1 Solvency Standard for Non-life Insurance Business Insurance Policy Prudential Supervision Department October 2011 (incorporates amendments to May 2012)
2 2 1. Introduction 1.1. Authority 1. This solvency standard is made under Section 55 of the Insurance (Prudential Supervision) Act 2010 ( the Act ). 2. Once approved by the Bank, this solvency standard becomes a regulation under the Act (refer Section 233(1)) Licensed insurer may be a non-life insurer and a life insurer, and may be subject to more than one solvency standard 3. A licensed insurer may be a non-life insurer as well as a life insurer. To the extent that the insurer carries on non-life insurance business in New Zealand it will be considered a non-life insurer, and, except as provided for in paragraph 5 below, all the provisions of this solvency standard will apply to that insurer in respect of the non-life insurance business. Similarly, to the extent that an insurer carries on insurance business in New Zealand that is life insurance business, or is otherwise not covered by this solvency standard, it will, except as provided for in paragraph 5 below, be subject to the requirements of the solvency standard appropriate to other business it carries on. 4. Except as provided for in paragraph 5 below, where a licensed insurer is subject to more than one solvency standard the requirements of each solvency standard will apply separately as appropriate to each class of business carried on by the licensed insurer, and the overall requirement on the licensed insurer will be the aggregate of the requirements of each solvency standard to which the licensed insurer is subject. 5. Where a licensed insurer is subject to more than one solvency standard the Minimum Capital Requirement applicable to the licensed insurer (refer paragraph 51 of this solvency standard) will be the higher, or highest, of the Minimum Capital Requirement (or in the case of a licensed insurer that is a life insurer, the Fixed Capital Requirement) amounts within the applicable solvency standards. The requirements shall not be cumulative Application 6. This solvency standard applies to every licensed insurer under the Act, except for a life insurer that is subject to the solvency standard for life insurance business, or any licensed insurer that is subject to another solvency standard that is made under Section 55 of the Act and that is
3 3 specific to that licensed insurer or to a class of insurers to which that licensed insurer belongs. 7. Section 5 of this solvency standard applies to the actuary appointed by the licensed insurer in accordance with Section 76 of the Act Previous Versions 8. None Effective Date 9. This solvency standard is effective from the date of commencement of Subpart 2 of Part 2 of the Act Definitions 10. The Act means the Insurance (Prudential Supervision) Act Terms defined in the Act have the same meaning in this solvency standard and are shown in bold type. 11. Actual Solvency Capital of a licensed insurer means the total of Capital minus Deductions from Capital determined in accordance with paragraphs 37 and 38 of this solvency standard. 12. Appointed actuary means the actuary appointed by the licensed insurer in accordance with Section 76 of the Act. 13. Collective investment vehicle means a managed investment fund including but not limited to unit trusts and group investment funds. 14. Extreme Event means one or more events, including (but not limited to) earthquake, flood or storm, that result in unexpected large or extreme losses as a result of claims on more than one insurance contract. 15. Extreme Event Exposure means the total of all insurance losses incurred under any contract of insurance issued by the licensed insurer that arise as a result of an Extreme Event, calculated on the basis set out in paragraphs Financial Institution means a financial institution as defined in the Reserve Bank of New Zealand Act Local Authority has the same meaning as in Section 5(1) of the Local Government Act Material and materiality have the meaning set out in Appendix A. 19. Minimum Solvency Capital for a licensed insurer means the amount determined in accordance with Section 3 of this solvency standard.
4 4 20. Net Outstanding Claims Liability means all unpaid claims and claims handling expenses, net of reinsurance and other recoveries and excluding any Government charges imposed such as levies, duties and taxes, relating to claims incurred prior to the end of the reporting period, determined in accordance with NZ GAAP as it relates to insurance contracts. 21. Non-insurance Activity means any business activity undertaken for third party customers that does not involve the bearing of risk under a contract of insurance. For example, Non-insurance Activity includes insurance broking, premium funding, claims management services and risk management or any other consultancy activities. 22. NZ GAAP means New Zealand Generally Accepted Accounting Practice. For the purposes of this regulation, financial statements will be deemed to comply with NZ GAAP only if those statements comply with: (a) applicable financial reporting standards; and (b) in relation to matters for which no provision is made in applicable financial reporting standards and that are not subject to any applicable rule of law, accounting policies that: i. are appropriate to the circumstances of the reporting entity; and ii. have authoritative support within the accounting profession in New Zealand. 23. Premium Liabilities means the present value of the expected future cash flows relating to all future claims arising from the rights and obligations under the licensed insurer s existing policies that have not yet expired during the assessment period. The assessment period is the period during which, in the opinion of the appointed actuary, premiums and benefits cannot in practice be adjusted to reflect adverse changes in risk. This period may be until expiry, or next policy renewal or some other date, and may differ from any period used for accounting purposes. (a) The value of the premium liabilities must include an amount in respect of the expenses that the licensed insurer expects to incur in administering and settling the relevant claims and allow for expected premium refunds; (b) In respect of premium liabilities for which reinsurance has not yet been purchased, allowance must be made for this reinsurance; (c) Premium liabilities are to be determined on a prospective basis, net of expected reinsurance recoveries and non-reinsurance recoveries; (d) The value of premium liabilities may exclude any Government charges imposed such as levies, duties and taxes; and
5 5 (e) Premium Liabilities are to include a risk margin intended to provide a 75% probability of sufficiency, and are to be assessed by the appointed actuary. 24. Solvency Margin is defined as the excess of Actual Solvency Capital over Minimum Solvency Capital, expressed as a dollar amount. 25. Solvency Ratio is defined as the ratio of Actual Solvency Capital divided by Minimum Solvency Capital, expressed as a ratio or a percentage. 26. Solvency Unexpired Risk means the difference between Premium Liabilities (as defined above) and the amount of unearned premium in respect of the same assessment period, with a minimum of zero. 27. State-Owned Enterprise means an organisation named in Schedule 1 or Schedule 2 of the State-Owned Enterprises Act Requirements of the Act 28. Section 21(2)(b) of the Act allows the Bank to impose a condition of licence that requires that a licensed insurer must, at all times, maintain a Solvency Margin as defined in the solvency standard. The Solvency Margin must always be a positive amount, and a licensed insurer must maintain Actual Solvency Capital in excess of the amount required to maintain this Solvency Margin. 29. Conditions of licence imposed under sections 21(2)(f) and (g) of the Act may require attestation by a licensed insurer to the Bank relating to compliance with any conditions of licence, which includes any that may relate to a solvency standard. 30. Section 24 of the Act requires that, if a licensed insurer has reasonable grounds to believe that a failure to maintain a solvency margin is likely to occur at any time within the next three years, the licensed insurer must report the likely failure to the Bank as soon as is reasonably practicable. 31. Section 76 of the Act requires each licensed insurer to appoint an actuary. Section 77 requires the licensed insurer to have its appointed actuary review certain items in the financial statements. Section 56(d) sets out requirements regarding the preparation of a Financial Condition Report. 32. Compliance with the solvency standard is a continuous obligation. As a minimum a licensed insurer must undertake calculations as required in Section 3 of this solvency standard and report as required under Section 4 of this solvency standard twice each year as at its financial year end and as at six months after its financial year end and report those calculations to the Bank.
6 Responsibility for solvency calculations 33. The appointed actuary of the licensed insurer is responsible to the board of the licensed insurer for performing or reviewing all aspects of the Solvency Margin calculations to ensure the calculations are complete and accurate. 34. The board of the licensed insurer is responsible for ensuring that all requirements of this solvency standard and the Act are satisfied Simplifying Assumptions or Methodologies contained in Solvency Calculations 35. This solvency standard represents minimum requirements. Accordingly, if any simplifying assumptions are made or simplifying methodologies are used in calculating the licensed insurer s Solvency Margin, the appointed actuary must: (a) ensure that such simplifying assumptions or methodologies result in a more prudent assessment of the licensed insurer s Solvency Margin; (b) disclose such simplifying assumptions or methodologies in any associated reports; and (c) justify such simplifying assumptions or methodologies on the grounds of materiality or that they provide a more conservative outcome.
7 7 2. Actual Solvency Capital 36. Actual Solvency Capital is defined as the total of Capital (as per paragraph 37) minus Deductions from Capital (as per paragraph 38). - see following pages
8 8 37. Capital is defined as the following items: (a) issued and fully or partly paid-up ordinary shares, that have full voting rights, have no preferential or predetermined rights to distributions of capital or income and are not redeemable within the meaning of Section 68 of the Companies Act (Partly paid-up shares qualify as Capital only to the extent the shares have been paid); (b) fully paid-up perpetual non-cumulative preference shares may be included in Capital if they meet the following requirements: i. the payment of dividends on shares is able to be withheld if the financial condition of the licensed insurer would not support payment of those dividends; and ii. dividends that are withheld in accordance with sub-paragraph (i) are not cumulative; and iii. the dividend rate for the shares must be set: a. as a fixed percentage rate; or b. as a fixed margin above a benchmark floating rate (e.g. a bank bill rate); and iv. the shares are not: a. subject to any arrangement for resetting the dividend rate; or b. redeemable within the meaning of Section 68 of the Companies Act 1993; or c. repayable or redeemable at the option of the holder. Perpetual non-cumulative preference shares without full voting rights may not constitute more than 50% of Capital for a licensed insurer that is a mutual insurer and 25% for all other licensed insurers. (c) revenue and other reserves, including the following, but not including reserves that are held aside or otherwise committed on account of any assessed likelihood of loss: i. capital redemption reserves; ii. other reserves that are created or increased by appropriations of retained earnings net of tax and dividends payable; iii. any share premium reserves arising from the issue of ordinary shares; iv. each of the following types of reserves that are reflected in the statement of financial position: a. reserves arising from a revaluation of tangible fixed assets, including owner-occupied property; b. foreign currency translation reserves; c. reserves arising from the revaluation of investments; (d) retained earnings; and (e) non-controlling interests.
9 9 38. Deductions from Capital is defined as the sum of the value of the following items: (a) goodwill and other intangible assets as determined in accordance with Section 2.2 of this solvency standard; (b) deferred tax assets; (c) equity investments in, and subordinated loans to, related parties (but see paragraph 104; (d) equity investments in, and subordinated loans to, other financial institutions or holding companies of other financial institutions (whether held directly or indirectly) that are classified as Counterparty Grade 1 or 2 or 3 as per Table 4, to the extent that the total of such equity investments or subordinated loans exceeds 15% of Actual Solvency Capital, calculated excluding this clause; (e) equity investments in, and subordinated loans to other financial institutions or holding companies of other financial institutions (whether held directly or indirectly) that are classified as Counterparty Grade 4 or Counterparty Grade 5 as per Table 4; (f) unrealised gains and losses on liabilities designated at fair value through profit and loss that arise from changes in the licensed insurer s own credit risk; (g) any fair value gain that relates to a financial instrument for which: i. fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by processes from observable current market transactions in the same instrument; or ii. fair value is not based on observable market data; or iii. fair value is based on prices in a market that is not active; (h) any surplus, net of any associated deferred tax liabilities, in any defined benefit superannuation fund sponsored by the licensed insurer (or another group entity) as employer; (i) allowance for any dividend that has been declared or repayment of capital made prior to finalisation of the Solvency Margin calculations but which has not been reflected in the financial statements, (j) any deferred acquisition costs in excess of the amount determined in accordance with Section 2.5 of this solvency standard; and (k) any net assets of an overseas branch not freely available in all circumstances (refer paragraph 44 below).
10 General Provisions relating to Capital 39. The NZ GAAP financial statements to be used for the purpose of this solvency standard are, in the first instance, the entity financial statements of the licensed insurer. 40. The Capital of a licensed insurer is intended to represent capital instruments that are of a permanent nature and freely available to meet losses. If a capital instrument is not of a permanent nature and freely available to meet losses, then the appointed actuary must give advice to this effect to the licensed insurer, and subsequently also in the Financial Condition Report (refer section 5.3 of this solvency standard). If the appointed actuary recommends that part or all of the value of a capital instrument should be excluded from the Actual Solvency Capital, then the licensed insurer must follow that advice. 41. In the case of a licensed insurer that is a mutual insurer incorporated in New Zealand, Capital may be referred to as Reserves or Members Funds or such other term by which it is described in the financial statements of the mutual insurer Intangible Asset Deductions 42. The Intangible Asset Deductions comprise the following amounts to the extent that they form part of the assets of a licensed insurer as recognised and measured under NZ GAAP: (a) goodwill measured in accordance with NZ GAAP, to the extent that this has not otherwise been deducted; (b) capitalised computer software costs to the extent that they exceed the known resale value of that software (if the resale value is not known then it should be taken as nil); and (c) any other asset defined as an intangible asset under NZ GAAP Solo and Group Solvency Reporting Requirements 43. Where a licensed insurer has a subsidiary or subsidiaries that are themselves licensed insurers then the solvency standard must firstly be applied to, and reported on a solo basis for, each licensed insurer. 44. Where a licensed insurer has one or more overseas branches in a country or countries in which all or a portion of the net assets of any such branch are not freely available outside the branch, then the portion of net assets which are not freely available outside the branch in all circumstances must be treated as a Deduction from Capital (refer to paragraph 38(k)). 45. In addition, where a licensed insurer has insurance subsidiaries, within or outside New Zealand, that are themselves prudentially regulated as an insurer or a licensed insurer within or outside New Zealand, (or, in jurisdictions where licensing is not required, an insurer), such subsidiaries
11 11 must be consolidated with the licensed insurer. This consolidation will constitute the insurance group for the purpose of calculating and reporting group solvency in accordance with the requirements of this solvency standard. 46. Where a licensed insurer has subsidiaries that are non-insurance subsidiaries (refer paragraph 21) then, for the purposes of calculating the solvency of the New Zealand solo licensed insurer and the insurance group, such non-insurance subsidiaries should be treated as related party equity investments, subordinated loans or other obligations in accordance with the provisions of this solvency standard Overseas Insurers 47. An overseas insurer that operates a branch in New Zealand, that has been granted an exemption under Section 59 of the Act, will be required to calculate and report its solvency position calculated in accordance with the regulatory requirements of its home jurisdiction. In addition the Bank may, as a condition of the exemption, require the overseas insurer to report solvency in respect of the New Zealand branch of the overseas insurer (as if it were a New Zealand incorporated body), prepared in accordance with the requirements of this solvency standard. Within this calculation all or part of the Capital of the branch may be reported as Head Office Balance or similar. 48. An overseas insurer that operates a branch in New Zealand, that has not been granted an exemption under Section 59 of the Act, will be required to calculate and report its solvency position in accordance with the requirements of this solvency standard Deferred Acquisition Costs 49. The amount of deferred acquisition costs that may be included in Actual Solvency Capital is limited to the amount that can be supported after applying a Liability Adequacy Test which: (a) incorporates a risk margin to achieve a probability of sufficiency of at least 75%; and (b) does not defer acquisition costs beyond the current insurance contract period; and (c) is otherwise in accordance with NZ IFRS 4.
12 12 3. Minimum Solvency Capital 50. The Minimum Solvency Capital is the sum of all components of the: Insurance risk capital charge (refer Section 3.1 below); Catastrophe risk capital charge (refer Section 3.2 below); Asset risk capital charge (refer Section 3.3 below); Foreign currency risk capital charge (refer paragraph 97 below); Interest rate capital charge (refer paragraphs below); and Reinsurance recovery risk capital charge (refer Section 3.4 below). 51. The Minimum Solvency Capital applicable to the licensed insurer for the purposes of this solvency standard will be subject to a minimum required amount of $3 million. If the Minimum Solvency Capital calculated as per the previous paragraph is less than $3 million then the licensed insurer must increase its Minimum Solvency Capital to this amount Insurance Risk Capital Charge 52. The Insurance Risk Capital Charge is the total of the Underwriting Risk Capital Charge and the Run-off Risk Capital Charge. Concept 53. The Underwriting Risk Capital Charge is intended to reflect the risk to the licensed insurer of writing unprofitable insurance business. To some extent this charge is also intended to reflect the exposure of the licensed insurer to operational risk, although it is not a substitute for adequate management of operational risk. 54. The Run-off Risk Capital Charge is intended to reflect the risk to the licensed insurer of inadequate provision being made for outstanding claim liabilities, and includes any adjustment to the valuation of liabilities to bring them to a common basis. Calculation 55. The Underwriting Risk Capital Charge is determined by multiplying the Premium Liabilities of the licensed insurer at the calculation date by the Underwriting Risk Capital Factors in Table 1, and then adding the Premium Liabilities Adjustment (if any). The calculation is to be made by class of insurance business and summed across all classes.
13 The Run-off Risk Capital Charge is determined by multiplying the Net Outstanding Claims Liability of the licensed insurer at the calculation date by the Run-off Risk Capital Factors in Table 1 and then adding the Outstanding Claim Liability Adjustment (if any). The calculation is to be made by class of insurance business and summed across all classes. Table 1 Insurance Risk Capital Factors Class of Insurance Underwriting Risk Capital Run-off Risk Capital Business Factor Factor Domestic property 14% 9% Private motor 14% 9% Commercial property 16% 11% Commercial motor 14% 9% Liability classes 22% 15% Marine 16% 11% Health and Personal 16% 11% Accident Travel 14% 9% Other 16% 11% Premium Liabilities Adjustment 57. The Premium Liabilities Adjustment is required if the licensed insurer s unearned premium liability plus unexpired risk liability is less than the Premium Liabilities (as determined in accordance with this solvency standard). The Premium Liabilities Adjustment is equal to the difference between the Solvency Unexpired Risk and the unexpired risk liability in the licensed insurer s financial statements, with a minimum of zero. Outstanding Claim Liability Adjustment 58. The Outstanding Claim Liability Adjustment is required if the licensed insurer has established its Net Outstanding Claims Liability with a risk margin different to that required to achieve a 75% probability of sufficiency provision. 59. Section 5.1 of this solvency standard specifies that the appointed actuary must assess the provision for outstanding claims and the corresponding recovery asset. 60. If, in the opinion of the appointed actuary, the licensed insurer s Net Outstanding Claims Liability is less than the 75% POS provision, then the Run-off Risk Capital Factors in Table 1 must be applied to the 75% POS provision rather than the amount in the licensed insurer s financial statements and the Outstanding Claim Liability Adjustment is an addition to the risk charge equal to the 75% POS provision less the licensed insurer s provision after adjustment for tax.
14 If, in the opinion of the appointed actuary, the licensed insurer s net outstanding claims liability is greater than the 75% POS provision, then the licensed insurer may apply the Run-off Risk Capital Factors in Table 1 to the 75% POS provision rather the amount in the licensed insurer s financial statements and adopt an Outstanding Claim Liability Adjustment (being a deduction from the risk charge) equal to the licensed insurer s provision less the 75% POS provision after adjustment for tax. Insurance Business with Long Term Risk Characteristics 62. Most non-life insurance comprises short term contracts (up to one year) with no long term guarantees or contractual commitments. There can, however, be products that have features like guaranteed renewability, return of premiums and other features that create longer term commitments and risks for the licensed insurer. There are also products such as single premium consumer credit and lenders mortgage insurance that cover risks over a period much longer than one year and thus create long term risk for the licensed insurer. 63. If a licensed insurer issues a material volume of contracts with features that may produce significant risk for the licensed insurer for more than one year, then the licensed insurer must seek and adopt the advice of its appointed actuary on: (a) an appropriate basis for setting provisions for unexpired risk (including unearned premiums) and outstanding claims; and (b) whether an additional capital charge is appropriate in light of the risks to the licensed insurer and, if so, what is a suitable basis for calculating that capital charge. 64. The appointed actuary must, in giving the relevant advice, consider the significance of the risks and the materiality of the business, and may judge that no adjustments are needed. 65. The appointed actuary must consider whether the life insurance solvency standard(s) in force from time to time provide(s) additional guidance as to the appropriate treatment of contracts with long term risk and, if appropriate, seek to achieve reasonable consistency with the life insurance solvency standard(s) Catastrophe Risk Capital Charge Concept 66. The Catastrophe Risk Capital Charge for non-life insurers is intended to protect the licensed insurer s solvency position from the potential exposure of the licensed insurer to Extreme Event(s). 67. It is expected that a licensed insurer will have sufficient Actual Solvency Capital and catastrophe reinsurance to cover its Extreme Event Exposure
15 15 and still meet the solvency requirements of the Act and any other Solvency Margin requirements applicable to the licensed insurer issued by the Bank. Calculation 68. The calculation by the licensed insurer of its Extreme Event Exposure must include all exposures under any contract of insurance issued by the licensed insurer that could arise as a result of an Extreme Event. 69. The licensed insurer s Extreme Event Exposure for the purposes of calculating the Catastrophe Risk Capital Charge is the greater of the following: (a) The projected insurance losses incurred by the licensed insurer in respect of a major earthquake event affecting Wellington (defined as everywhere within a 50 kilometre radius from the Beehive), calibrated to a minimum loss return period as detailed in paragraph 70; or (b) The projected insurance losses incurred by the licensed insurer in respect of a major earthquake affecting any place other than Wellington (refer paragraph 69(a)), calibrated to a minimum loss return period as detailed in paragraph 70; or (c) The projected insurance losses incurred by the licensed insurer in respect of non-earthquake Extreme Event occurring anywhere within New Zealand or elsewhere, calibrated to a minimum loss return period of 1 in 250 years. 70. Subject to the provisions of paragraph 71, the projected insurance losses referred to in paragraph 69(a) and (b) shall be as follows: (a) For financial reporting periods commencing at any time before 7 September 2015: the greater of the maximum amount of catastrophe reinsurance (expressed in New Zealand dollars) held by the licensed insurer before the date of granting a full licence under subpart 1 of Part 2 of the Act, or an amount equivalent to the licensed insurer s calculation of a 1 in 500 years loss return period; (b) For financial reporting periods commencing on or after 8 September 2015: the greater of the maximum amount of catastrophe reinsurance (expressed in New Zealand dollars) held by the licensed insurer before 8 September 2015, or an amount equivalent to the licensed insurer s projected insurance losses calibrated to a specified loss return period to be published by the Bank in a formal Policy Position Paper which will set out the Bank s future loss return period requirements, (moving progressively to a maximum calibration of 1 in 1000 years). 71. If the amount of catastrophe reinsurance (expressed in New Zealand dollars) held by a licensed insurer before the date of granting a full licence under sub-part 1 of Part 2 of the Act is greater than the licensed insurer s
16 16 projected insurance losses calibrated to a loss return period of 1 in 1000 years then the licensed insurer may (but is not obliged to) reduce its catastrophe reinsurance to a level equal to the licensed insurer s calculation of projected insurance losses calibrated to a loss return period of 1 in 1000 years. 72. The requirements of paragraph 30 of this solvency standard (three year forward assessment of solvency position) are to be interpreted by the licensed insurer in the context of the return period applicable to the licensed insurer at the date of the forward assessment of solvency. 73. The Catastrophe Risk Capital Charge is the net cost (after reinsurance recoverable amounts) to the licensed insurer of the Extreme Event Exposure calculated in paragraphs 68-71, including any gap or shortfall in the reinsurance cover, plus the cost (if any) of one reinstatement of the full catastrophe reinsurance programme. 74. For a licensed insurer that does not have Extreme Event Exposures, and does not have other per risk exposures greater than the licensed insurer s net retention, the Catastrophe Risk Capital Charge is two times the largest per risk retention of the licensed insurer plus the cost of one reinstatement of the reinsurance programme if any. 75. The largest per risk retention is the cost to the licensed insurer of the largest individual claim to which it could reasonably be exposed under policies issued, net of reinsurance recoveries and including the cost (if any) of one reinstatement of the appropriate reinsurance. If the licensed insurer issues policies that do not have a maximum sum insured, or are not protected by excess of loss reinsurance, then the licensed insurer must seek the advice of its appointed actuary as to a reasonable approximation for the largest per risk retention. Actuarial Review 76. The appointed actuary of the licensed insurer must review the basis of the Catastrophe Risk Capital Charge. In carrying out the review of the Catastrophe Risk Capital Charge the appointed actuary must consider all relevant factors. If the appointed actuary has any concerns with respect to the Catastrophe Risk Capital Charge, the appointed actuary must raise them with the licensed insurer s board and report those matters to the Bank along with the licensed insurer s solvency calculation. 77. If the appointed actuary is of the opinion that the Extreme Event Exposure of the licensed insurer or other form of catastrophe risk (in the case of nonproperty exposure) is not adequately reflected in the Catastrophe Risk Capital Charge calculated as per paragraphs 68-75, the appointed actuary must recommend an appropriate alternative method of calculation for determining the Catastrophe Risk Capital Charge for the licensed insurer, which must be agreed by the Bank, and the licensed insurer must use that alternative method Asset Risk Capital Charge
17 17 Concept 78. The Asset Risk Capital Charge is intended to reflect the exposure of the licensed insurer to losses on investment assets, and other asset classes. It is intended to reflect credit risk in respect of the relevant assets as well as asset concentration risk. Calculation 79. In order to determine the Asset Risk Capital Charge, the licensed insurer must first assign each of its assets to the relevant Asset Class in Table 2. The counterparty grade must be determined in accordance with Section 3.5 of this solvency standard. 80. If the licensed insurer holds investments in a professionally managed collective investment vehicle such as a unit trust, then the licensed insurer must look through the investment vehicle to the nature of the underlying investments that represent the share of the assets attributable to the licensed insurer. Similarly, if the licensed insurer has a subsidiary entity that is primarily used to hold investments for the licensed insurer, then it must look through the subsidiary entity to the nature of the underlying investments. 81. In applying the look through approach in the preceding paragraph, the licensed insurer must only look through if it is satisfied with the quality and reliability of the information about the underlying investments. If the licensed insurer is not satisfied with the quality and reliability of the information about the underlying investments or, if the look through approach is unable to be applied, then all other appropriate requirements of this solvency standard apply. The licensed insurer must also take account of any special conditions (such as guarantees or redemption restrictions) that the investment vehicle may provide. 82. Assets that have been explicitly, unconditionally and irrevocably guaranteed for their remaining term to maturity by a guarantor with a counterparty rating (or for governments, the long-term foreign currency credit rating) in Grades 1, 2 or 3 (refer Table 4) may be assigned the Asset Risk Capital Factor that would be applicable to the guarantor. Guarantees provided to a licensed insurer by its own parent entity or by any related party are not eligible for this treatment. 83. The Asset Risk Capital Charge is the total of the asset values in each Asset Class (to the extent that the asset values have not been excluded from, or reduced in, the determination of Actual Solvency Capital in Section 2 of this solvency standard) multiplied by the relevant Asset Risk Capital Factor from Table 2 plus the Asset Concentration Risk Charge (if any). 84. Any asset that is a Deduction from Capital under Section 2 of this solvency standard will not be subject to an Asset Risk Capital Charge.
18 18 Table 2 Definition of Asset Classes, and Asset Risk Capital Factors Asset Class Definition Asset Risk Capital Factor 1 Cash and Sovereign Notes and coin 0.5% Debt Cash at bank on call Debt or other obligations issued by or guaranteed irrevocably by the New Zealand government or a government or supra-national agency with a Grade 1 counterparty rating 2 AA rated fixed interest < 1 yr 3 AA rated fixed interest > 1 yr Any debt obligation (excluding subordinated debt) maturing or redeemable in less than one year with counterparty rating of Grade 1 or 2 Cash management trusts with counterparty rating Grade 1 or 2 Any debt obligation (excluding subordinated debt) maturing or redeemable in one year or more with counterparty rating of Grade 1 or 2 1% 2% 4 A rated fixed interest Any debt obligation (excluding subordinated debt) with counterparty rating of Grade 3 Cash management trusts with counterparty rating of Grade 3 4% 5 Unpaid premiums < 6 months 6 Deferred Acquisition Costs Unpaid premiums (including premium funding receivables) that are not yet due or are less than six months past the contractual due date for payment to the licensed insurer Deferred Acquisition Costs determined in accordance with Section 2.5 of this standard 4% 5%
19 19 7 BBB rated fixed interest 8 Unrated Local Authority Debt, and Third Party Claims Recoveries 9 Other fixed interest and short term unpaid premiums 10 Off Balance Sheet Exposures not covered elsewhere 11 Listed equity & trusts, and property, plant and equipment Any debt obligation (excluding subordinated debt) with counterparty rating of Grade 4 Cash management trusts with counterparty rating of Grade 4 Credit provided to a related party (refer paragraph 104) on not more than 90 day terms in the ordinary course of business on an arm s length commercial basis and where payment is not overdue Any debt obligation with a New Zealand local authority that is unrated Claim recoveries collectable from Third Parties (excluding reinsurance recoveries or coinsurance recoveries from the New Zealand Earthquake Commission ( EQC )) Any debt obligation with counterparty rating of Grade 5 or unrated Cash management trusts with counterparty rating of Grade 5 or unrated Subordinated debt of a counterparty with rating of Grade 1 or 2 or 3 Unpaid premiums (including premium funding receivables) that are more than six months but less than twelve months past the contractual due date for payment to the licensed insurer Off balance sheet exposures and contingent liabilities not dealt with elsewhere Equities listed on a recognised stock exchange Listed trusts (unless the look through provisions require them to be included in another asset class) Listed property trusts Direct property holdings Owner occupied property Property, plant and equipment 6% 8% 15% 20% 25%
20 20 12 Unlisted equity, unlisted trusts Unlisted equities Unlisted trusts (unless the look through provisions require them to be included in another asset class) 35% 13 Any Other Assets (not described elsewhere) 14 Assets incurring a full Capital Charge Any other asset not described in the table, including assets associated with Non-insurance Activities that are not dealt with elsewhere, but not including reinsurance assets covered under Section 3.4 and not including any coinsurance amounts recoverable from EQC Loans to directors of the licensed insurer or of associated parties Unsecured loans to employees or agents of the licensed insurer in excess of $1,000 Assets under a fixed or floating charge Obligations of a related party (but refer paragraph 104) Unpaid premiums (including premium funding receivables) that are twelve months or more past the contractual due date for payment to the licensed insurer 40% 100% Asset Concentration Risk Charge 85. In order to determine the Asset Concentration Risk Charge, the licensed insurer must first calculate the total value of its assets that represent obligations of one entity (counterparty) or group of related entities, (to the extent that the asset values have not been excluded from, or reduced in, the determination of Actual Solvency Capital in Section 2). 86. The Asset Concentration Risk Charge for each counterparty is a separate charge in addition to the Asset Risk Capital Charge calculated in accordance with paragraph 83, and applies only to the licensed insurer s total asset exposure to each counterparty that exceeds the limits specified in Table The Asset Concentration Risk Charge in respect of each counterparty is calculated as the product of the licensed insurer s total assets with that counterparty in excess of the limits specified in Table 3, and the applicable Asset Risk Capital Factors determined from Table 2, except for the obligation category Any other asset or counterparty exposure for which the multiplier will be two times the applicable Asset Risk Capital Factor determined from Table 2.
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