And it says its proposals, to be introduced with a two-year transition period, would have a significant impact on a small number of insurers that might need to seek additional capital to continue to meet solvency standards or otherwise change their businesses to meet the new requirement.

It issued a consultation paper earlier in the year, asking for submissions on whether there was a true risk transfer involved in reinsurance deals, or whether it was a loan that should be reflected in accounts as such.

Re-insurers use their substantial capital bases to fund insurers who would otherwise have to raise significant amounts of capital. They pay a portion of sale and issue costs and in return receive a proportion of premiums paid.

The Bank received 18 submissions, with a variety of views. Most said the issue needed to be clarified to provide the industry with stability.

Several respondents agreed with the Reserve Bank’s concerns. One said certain financial reinsurance arrangements “might lower the level of capital available in the industry to support stress scenarios, either by not effectively absorbing losses or by hindering recapitalisation if arrangements strip a large share of the insurer’s cash flows”.

Other respondents said some financial reinsurance arrangements were effectively structured like a debt instrument or might contain contingent liabilities that were not recognised on the balance sheet or in solvency calculations.

A small number of respondents disagreed with the Reserve Bank’s concerns and a number disagreed with the proposals in the consultation paper. One said the change would have a disproportionate impact on start-up businesses.

The Bank said: “The Reserve Bank stresses that its concern in not that any reinsurance agreements are inappropriate but that all debt like aspects of reinsurance agreements should be accounted for on a consistent and transparent basis. This is consistent with the view of the IAIS that policyholders are best protected ‘if technical provisions and other liabilities are expected to remain covered by assets over the defined period of time’.”

It is proposing a raft of changes that expand the circumstances in which arrangements have to be reflected as liabilities on companies’ balance sheets, to identify and appropriately account for aspects of reinsurance arrangements that are more like debt than insurance.

Submissions on the latest proposal close on December 9.