Some insurance companies, such as Partners Life, are backed by re-insurance. When a policy is sold, the re-insurer pays a proportion of the associated sales and issue costs. In return, they receive that same proportion of the premiums, less an expense allowance, and pay the same proportion of claims.

Re-insurers use their substantial capital bases to fund insurers who would otherwise have to raise significant amounts of capital.

But the Reserve Bank has asked for submissions on whether there is a real risk transfer involved, or whether the deal is a loan and should be reflected in insurance companies’ accounts as such.

Some insurance companies are believed to keep a tally so that when the initial contribution by a reinsurer has been paid back, plus interest, the re-insurer’s interest in the policy ceases or is significantly reduced.  This has many of the hallmarks of a loan rather than a life reinsurance contract.

The Reserve Bank says: “These are not precluded from being counted as capital under the current insolvency standards. However, there is the potential for the risk transfer component of a financial reinsurance treaty to be unclear or difficult to establish, leading to an overestimation of the risks that have been transferred.”

It says that raises questions on whether New Zealand’s solvency standards should treat financial reinsurance differently for regulatory capital purposes.

“The primary question is whether components of financial reinsurance arrangements can be considered as essentially debt-like arrangements… arrangements that are to a large extent effectively debt-like raise policy questions about their potential effects on an insurer’s solvency position.”

The Reserve Bank says solvency standards should explicitly address financial reinsurance. “Leaving the current standards unchanged is not seen as a viable option.”

It is seeking stakeholders’ views.

Partners Life chief financial officer Sean Kam said his firm had made a submission. “The RBNZ has not finalised any policy and the submission period has just closed. So it’s not possible to determine if there will be any impact on Partners or any other insurers at this time.”

He said the Partners Life reinsurance arrangements, a form of modified co-insurance, met the current regulatory requirements for capital.

Kam said the Reserve Bank was most concerned about finite agreements, where there was only limited risk transfer. Partners Life’s system involved genuine risk transfer, he said.

“If changes were made to the solvency rules that have an impact on any individual insurers, there would be an appropriate transition period during which those companies can restructure to meet the new RBNZ requirements.”