusted There is a wide range in calibration the level capital target. In order to compare the differing methods and to allow for solvency-related licence conditions, the level has been converted to a percentage Minimum Solvency Capital Adjusted. Minimum Solvency Capital Adjusted is the sum Minimum Solvency Capital and the effective dollar amount any licence condition. The capital target level used in this analysis is the minimum figure, or equivalently the bottom a range for insurers that report a capital target as a range. There are 11 insurers with a capital target level less than 20% Minimum Solvency Capital Adjusted (i.e. the target is equivalent to a Solvency Ratio Adjusted less than 120%). Some these insurers appear to have a relatively high risk appetite for a breach solvency requirements. In contrast, for 10 insurers the capital target level is 100% or more Minimum Solvency Capital Adjusted (i.e. the target is equivalent to a Solvency Ratio Adjusted 200% or more), in some cases much higher. By inspection, the insurers with the highest and lowest capital target levels have widely varying circumstances. Excluding the 17 insurers with no capital target or no explicit capital target, the median capital target is 33% Minimum Solvency Capital Adjusted. The upper and lower quartiles are 53% and 20% respectively.

59 59 Solvency position relative to capital target The following analysis compares reported solvency position with the capital target for each insurer. The capital target level used in this analysis is the minimum figure, or equivalently the bottom a range for insurers that report a capital target as a range. To enable comparisons between insurers, the capital target expressed as a percentage Minimum Solvency Capital Adjusted is subtracted from Solvency Ratio Adjusted to obtain the excess solvency ratio above the capital target. Care is needed in interpreting solvency position at any given point in time since there are a range approaches to dividends some which affect reported year end solvency figures and some do not. Figure 34 Solvency position relative to capital target Nine insurers have a target shortfall (solvency ratio below capital target). In contrast 14 insurers have a significant target excess (solvency ratio well above capital target). Excluding the 17 insurers with no capital target or no explicit capital target, the median difference between Solvency Ratio Adjusted and capital target is +14% Minimum Solvency Capital Adjusted (i.e. solvency ratio is higher than capital target). The upper and lower quartiles are +33% (i.e. solvency ratio is higher than capital target) and +1% (i.e. solvency ratio is higher than capital target), respectively.

60 60 Figure 35 Solvency Margin/Ratio in excess Capital target Main type Solvency Margin, Capital target and difference ($ million) Solvency Margin Adjusted Capital target in excess Minimum Solvency Capital Adjusted Solvency Margin Adjusted in excess Capital target All 1, , General Life Health Main type Solvency Ratio, Capital target and difference (% Minimum Solvency Capital Adjusted) Solvency Ratio Adjusted Capital target in excess Minimum Solvency Capital Adjusted Solvency Ratio Adjusted in excess Capital target All 149% 29% 19% General 142% 29% 13% Life 135% 15% 20% Health 490% 274% 115% Solvency Margin/Ratio in excess Capital target by insurer is shown in the Appendices as figure A35. Insurers with a capital target in the lower quartile (below 20% Minimum Solvency Capital Adjusted) have a similar distribution to all insurers for the difference between solvency ratio and capital target. That is, as a group they did not appear to compensate for low capital targets by holding an increased buffer above the target level, as at the financial year end date during The converse does not hold. Insurers with a capital target in the upper quartile (above 53% Minimum Solvency Capital Adjusted) have a different distribution than all insurers for the difference between solvency position and capital target. They are over-represented in insurers that are below their capital target, and also overrepresented in insurers with solvency position at least 30% in excess capital target as a percentage Minimum Solvency Capital Adjusted.

61 Solvency projection 61 The Solvency Return includes the insurer s projected solvency results, on a solo basis for the insurer as a whole, over the next four years after report date. This period is longer than the three year requirement under section 24 IPSA, because that obligation is continuous thus insurers need to project their solvency position for a longer period. These figures do not adjust for licence conditions because these may change over time. Figure 36 Projected Solvency Margin/Ratio Main type Actual one year prior Actual financial year end date during 2015 Projected in one year's time Projected in two year's time Projected in three year's time Projected in four year's time All 1, , , , , ,489.8 General , , , , ,251.9 Life Health Main type Actual one year prior Actual financial year end date during 2015 Actual and Projected Solvency Margin ($ million) Actual and Projected Solvency Ratio (%) Projected in one year's time Projected in two year's time Projected in three year's time Projected in four year's time All 135% 177% 169% 166% 164% 162% General 108% 214% 210% 206% 202% 200% Life 141% 136% 129% 128% 127% 126% Health 505% 490% 482% 488% 496% 503% Projected Solvency Margin/Ratio by insurer are shown in the Appendices as figure A36. For some insurers the projections show improving solvency position as they are based on business plans that forecast strong prits, and ten do not allow for future dividends. This does not seem to be realistic in every case. The expected future solvency position is likely to be worse than shown in figure 36, since future dividends are missing for some insurers. Furthermore, anecdotally business plans seem to be generally optimistic (e.g. assuming future experience is significantly more favourable than past experience). If so, future experience deviations from the projections may be more likely to reduce than to improve solvency position relative to the projections, all else being equal. Three insurers only provided projected solvency figures for the next three years. For the purpose calculating totals in figure 36 we have assumed there is nil change in solvency position between years three and four. This may slightly understate total Solvency Margin and slightly overstate total Solvency Ratio because these insurers are projecting a slow growth in Solvency Margin each year and also have materially lower than average Solvency Ratio. Two insurers in run-f have only projected to their expected completion the runf, which seems reasonable.

62 Appointed Actuary 62 The Appointed Actuary is required to perform or review solvency calculations at financial year end and half year. At financial year end date during 2015 about half the solvency calculations were performed by the Appointed Actuary and half were reviewed by the Appointed Actuary. Figure 37 Appointed Actuary solvency task by main type There is no marked difference by type insurer (i.e. general, life and health) for each type about half the solvency calculations were performed by the Appointed Actuary and half were reviewed by the Appointed Actuary.

63 63 Figure 38 Appointed Actuary solvency task by size insurer There is a distinct difference by size insurer solvency calculations were mostly performed by the Appointed Actuary for insurers with gross annual premium less than $50 million, and mostly reviewed by the Appointed Actuary for larger insurers. This is not surprising as small and medium-sized insurers generally do not have any in-house actuarial expertise.

64 Figure 39 Appointed Actuary solvency task by employment status 64 There are also significant differences when considering the employer the Appointed Actuary. Employees the insurer or related businesses mostly review the solvency calculations. In contrast the Appointed Actuaries that are consultants perform solvency calculations more ten than review them, particularly where the Appointed Actuary is with a specialist actuarial firm (as opposed to an accounting/audit firm or a wider financial services firm).

65 Auditor 65 The auditor is required to audit or review the Solvency Return at financial year end, excluding Catastrophe Risk Capital Charge and solvency projections, and provide a report on this. Most the auditor reports on Solvency Returns are heavily caveated. Typically the auditor only provides a limited assurance as to the reasonableness, and explicitly does not confirm the solvency result is correct or any components solvency calculations are correct. This has implications for both insurers and RBNZ! Figure 40 Auditor solvency task by main type At financial year end date during 2015 the auditor for most insurers reviewed the Solvency Returns, rather than audited them. There is no marked difference by type insurer (i.e. general, life, health) for each type the auditor for most insurers reviewed the Solvency Returns, rather than audited them.

66 66 Figure 41 Auditor solvency task by size insurer There is a distinct difference by size insurer the auditor reviewed the Solvency Returns for all insurers with gross annual premium greater than $50 million, reviewed the Solvency Returns for most insurers with gross annual premium between $1.5 million and $50 million, and audited almost as many Solvency Returns as were reviewed for small insurers (gross annual premium less than $1.5 million).

67 67 Figure 42 Auditor solvency task by audit firm type There are also significant differences when considering the audit firm type. The insurers with a big 4 audit firm as auditor all had reviews the Solvency Return by the auditor (none had audits). The 13 insurers with another auditor mostly had audits the Solvency Return by the auditor.

68 68 Figure 43 Audit firm type by size insurer Almost all large and medium-large sized insurers use a big 4 audit firm as auditor. The majority medium-small sized insurers also use a big 4 audit firm, although several do not. Small insurers are roughly evenly split between using a big 4 audit firm and another auditor.

69 Feedback on Solvency Return 69 The feedback in this section is necessarily general in nature, and may only apply to insurers in certain circumstances. This feedback does not cover all the questions or issues that have been identified by RBNZ in relation to Insurer Solvency Return (ISR). ISR Requirement Topic Feedback 1. S121 notice Due date All returns must be submitted by the relevant due date. 2. S121 notice Submission method ISR must be submitted using the RBNZ secure upload facility, and not by unless otherwise agreed by RBNZ. is not as secure and is less efficient for our processing. 3. S121 notice Format ISR must be submitted in Excel format. PDF format is unable to be loaded. 4. S121 notice Version Please submit ISR using the correct version the template, as specified on the insurer data collections webpage based on report date (the as at date the calculations). An incorrect version might not be able to be loaded. 5. CEO sign-f CEO sign-f Details the CEO sign-f must be provided in the spaces provided. If the ISR is resubmitted a fresh sign-f is required (i.e. the date sign-f should be updated). 6. All solvency standards Use judgement and discretions There are several aspects the solvency calculations which require judgement. The purpose solvency requirements is to have some protection against very adverse experience. The circumstances the insurer and the particular risk under consideration are also relevant. RBNZ may ask for justification any judgement that has been applied if it appears to be unreasonable, unrealistic, inappropriate, or imprudent. Examples considerations that may be relevant to the application discretions include the inability to have perfect foresight leads to imperfect decisions, consequent changes in policyholder behaviours, constraints in data and systems, the time needed to make decisions, competitive pressures influencing decisions, etc.

70 ISR Requirement Topic 70 Feedback 7. All solvency standards 8. All solvency standards 9. All solvency standards 10. All solvency standards 11. All solvency standards 12. All solvency standards 13. All solvency standards 14. All solvency standards Financial statements Tax Capital Assets Assets Assets Assets Assets For some insurers the financial statements which form the basis the solvency calculations are not compliant with NZ GAAP (e.g. at financial half-year). In this situation case is needed to make appropriate adjustments to the Alternative Financial Information, upon which the solvency calculations are based. The solvency standard treatment tax is complex and requires careful consideration the appropriate tax position at balance date and also under stressed circumstances. All solvency standards currently in force have eligibility requirements for capital instruments and reserves to qualify as Capital for the purposes solvency. This was a change from earlier solvency standards. For a few insurers there appears to be a component balance sheet equity/net assets that may not qualify for solvency, but which has not been excluded from Capital. For some insurers some assets have not been Deducted From Capital and have not had relevant asset capital charge(s) applied. All assets should have either a Deduction From Capital or relevant asset capital change(s) applied. Applying investment asset look through provisions when the data is not detailed enough for full and accurate allocation to Exposure Classes. In this circumstance the appropriate Exposure Class for the investment vehicle as a whole should be used. Refunds GST, fire service levy and earthquake commission levy could be classified as sovereign debt if the amounts are certain. Misclassifying term deposits as cash. Misclassification unrated or subordinated debt.

71 ISR Requirement Topic 71 Feedback 15. All solvency standards 16. All solvency standards 17. All solvency standards 18. All solvency standards 19. All solvency standards 20. All solvency standards 21. All solvency standards 22. All solvency standards 23. All solvency standards Assets Assets Assets Assets Contingent liabilities Contingent liabilities Contingent liabilities Guarantees (purchased) Derivatives Sometimes the Exposure Class for any other asset has been used when another Exposure Class is applicable. Some insurers have not made a Deduction From Capital for equity in related parties. In some cases it is not clear that the criteria have been correctly applied for exempting certain related party assets from being treated as related party for solvency. E.g. is the asset in substance a permanent funding or is it short-term on commercial terms and not overdue? Some assets are not freely available for the benefit the insurer. For example assets that are subject to charges, encumbrances for the benefit another party, collateral provided to a cedant or derivative counterparty, etc. The solvency treatment these restricted assets should have regard to the effects the constraints. Contingent liabilities should not be reduced by a factor to account for the probability loss, because the Resilience Capital Factor already takes this into account. Contingent liabilities with exposures to a related party attract a full capital charge. This was made explicit in the 2014 solvency standards. If the potential value the contingent liability is uncertain or a range outcomes is possible a value greater than best estimate (i.e. a prudent amount) must be used. In some cases it appears a best estimate value has been used with no conservatism. The 2014 solvency standards changed the criteria for reducing the Asset Risk Capital Charge on assets that have been guaranteed. In some cases it is not clear that the criteria have been correctly applied. Very few insurers have recorded an amount for Derivatives Risk Capital Charge.

72 ISR Requirement Topic 72 Feedback 24. All solvency standards 25. All solvency standards 26. All solvency standards 27. Non-life solvency standards 28. Non-life solvency standards 29. Non-life solvency standards Asset concentration Re Counterparty grades Insurance risk Insurance risk Outstanding claims Various issues have arisen including - the correct calculation the relevant thresholds, failure to include all exposures to the same counterparty (when there are multiple exposure types for the same counterparty), failing to use a multiplier two for the obligation category any other asset or counterparty exposure, the calculations when there are multiple exposure classes for the same counterparty, treatment bank exposures that are not bills or deposits (e.g. long-term debt securities or swaps). In some instances re assets and re liabilities have been netted f when these have different counterparties. Some insurers have used default minimum ratings based on their investment policy or re policy when the actual ratings (at report date) are unknown. If the actual rating has not been identified then treating as unrated is a more prudent approach. For solvency purposes classes business have not been defined. Nonetheless, for some insurers the classification used for some their business is unexpected. Some insurers have incorporated the Premium Liabilities Adjustment or Outstanding Claims Adjustment in the cells for base risk charges by class instead in the provided separate cells (totalled but not by class). This does not affect the results but makes it more difficult to interpret. Some insurers with negative net outstanding claims have negative figures for Run-f Risk Capital Charge. This isn t prudent because it effectively reduces the solvency requirement by a percentage the amount recoveries that are in excess provisions.

73 ISR Requirement Topic 73 Feedback 30. Non-life solvency standards 31. Non-life solvency standards 32. Non-life solvency standards 33. Non-life solvency standards 34. Non-life solvency standards 35. Non-life solvency standards Outstanding claims Premium liabilities Premium liabilities Long-term risk Re Catastrophe Some insurers have infrequent reviews their risk margins (e.g. every two years). If there is no review at report date, it is not clear that the risk margins used are calibrated at the required probability sufficiency for solvency purposes. For some insurers, particularly health insurers, the period assessment for premium liabilities appears to be very short compared with current and past business practices. In some instances there appears to be reliance upon potential significant benefit reductions at very short notice without regard to whether this is practicable or reasonable (i.e. ignoring consequences); and similarly for reliance on potential significant premium increases. There are some issues with calculation premium liabilities. For example, some insurers appear to be assuming significantly lower loss ratios than have been experienced recently, allowance for relevant expenses including re sometimes appears to be very light or missing. Some insurers have business with long-term characteristics for either the period exposure and/or for the claim settlement period, but have no additional charge. The rationale for this is missing in some cases, and in other cases does not appear to be reasonable or appropriately prudent. Some captive insurers have not included reinstatement premiums in the calculation Insurance Risk Capital Charge on the assumption that this cost will be funded by the parent. This may be questionable if there is no arrangement in place to do so. The calculations are in respect a future event and therefore should take into account known changes to exposures and re that are about to occur (e.g. on the day after report date).

74 ISR Requirement Topic 74 Feedback 36. Non-life solvency standards 37. Non-life solvency standards 38. Non-life solvency standards 39. Non-life solvency standards 40. Non-life solvency standards Catastrophe Catastrophe Catastrophe Catastrophe Catastrophe Some insurers have used an alternative method recommended by the Appointed Actuary without obtaining RBNZ agreement as required. Insurers with Extreme Event Exposure (i.e. liable for claims on more than one contract from an event) but using the twice maximum net retention method are using an alternative method, and similarly for insurers without Extreme Event Exposure that are not using twice maximum net retention method. For some insurers the default calculation appears to produce an inappropriately low Catastrophe Risk Capital Charge considering the circumstances the insurer, but no alternative method has been used. Under the Extreme Event method, the ISR has spaces for providing information on whether the transition in the policy position paper has been applied, the amount assessed gross losses for the required return period, and the return period the limit catastrophe re. These all provide context for the Catastrophe Risk Capital Charge. Sometimes the information is missing or inconsistent. The transition in the policy position paper appears to have been applied for some insurers that are not eligible (due to the no backsliding restriction). Some insurers may be exposed to multiple re retentions that should be allowed for under the Extreme Event method. Similarly, some insurers may be exposed to claims under multiple parts a policy and thus requiring allowance that is in excess maximum benefit limit under the twice maximum net retention method.

75 ISR Requirement Topic 75 Feedback 41. Non-life solvency standards 42. Non-life solvency standards 43. Non-life solvency standards 44. Life solvency standards 45. Life solvency standards 46. Life solvency standards Catastrophe Catastrophe Assets Related product groups Assets Assets The treatment re is not always clear cut. The solvency standards refer to catastrophe re under the Extreme Event method, but to any re under the twice maximum net retention method. Insurers should consider how to appropriately deal with their re situations. For example if catastrophe re cover is shared with other cedant(s) that are exposed to the same event then it may not be possible for the insurer to recover fully up to the required level. The potential recoveries under re that substantially varies depending on the circumstances (e.g. surplus lines or aggregate) also requires care. Assessment Extreme Event Exposures is complex and cannot be determined solely by running a catastrophe model. An explanation this analysis should be provided in financial condition reports (and to a lesser degree detail also solvency returns). Some insurers have recoveries that are not re recoveries, but have not been correctly treated for solvency calculations. Third party recoveries (includes ACC) these have an Exposure Class for Asset Risk Capital Charge. Recoveries including EQC for the coinsurer share claims previously paid by the insurer are included in the Re Recovery Risk Capital Charge. For some insurers related product groups appear to be very broad and may not be appropriate prudent. Some insurers report as Solvency Liability Resilience Impact the net effect on assets and liabilities instead the gross effect on liabilities only. Some insurers exclude from Resilience Risk Capital Charge any unit-linked assets in respect investment-linked business. Insurers should only do this if the Solvency Liability Resilience Impact either perfectly fsets the asset impact, or if the net effect is immaterial.

76 ISR Requirement Topic 76 Feedback 47. Life solvency standards 48. Life solvency standards 49. Consolidated solvency 50. Solvency projection 51. Solvency projection 52. Solvency projection 53. Solvency projection Re Re Consolidated solvency Solvency projection Solvency projection Solvency projection S24 statement Some insurers did not include in Re Recovery Risk Capital Charge the required amount for re recoveries assumed in the Catastrophe Risk Capital Charge. The 2014 solvency standard requires specific information in respect re to be reported in the financial condition report. This is missing from some. Some insurers provided figures in this table when there is no subsidiary to consolidate. When the projected solvency figures are missing for the date that is four years after the report date, this means the solvency return has not been fully completed. Some solvency projections have high and growing solvency levels that appear to be unrealistic under the circumstances. For example nil dividends when capital far exceeds target levels. If an insurer currently has a small insurer exemption from minimum capital but is growing such that the exemption is reasonably anticipated to be lost within the next 4 years, then this should be reflected in their solvency projection. If an insurer is in breach solvency requirements at report date, or is projecting solvency requirements to be breached at any time within the next 3 years, or has recently notified RBNZ under section 24, then s24=yes should be selected from the dropdown options. This has not always occurred. 54. Form Cover sheet Selecting the wrong insurer name causes problems in loading the data. 55. Form Cover sheet Entering the wrong report date (as at date calculation) causes problems in loading the data. 56. Form All sheets Monetary amounts in the ISR are required to be NZ$ thousands. Some insurers have reported in NZ$s or NZ$ millions.

77 ISR Requirement Topic 77 Feedback 57. Form All sheets Sometimes comments are ambiguously worded or missing when they are relevant. Good comments support clear interpretation the solvency data. Poor comments are unhelpful. E.g. same as last year or target is a reasonable margin do not provide useful information. There have also been instances where comments contradict other information (in the solvency return, in the financial condition report, or otherwise provided by the insurer). 58. Form Minimum capital exemption 59. Form Solvency standards 60. Form Interest rate risk Selecting the wrong option in the drop-down for exemption to minimum capital may result in the incorrect calculation solvency and capital requirements (because minimum capital is not applied). Selecting the wrong option(s) in the dropdowns for solvency standards affects our interpretation results as we take into account differences in the solvency standards. For some insurers the selected option in the drop-down for direction interest rate change that applies has either been not selected or appears inconsistent with the results. 61. Form Sign-f sheet The actuary statement should be completed and dated. 62. Form Sign-f sheet The auditor statement should be completed and dated. Sometimes the wrong option has been selected from the drop-down list. 63. Form Sign-f sheet The contact(s) entered should be the person(s) at the insurer or their agent (e.g. an external accountant or actuary) to whom RBNZ should, in the first instance, direct its feedback or questions. Sometimes a contact person at RBNZ is listed instead. 64. Form Links Links to other files can cause problems in loading the data. Please paste as values all cells that link to an external file before submission.

78 ISR Requirement Topic 65. N/A Notes and workings 78 Feedback Notes and workings are optional but improve our understanding reported solvency. These can be provided within the template in the unlocked sheet labelled Notes and Workings, in sheet(s) added to the template, or in separate workings files.

79 Strength solvency position 79 For this paper we define the strength a solvency position to be the size shock that can be absorbed and still meet solvency requirements. Under this approach, the shock is the combined impact the effect adverse experience on net assets, consequent changes to solvency requirements, allowance for mitigation, and to some extent allowance for the effect management discretions and actions. In contrast, the Solvency Margin is a measure the size shock that can be absorbed and still maintain positive net assets. Solvency Margin and Solvency Ratio figures, adjusted for licence conditions, provide the solvency position relative to regulatory requirements. However they do not provide complete context for the size the insurer or for risk exposures. A level for Solvency Margin or Solvency Ratio that may provide very strong protection for one insurer may provide weaker protection for another insurer in different circumstances. The following analysis is used to illustrate the concepts, but is overly simplistic. It is not a stress testing exercise. We expect insurers, particularly larger insurers, to perform robust analysis their capital needs taking into account their own circumstances including the risks they are exposed to and the mitigants that are available. Consideration the appropriate strength the solvency position, whether for regulatory purposes or for insurer management purposes, is out scope for this paper.

80 80 Solvency position relative to size insurer One broad indicator strength is the solvency position relative to the size business. This can be measured by the ratio Solvency Margin Adjusted to various size metrics e.g. gross annual premium and net assets. Total assets are also a useful size metric. However, for most insurers the financial year end date during 2015 pre-dates the commencement insurer data collections 10, and therefore we do not have a measure total assets that is consistent across all insurers. This is because accounting standards provide flexibility in the presentation assets and liabilities, including the treatment negative amounts (particularly relevant for most life insurers with negative liabilities), and the extent to which balances can be fset (within a category for positive and negative balances or by corresponding items such as re or tax). Figure 44 Solvency Margin Adjusted relative to size Main type Solvency Ratio Solvency Ratio Solvency Ratio Adjusted Solvency Margin Adjusted Solvency Margin Adjusted as % Gross Annual Premium Solvency Margin Adjusted as % Net Assets All 177% 149% 23% 26% General 214% 142% 14% 20% Life 136% 135% 34% 23% Health 490% 490% 40% 73% Solvency Margin Adjusted relative to size by insurer is shown in the Appendices as figure A44. For strength relative to gross premium and net assets, in aggregate general insurers have the lowest metric followed by life insurers, and with health insurers much higher. However, there is considerable variation between insurers much more than the variation in Solvency Ratio. There are nine insurers with Solvency Margin Adjusted less than 8% Gross Annual Premium (the equivalent one month gross premium). In contrast there are 19 insurers with Solvency Margin Adjusted the equivalent at least 100% Gross Annual Premium. There are seven insurers with Solvency Margin Adjusted 10% or less Net Assets. In contrast there are 24 insurers with Solvency Margin Adjusted at least 50% net assets. 10 Insurer data collections include the reporting financial and exposure data in a specified format. These returns commenced between June 2015 and August 2016, depending on the insurer s financial year and other circumstances. For more information see the insurer data collections webpage at

81 81 Solvency position relative to risk charges Another broad indicator strength is a comparison the various risk charges relative to the solvency margin. A solvency margin that is smaller than certain risk charges could identify the types risks that are the most important for an insurer to have strong mitigation against. Since the risk charges generally incorporate some mitigants based on the solvency standards, it could also indicate areas risks for which the existing mitigants are weak relative to existing mitigants protecting against other types risks. It does not necessarily follow that an insurer with solvency margin smaller than certain risk charges will have a solvency breach upon the occurrence adverse experience in that area. It also does not necessarily follow that an insurer with a solvency margin much larger than certain risk charges is immune from risk. This is for many reasons, including: The solvency standard does not fully cover all types risks. The effect minimum capital requirement (i.e. Fixed Capital Amount) reduces the sensitivity solvency position to risks (up to a point) for some insurers. Risk charges in the solvency standard cater for fairly extreme outcomes. Solvency requirements following adverse experience will generally be different to those before the adverse experience (e.g. after a large fall in investment values the Asset Risk Capital Charge is likely to be smaller). Many risks have highly non-linear impacts (e.g. due to exhaustion any discretions, changes in tax status, effects aggregate or stop-loss re). Adverse experience could occur with multiple areas risk. Management actions following significant adverse experience may materially change the exposures to risk and/or relevant mitigants. Some balance sheet components may partially protect against some risks. In the analysis below Liabilities are subtracted from Insurance Risk Capital Charge under the life solvency standard (only); and Asset Risk Capital Charge includes Asset Concentration Risk Capital Charge, net impact Interest Rate Risk, and Foreign Currency Risk Capital Charge. This treatment is required due to differences between life and non-life solvency standards.

82 82 Figure 45 Solvency Margin Adjusted relative to risk charges Main type Solvency Margin Adjusted impact loss small insurer exemption Insurance Risk Capital Charge (less Liabilities) Catastrophe Risk Capital Charge Re Recovery Risk Capital Charge Asset Risk Capital Charge All 1, , General Life , Health Main type Solvency Margin Adjusted Solvency Margin Adjusted, and aggregate Capital Charges ($ million) Solvency Margin Adjusted, and aggregate Capital Charges (% Net Assets) impact loss small insurer exemption Insurance Risk Capital Charge (less Liabilities) Catastrophe Risk Capital Charge Re Recovery Risk Capital Charge Asset Risk Capital Charge All 26% 0% 26% 5% 7% 12% General 20% 0% 7% 5% 13% 17% Life 23% 0% 53% 6% 2% 7% Health 73% - 9% 1% - 8% Solvency Margin Adjusted relative to risk charges by insurer are shown in the Appendices as figure A45. For general insurers in aggregate, the Asset Risk Capital Charge and Re Recovery Risk Capital Charge are both (separately) between half and one times the amount Solvency Margin Adjusted. Part the Asset Risk Capital Charge is due to liabilities being largely undiscounted. For life insurers in aggregate, the Insurance Risk Capital Charge less Liabilities exceeds the Solvency Margin Adjusted, with all the other risk charges being less than half the amount Solvency Margin Adjusted. However, this is not the case for individual insurers. For health insurers, all the risk charges are less than half the amount Solvency Margin Adjusted. Five out eight insurers with a small insurer exemption have an impact loss small insurer exemption that exceeds net assets. Another insurer has an impact that exceeds the Solvency Margin Adjusted, and a further insurer has an impact between half and one times the amount Solvency Margin Adjusted. For only one insurer with a small insurer exemption is the impact less than half the amount their Solvency Margin Adjusted. This suggests small insurers may need to carefully manage any growth that is large enough to cause the loss small insurer exemption (by gross annual premium exceeding $1.5 million) in the future. There are six out 35 general insurers with Insurance Risk Capital Charge exceeding Solvency Margin Adjusted. For a further five general insurers it is between half and one times the amount Solvency Margin Adjusted. There are eight out 21 life insurers with Insurance Risk Capital Charge less Liabilities exceeding Solvency Margin Adjusted. For a further two life insurers it is between half and one times the amount Solvency Margin Adjusted.

83 83 There are three insurers (two general insurers and one life insurer) with Catastrophe Risk Capital Charge exceeding Solvency Margin Adjusted. For a further five general insurers and one life insurer it is between half and one times the amount Solvency Margin Adjusted. There are six insurers (five general insurers and one life insurer) with Re Recovery Risk Capital Charge exceeding Solvency Margin Adjusted. These include insurers with elevated re assets due to the Canterbury earthquakes and a reinsurer that has 100% retrocession. For a further four general insurers it is between half and one times the amount Solvency Margin Adjusted. There are nine general insurers with Asset Risk Capital Charge exceeding Solvency Margin Adjusted. For a further four general insurers it is between half and one times the amount Solvency Margin Adjusted. There are six life insurers with Asset Risk Capital Charge exceeding Solvency Margin Adjusted. For a further four life insurers it is between half and one times the amount Solvency Margin Adjusted.

84 Part Two Home jurisdiction solvency requirements 84 Foreign insurers are licensed for the insurer as a whole not just for the New Zealand branch. Most licensed insurers that operate as branches in New Zealand are subject to solvency requirements their home supervisor. An exemption notice may be issued under section 59 IPSA if certain requirements are met. One these requirements may be satisfied if the foreign insurer is domiciled in a jurisdiction prescribed by regulation 5 IPSR. A small number branch insurers are subject to New Zealand solvency standards in respect their New Zealand business because they are not domiciled in a prescribed jurisdiction for the purposes statutory funds requirements (subpart 3 part 2 IPSA). Figure 46 Jurisdiction applicable solvency requirements There are nine different prescribed jurisdictions which have a New Zealand solvency exemption and home jurisdiction solvency requirements applied. The most common home jurisdiction is Australia. Three EU jurisdictions had Solvency I requirements applying for the financial year end date during 2015 (Solvency II requirements at time writing this paper). The other five home jurisdictions are three US states and two countries in Asia (Japan and India). All foreign insurers that are subject to their home jurisdiction solvency requirements (with a New Zealand solvency exemption) are required to report their solvency position to RBNZ at financial year end and half year by a copy their home supervisor s solvency report and also using the solvency exempt return template provided on the website

85 85 How solvency requirements and results are presented varies considerably across jurisdictions. For example some jurisdictions have a requirement to maintain a minimum ratio 200% or some other level than 100%, and accordingly cannot be directly compared to a New Zealand requirement a minimum solvency margin $0 (or equivalently a minimum solvency ratio 100%). Some jurisdictions have multiple solvency requirements (e.g. multiple triggers for various supervisory actions including optional and compulsory supervisory actions), and the insurer has not necessarily reported on the more onerous one these. The calculations are made for the insurer as a whole, not the New Zealand branch. For many foreign insurers, their New Zealand business is well under 1% their total business and so their New Zealand branch may not be representative the insurer as a whole. Therefore we are unable to provide detailed analysis solvency insurers that are subject to home jurisdiction solvency requirements, and it is also generally not meaningful to make direct comparisons with the insurers that are subject to the New Zealand solvency requirements. Figure 47 Solvency ratio under home jurisdiction solvency requirements The median reported solvency ratio is 236% and the lowest is 118%.

86 Insurers subject to Australian solvency requirements 86 Australian solvency requirements have several common elements to New Zealand solvency requirements, and with broadly similar calibration overall. There were 19 insurers subject to Australian solvency requirements at the financial year end date during We can do a limited analysis their solvency position, including comparisons with the insurers that are subject to the New Zealand solvency requirements. However, the figures are not fully comparable for several reasons, including: Differences in the solvency requirements including calibration. The reported solvency position for 19 insurers subject to Australian solvency requirements are for the insurer as a whole and not the New Zealand branch. The circumstances 62 insurers subject to New Zealand solvency standards may differ from the 19 licensed New Zealand insurers that are subject to Australian solvency requirements. This includes a different mix insurers (e.g. no specialist health insurers), different exposures to risks, different mitigants, different risk appetites, etc. Figure 48 Australian Solvency Ratio Adjusted for 19 insurers For the 19 licensed New Zealand insurers that are subject to Australian solvency requirements, the median Solvency Ratio Adjusted is 184%, the upper quartile is 242%, the lower quartile is 136%, and the lowest is 118%. At first glance the median, upper and lower quartile Solvency Ratios Adjusted are similar for licensed New Zealand insurers that are subject to Australian solvency requirements and for those that are subject to New Zealand solvency standards. However, there is only one insurer (5% by number) that is subject to Australian solvency standards with Solvency Ratio Adjusted below 130%, compared with 13 (21% by number) insurers that are subject to New Zealand solvency standards.