Insurer solvency standards – reducing risk in a risk business

Significant earthquakes in Christchurch have brought the need for stability in the New Zealand insurance market into sharp focus. The ability of insurance companies to meet claims as they fall due has tremendous potential impact in such circumstances and the need for insurers to hold sufficient capital and other resources for those purposes is more visible in such difficult times. Whether in terms of meeting household claims or those for large businesses, insurance companies have a crucial role to play in rebuilding the lives, communities and economies of those affected. Given the significant potential impact of financial weakness in the insurance sector, regulation of insurers’ financial strength helps to maintain confidence in the sector (a key objective of our prudential role). The Reserve Bank seeks to ensure financial strength by applying solvency standards to insurers carrying on business in New Zealand and these differ depending on the type of insurer. The key components in assessing the fina ncial stability of an insurer are its solvency, capital adequacy and liquidity.