Monitoring Insurer Solvency

This paper explains why we need solvency measures for insurers, what those measures are, how the new ISS is changing them and how the new measures should be interpreted. Insurers are required to have capital in excess of their liabilities so they will be able to pay claims to customers - even in adverse circumstances. Regulators such as the Reserve Bank establish this capital requirement in proportion to the risks the insurer faces. Stakeholders have an interest in monitoring the financial strength of their insurer to, among other things, assess the likelihood that it will meet its obligations to customers. The ISS values solvency capital on an economic basis, as opposed to the more conservative hybrid basis used by our current solvency standards. The PCR is determined by modelling a set of stresses on the insurer, and subtracting the economic value of assets and liabilities from their stressed value. The solvency margin is the amount of solvency capital that would remain after the stress, and the solvency ratio is the solvency capital divided by the PCR. Due to the introduction of the ISS, solvency margins are expected to generally decrease as the operational risk charge is phased in. Solvency ratios are also expected to drop due to the move to economic value basis. There will also be idiosyncratic effects dependent on insurers’ business and risk profiles. Solvency margins and ratios under the ISS are not directlycomparable to those under pre-existing solvency standards. While margins and ratios will change, there is no change in the financial strength of insurers, just in the way the ISS expresses that financial strength.