The Insurance Council of New Zealand (ICNZ) has welcomed the central bank’s accommodating approach to industry concerns over insurance solvency standards and lease requirements.

Insurers were concerned about the impact an ultra-conservative approach could have on capital requirements. The new NZ IFRS 16 lease standard will require companies to bring most leases onto their balance sheets from next year.

In a submission, ICNZ says it is pleased to see the industry is not facing a punitive interpretation of NZ IFRS 16 in relation to capital.

The Reserve Bank of New Zealand’s approach is technically accurate and a pragmatic solution to what could have been a material issue for some insurers, ICNZ says.

A Reserve Bank consultation paper proposes an asset risk capital charge of 100% of the value of the right-of-use asset, minus the lease liability.

ICNZ expects the lease liability will exceed the value of the asset for most of the lease, due to front-loading interest expenses. This will mean no change from current solvency positions, because insurers do not gain a solvency advantage from the lease expense.