Life insurers have opposed a Reserve Bank of New Zealand (RBNZ) proposal on the way reinsurance stress testing should be implemented.

Several submissions on the matter say stress tests should not be used to assess whether a repayable amount exists.

Others argue stress testing will lead to unnecessary compliance costs.

The bank says there were mixed views on whether stress testing should be parameter-based or whether reverse stress tests should be mandated.

“The RBNZ considers stress testing is important to determine when an amount is a repayable amount,” it says in a report on the submissions. “Also, stress testing is an important risk-management tool in relation to reinsurance more generally.”

The bank accepts that specifying the probability outcome to be modelled will not always give the correct result, because of the diversity of reinsurance arrangements.

“Insurers should take into account the nature of the risk reinsured when assessing the likelihood of the reinsurer making a loss under the reinsurance agreement,” it says.

“The RBNZ continues to hold the view that a reverse stress test is required.”

It also wants stress-testing results reported to the bank, arguing it allows an assessment of a policy over a period of time.

The RBNZ has finalised changes to the way reinsurance is treated under solvency requirements for life insurers.

The proposed amendment would restrict how insurers can recognise reinsurance when calculating solvency capital requirements.

Submissions on the solvency reinsurance rule change close on June 6.