New Zealand insurers are divided on the Reserve Bank of New Zealand’s (RBNZ) new solvency standard that will require them to hold reinsurance or capital cover for a 1-in-1000-year event.

The RBNZ has issued the standard as part of the new Insurance (Prudential Supervision) Act which is now coming into effect. It says the Canterbury earthquakes have underlined the importance of earthquake risk in New Zealand.

“The adequacy of reinsurance and capital resources becomes vital for the country at a time of serious natural disaster,” it says in a position paper on the standards.

But the Insurance Council of New Zealand (ICNZ) says the 1-in-1000 year requirement is a simple solution to a complex issue and will impose a too-stringent requirement on some insurers while others will still not have enough cover.

ICNZ Manager of Regulation and Finance Terry Jordan says the broad-brush approach does not allow for the “huge difference” in insurers’ probable maximum losses, which reflect how the companies model their risk and where and how it might be concentrated.

The RBNZ says the aim is to ensure insurers can withstand major earthquakes but makes clear that companies should not rely on government support after a disaster.

The Government had to offer a support package to major mutual insurer AMI following the February earthquake.

Mr Jordan says the standard will capture insurers who write business outside major cities and who might only need cover for a 1-in-500-year event.

“It will require all companies to hold higher levels of reinsurance or capital, and a number of these companies will have to hold levels way above their probable maximum loss,” he told insuranceNEWS.com.au.

“Their costs will go up needlessly. Other companies will need to hold more than 1-in-1000 because of the concentration of risk.”

He says ICNZ proposed “in long and protracted representations” standards that were based on how cover is measured and greater technical requirements on modelling.

This would put more responsibility on insurers, their actuaries and directors to assess their probable losses under their risk management programs.

The RBNZ is phasing in the solvency standard, recognising implementation is taking place during a period of significant uncertainty for the insurance market.

It is giving insurers until September 2015 to establish a “catastrophe risk capital charge” to cover them for a 1-in-500-year loss.

For financial reporting periods from September 2015 to September 2016 it is raising this to a 1-in-750-year event, and after that to a 1-in-1000-year event.

The regulator says it wants to minimise the likelihood of insurer failure “but not to totally eliminate this possibility”.

It says insurers, reinsurers and property-owners should rightly bear the risks of a catastrophe rather than the taxpayer, but recent events may have increased moral hazard in the market.

“Insurers may believe that government intervention in the case of another catastrophe may occur in the future,” the RBNZ position paper says. “These factors further support the need for robust solvency requirements in respect of earthquake risk.”

After consulting with the industry, it believes the 1-in-500-year measure is unlikely to cause most insurers significant concern.

“By flagging our intentions early we are giving adequate time for the industry to plan its path toward any indicated future calibration levels that may require additional reinsurance.”