Insurance Down Under: Analyzing Prudential Solvency Regimes in Australia and New Zealand

Episode Summary

Australia and New Zealand sit at opposite ends of the international solvency spectrum — as Australia is among the largest in the Asia Pacific region, while New Zealand is smaller in scale and undergoing significant evolution to align with international best practices. During this penultimate episode of “The Standard Formula” series on global prudential solvency requirements, host Rob Chaplin and associate Connor Williamson examine the two countries’ markets and regulatory regimes, regulatory structures, capital standards, governance and reporting requirements, and reinsurance frameworks, among other topics.

Key Points

• Australia’s “Twin Peaks” Model: Australia’s insurance sector is governed by a "Twin Peaks" system that divides responsibility between the Australian Prudential Regulation Authority (APRA), which oversees prudential standards and financial stability, and the Australian Securities and Investments Commission (ASIC), which handles market conduct and consumer protection.
• New Zealand’s Regulatory Reform: In September 2025, the New Zealand government agreed to recommendations from the Reserve Bank of New Zealand (RBNZ) to reform the Insurance Prudential Supervision Act (IPSA). Changes are expected after a late 2026 election and aim to shift from a relatively light-touch model to a more proactive, intensive, and risk-based approach aligned with international standards.
• New Zealand’s Seismic Risk Capital Standard: New Zealand imposes the highest risk-based capital standard in the world for seismic risk, requiring general insurers to hold sufficient capital or reinsurance to cover liabilities for a 1-in-1,000-year seismic event.
• Earthquakes and Climate: Both markets respond to natural disaster risks that manifest differently. In New Zealand, for example, earthquakes represent a significant risk and up to 80% of economic losses resulting from earthquakes are insured. In Australia, the most significant natural hazard risk is extreme weather events. Accordingly, between 2020 and 2025, approximately AU$22.5 billion was paid on claims for cyclones, bush fires and floods.

Voiceover (00:01):
From Skadden, The Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.

Rob Chaplin (00:18):
Welcome to The Standard Formula Podcast. Today, we’ll continue our global tour of insurance prudential Solvency regimes focusing on Australia and New Zealand. I’m Rob Chaplin, and joining me is my colleague, Connor Williamson. Connor, great to have you with us.

Connor Williamson (00:33):
Thanks, Rob. Great to be here. It should be interesting to compare the two regimes. I also just wanted to start by thanking our local experts, MinterEllison in Australia and MinterEllisonRuddWatts in New Zealand for their input on today’s content.

Rob Chaplin (00:45):
Great. Connor, can you provide us with a brief overview of the insurance market in Australia, please?

Connor Williamson (00:51):
Yeah, absolutely. So Australia’s insurance market is one of the largest in the Asia Pacific region. The market’s highly concentrated with a few large players dominating both the life and non-life sectors. The life sector accounts for approximately 26 billion Australian dollars in gross written premiums, while the non-life sector represents approximately 95 billion Australian dollars in gross written premiums. Life insurance products are available in Australia, including term life insurance and disability income insurance. Australian insurers are distinctive in offering lump sum total and permanent disability insurance, as well as trauma and critical illness insurance. Additionally, life insurers in Australia provide superannuation investment products. As evident from the figures just mentioned, non-life products hold a particularly prominent share in Australia, representing roughly 70% of life and non-life revenue combined from 2025. Australia’s insurers frequently deal with extreme weather events, yet remain robust and profitable, with financial year 2025 being an especially strong year.

(01:53):
However, cost of living pressures, rising business insolvencies and accelerating climate and cyber challenges may impact Australian risks on a go-forward basis. Distribution channels include intermediaries, direct sales and, increasingly, digital platforms. The market is mature, well-regulated and characterized by strong emphasis on consumer protection and ongoing innovation. It’s also worth noting that underwriters at Lloyd’s are able to underwrite Australian insurance business pursuant to local Australian insurance regulation. They’re also able to underwrite non-life and reinsurance for New Zealand. In 2024, a dedicated Syndicate in a Box was established to focus on Australia and New Zealand, specifically with respect to accident, health, aviation, casualty, construction, financial lines and property business.

Rob Chaplin (02:41):
How does the insurance market in New Zealand compare?

Connor Williamson (02:45):
As you might expect, New Zealand’s insurance market is smaller in scale. The market is reasonably concentrated with a mix of local and international insurers operating within it. Distribution occurs through intermediaries and direct channels and digital adoption is steadily increasing. However, it is less common than in Australia. The market is undergoing significant evolution, such as moving towards risk-based pricing for climate and natural hazards, supported by recent regulatory reforms designed to enhance consumer protection and market stability. Property and casual (P&C) insurance remains the dominant sector influenced by rising reinsurance costs and increasing climate-related risks. In particular, the significant potential for earthquake damage in New Zealand has provided a challenge to the insurance industry over the last century. Following a series of destructive earthquakes beginning in the 1920s, the premiums that needed to adequately insure against such risks became prohibitively expensive for the standard commercial market. In response, the government established the New Zealand Earthquake Commission in the early 1940s, originally named the Earthquake and War Damage Commission.

(03:47):
Over time, coverage for war damage was deemed unnecessary and the scheme was expanded to include certain other natural disasters, partially in response to climate change physical impacts. Reflecting that expansion, the EQC has recently been renamed the Natural Hazards Commission, Toka Tū Ake. Currently, earthquake coverage is automatically included when individuals purchase home contents and fire insurance from private insurers. As a result, up to 80% of the economic losses resulting from an earthquake are insured, ensuring the resources are available for reconstruction efforts. Another unique feature of New Zealand is the no-fault accidental injury compensation scheme administered by the Accident Compensation Corporation. Since 1974, the ACC has been the sole and compulsory provider of accident insurance in New Zealand for all work and non-work-related personal injuries, primarily funded for a combination of levies and government contributions. As a result, the market for personal injury insurance is limited in New Zealand.

(04:45):
Life insurance in New Zealand is dominated by term life insurance, with only low levels of types of life insurance that dominate in other markets, such as investment-based policies. And this is largely due to the tax treatment. More broadly, both the Australian and New Zealand markets are shaped by global insurance trends and the impact of climate change. Although separated by distance, Australia and New Zealand have maintained enduring connections with the wider world through global trade and cultural networks, all the while preserving a strong sense of independence. In recent times, there has been a notable shift in their external economic orientation, moving away from Europe and the United States and increasingly focusing on north and southeast Asia. Both Australia and New Zealand possess abundant natural sources, but have very different physical environments. They each also face material risks from natural disasters, which manifest differently in the two countries.

(05:37):
In Australia, extreme weather has been responsible for AU$4.5 billion in claims annually on average since 2019. And between 2020 and 2025, the insurance market has paid out approximately AU$22.5 billion insurance claims for extreme weather events, including cyclones, bush fires and floods. This was a 67% increase from the preceding five years. Perhaps more concerning for the Australian insurance market is that annual costs for extreme weather events are projected to reach AU$35.2 billion per year by 2050. The ongoing ability of these nations and their insurance sectors to develop effective responses to these challenges is a testament to their resilience. Rob, can you now give an overview of the regulatory framework in Australia, please?

Rob Chaplin (06:19):
Yes, of course, Connor. Australia’s insurance sector falls under a “Twin Peaks” regulatory system that splits financial regulation between Australia’s two largest regulatory authorities, the Australian Prudential Regulation Authority, or APRA, and the Australian Securities and Investments Commission, ASIC. APRA is responsible for prudential standards, licensing and supervision in respect to promoting financial stability, both in relation to insurers and other financial institutions, including deposit takers. They are a member of the International Association of Insurance Supervisors, or IAIS. On the other hand, ASIC oversees market conduct and consumer protection, serving as the conduct regulator for market integrity and consumer protection. The Australian Financial Complaints Authority, or AFCA, is responsible for handling consumer disputes and is an alternative dispute resolution forum for insurance claim disputes.

(07:17):
Key legislation includes the Insurance Act 1973, which governs the authorization and prudential supervision of general insurers to ensure their solvency; the Life Insurance Act 1995, which applies to life insurers; the Corporations Act 2001, which is overseen by ASIC; and the Insurance Contracts Act 1984, which regulates the interpretation and application of insurance contracts. Recent reforms have focused on strengthening risk management and governance within the sector. Connor, can you tell us please about New Zealand’s regulatory framework?

Connor Williamson (07:51):
Yeah, of course. And actually the first point to understand is that New Zealand has its own regulatory regime, and that’s actually more different from Australia than you might expect. So, in New Zealand, the Reserve Bank of New Zealand is both the central bank and the prudential regulator for banks and insurers with responsibility for prudential licensing, solvency standards and ongoing supervision. You then have the Financial Markets Authority, or the FMA, which oversees market conduct and disclosure and content licensing under the CoFI reforms, which I’ll expand on shortly. The RBNZ is a member of the AIS and the FMA is a member of IOSCO. In terms of legislation, the primary legislation in New Zealand is the Insurance Prudential Supervision Act 2010, which the RBNZ supervises from a prudential perspective, and the Financial Markets Conduct 2013 under which the FMA supervisors conduct. The latter was amended by the Financial Markets Conduct Institutions Amendment Act 2022, effective from March 25, which requires financial institutions and their intermediaries to comply with fair conduct and associated duties in relation to retail banking, but also in relation to consumer insurance.

(09:00):
The FMA also oversees New Zealand’s mandatory climate-related disclosures, which have been required under the FMCA since 2023 for large insurers (i.e. those with over 250 million New Zealand dollars annual premium income or over 1 billion New Zealand dollars income and gross assets). Those firms are required to publish TCFD-style climate statements each year. Another major development underway in New Zealand is the New Contracts of Insurance Act 2024, which is due to come into full force by November 27 at the latest. That will make once-in-a-generation changes to insurance law, elevating the importance of policyholder protections, fundamentally changing duties of disclosure and applying unfair contract terms requirements to certain policies.

Rob Chaplin (09:45):
Thanks, Connor. What are the requirements for foreign insurers wishing to operate in Australia and New Zealand?

Connor Williamson (09:52):
Thanks, Rob. Same in Australia. Foreign insurers are generally required to establish a locally incorporated subsidiary or operate via an Australian branch of a foreign entity with both options requiring authorization from APRA and obtaining an Australia financial services license from ASIC. These entities must satisfy minimal capital requirements, maintain robust risk management frameworks and ensure that key personnel meet APRA’s fit and proper standards. A foreign insurer must demonstrate that they’re an authorized insurer in their home jurisdiction and have received the appropriate and necessary consents, if any, from its own jurisdiction supervisor to establish the insured’s operations in Australia. All insurers must comply with APRA’s prudential standards, including a requirement to hold assets in Australia that exceed their liabilities in Australia with an appropriate buffer. A foreign branch must also point an agent in Australia who can be either an individual or a body corporate. That being said, certain offshore insurers are, however, permitted to provide insurance in Australia without authorization in limited circumstances, such as when providing reinsurance or insuring high-value or unusual risks, provided they meet certain criteria.

(11:02):
Then turning to New Zealand, foreign insurers are equally required to obtain an IPSA license from the RBNZ, either by establishing a locally incorporated entity or by operating as a branch of an overseas insurer. Recent reforms now require non-operating holding companies of insurers to also be approved, enabling the RBNZ to effectively supervise entire group supervision. Certain overseas reinsurers and captive insurers may be exempt from licensing if they operate solely as reinsurers. In New Zealand, all licensed insurers must also meet minimum solvency and risk management requirements. The RBNZ evaluates the financial strength and regulatory standard of the parent entity as part of the licensing process. Insurers are also subject to additional disclosure and reporting obligations to promote transparency and protect policyholders. When seeking a license, an insurer must show that it has sound governance and ownership arrangements in place, along with an effective risk management framework. It is also necessary for the insurer to maintain an improved financial strength rating and meet the prescribed solvency requirements, ensuring an insurer can operate its business responsibly.

(12:06):
Additionally, the insurer is responsible for evaluating the suitability, integrity of all directors and senior management, including the appointed actuary. If the insurer is established or headquartered overseas, RBNZ will also consider the regulatory legal environment of the country of origin. The potential obligation to obtain a CoFi license from the FMA also needs to be considered carefully for both branches and subsidiaries, as mentioned earlier.

Rob Chaplin (12:34):
Thanks, Connor. I suggest we now turn to the solvency regime itself and consider the main prudential capital standard for insurers in Australia. Non-life insurers in Australia must maintain a minimum capital requirement, or MCR, to cover a range of risks, including insurance claims, investment risks, counterparty defaults, asset liability mismatches, catastrophic events and operational errors. The absolute minimum capital for most insurers is 5 million Australian dollars. APRA expects insurers to maintain a reasonable buffer amount above the MCR. In many respects, the Australian prudential regime for reinsurance and insurance undertakings is comparable to Solvency II. There are three approaches to calculating the MCR. The first is the prescribed method, a risk-based factor-driven approach to capital charges for insurance investment and concentration risks with additional capital for high exposures. The second is the internal model-based method, or IMB method. Insurers may use APRA-approved internal models to estimate required capital, provided the model is robust, well-governed and covers all material risks.

(13:44):
The third is the combination method. Insurers can use the IMB method for some risks or business segments and the prescribed method for others, with APRA’s approval. Insurers must always hold eligible capital above the MCR. Insurers must comply with all governance, risk management and other requirements, which we will discuss further shortly, and, additionally, reporting requirements. Material changes to risk management strategies or internal models must be reported to APRA, and significant changes may require approval. It’s important to note that life insurers in Australia are subject to a different regulatory system and are not covered by the same requirements as general insurers. While both life and general insurers are dual-regulated by APRA and ASIC, they operate under separate specialized legislation and licensing regimes.

(14:31):
Life insurers are governed primarily by the Life Insurance Act 1995. APRA sets different capital requirements based on the risk profile of each business with higher minimum capital requirements for life insurers, a minimum of 10 million Australian dollars, compared to the general insurance requirement of five (million). Albeit, otherwise the life insurance regime is very similar to the non-life insurance regime. Connor, what about New Zealand’s prudential capital standards, please?

Connor Williamson (14:59):
Well, New Zealand uses a risk-based capital approach with solvency standards set by the RBNZ. Insurers must maintain a minimum solvency margin calculated based on the nature and scale of their business. The standards cover insurance risk, asset risk and other relevant risks. There are, of course, significantly different approaches taken in relation to general insurers and life insurance. Overall, however, the approach in New Zealand is more similar to the U.S. risk-based capital approach than the approach taken under Solvency II. The RBNZ can intervene if an insurer’s solvency margin falls below the required level, including requiring remedial action or, in extreme cases, restricting business operations. Interestingly, New Zealand has the highest risk-based capital standard in the world in relation to seismic risk for general insurers. The RBNZ applies a high catastrophic risk charge on New Zealand-licensed insurers. You must hold sufficient capital reserves or reinsurance to cover their liabilities for a 1-in-1,000-year seismic event.

(15:58):
However, this doesn’t apply to the Natural Hazards Commission, Toka Tū Ake, in respect of natural disaster insurance, as this body is backed by government guarantee rather than subject to private insurer Solvency standards. Other risks are calibrated to a 1-in-200-year basis, and this is far more comparable to insurers globally, which would usually be expected to hold sufficient capital reserves or reinsurance to cover their liabilities for 1-in-200 or 1-in-250-year catastrophic event. Both New Zealand and Australia employ risk-based capital standards to ensure their Solvency. However, New Zealand imposes more stringent requirements for seismic catastrophic risk, reflecting its higher exposure to that type of natural disaster. This means that while both countries prioritize the financial stability of insurers, New Zealand’s regulations demand greater capital reserves specifically to address the elevated risk of seismic events. Rob, could you now please take us through the corporate government requirements for insurers in Australia?

Rob Chaplin (16:56):
Thanks, Connor. APRA requires strict governance and risk management standards, with the board of directors of the company ultimately responsible for sound management. By statute, each insurer is required to have an appointed auditor and an appointed actuary who must be independent of each other. Key governance requirements include specific rules on board size and composition, an independent chair, the establishment of a board audit committee, a dedicated internal audit function, appointed auditor independence, appointed actuary, impartiality and policies for board renewal and performance assessment. Risk management standards require a documented risk management strategy, clearly defined managerial responsibilities and controls, a dedicated risk management function and the submission of a three-year business plan and annual direct declarations to APRA. So Connor, what about New Zealand?

Connor Williamson (17:55):
In New Zealand, insurers must equally have effective governance arrangements, including a fit and proper board, clear accountability and appropriate risk management systems under both the IPSA, and if applicable, CoFI regimes. However, there is less prescription on board composition than compared to Australia, but nevertheless, the RBNZ expects insurers to demonstrate independence and expertise, particularly for key roles such as the chief executive, chief financial officer and the appointed actuary, the latter of which is a designated role under statute. Rob, what are the reporting requirements for insurers in Australia and New Zealand?

Rob Chaplin (18:29):
Well, in Australia, insurers must submit comprehensive financial and risk management reports to APRA, including annual and quarterly statutory returns based on modified IFRS and a certificate from the auditor confirming the accuracy of yearly statutory accounts. The auditor also provides a detailed report on the effectiveness of the insurer’s systems, procedures and controls, as well as any non-compliance or issues that could impact policyholders. The appointed actuary must produce an annual financial condition report and an insurance liability valuation report, or ILVR. In New Zealand, insurers must provide annual and half-yearly financial statements, quarterly solvency returns and annual actuarial reports to the RBNZ. They must also disclose key management changes and significant events. Public disclosure requirements are in place to ensure policyholder confidence and market discipline. Connor, how about requirements relating to assets and liabilities under the Australian and New Zealand regimes?

Connor Williamson (19:37):
Thanks, Rob. So in Australia, under the supervision of APRA, there is a predominantly principle-based prudential framework, and this is also the case in respect to asset and liability rules. So, insurers are required to value assets and liabilities largely on a fair value basis aligned with accounting standards, with technical provisions determined using actuarial best estimates plus risk margins, rather than imposing rigid quantitative asset limits. APRA relies on strong governance requirements, board-approved investment frameworks and risk-based capital charges to discourage excessive concentration or inappropriate risk-taking. Asset liability management is explicitly embedded within the framework, with capital requirements sensitive to market liquidity and mismatch risks. Then, looking at New Zealand, equally also adopts fair value accounting for assets and applies prescribed solvency standards to determine liability valuation and capital requirements.

(20:32):
The regime combines actuarial certification, solvency formula and supervisory oversight to constrain investment risk. The approach is somewhat more structured and formula-driven than Australia’s, particularly regarding asset eligibility and solvency margin calculations. ALM considerations are incorporated through liability valuation methods, discount rate prescriptions and solvency stress test calculations, though the framework is generally less granular or less capital-sensitive to mismatch risk when compared to Australia’s regime.

Rob Chaplin (21:03):
Connor, are there any unique features in Australia’s approach to reinsurance and risk transfer?

Connor Williamson (21:09):
Thanks, Rob. So, Australia has detailed prudential standards for reinsurance, requiring genuine risk transfer and counterparty credit worthiness. Insurers must report reinsurance arrangements to APRA and may only receive capital relief if risk transfer is effective. There are also requirements for reinsurance recoverables and limits on exposure to single reinsurers. In particular, in order to have reinsurance arrangements recognized for the purposes of prudential regulation, a general insurer is required to enter into a legally binding reinsurance agreement following the two-month rule and six-month rule for signing and stamping, placing slips and formal reinsurance contracts. Reinsurance contracts must also be governed by Australian law and be subject to Australian courts for disputes.

(21:53):
A general reinsurer must have a documented reinsurance management strategy as part of its reinsurance management framework. It must also have sound reinsurance management policies and procedures and clearly defined managerial responsibilities and controls. Life companies are also required to report on prescribed matters relating to reinsurance arrangements on an annual basis and comply with any conditions imposed by APRA in relation to approved reinsurance or financing arrangements. In Australia, the content of reinsurance agreements are subject to minimal regulatory oversight, with those agreements being governed primarily by their terms in the common law.

Rob Chaplin (22:28):
And what about New Zealand’s reinsurance framework?

Connor Williamson (22:31):
I mean, well, so the requirements are largely similar. In particular, the regulator requires insurers to have effective reinsurance programs with the RBNZ assessing the adequacy and effectiveness of risk transfer. There are requirements for the financial strength of reinsurers and disclosure of reinsurance arrangements. Capital relief is available where risk transfer is genuine, and the RBNZ monitors insurance recoverables and counterparty exposures. One area of particular interest for the RBNZ at present is the extent to which some New Zealand insurers rely on their Australian parents to provide or arrange reinsurance. The RBNZ is concerned to ensure that the interests of New Zealand policy holders are appropriately addressed, including in the event of stress at the parent level.

Rob Chaplin (23:16):
So to close things out, Connor, how do Australia and New Zealand’s solvency regimes compare to other international frameworks?

Connor Williamson (23:24):
So, Australia’s risk-based capital regime is broadly aligned with international standards, such as Solvency II and the IAIS’s insurance core principles, or ICPs. The Australian framework emphasizes market consistent valuation, comprehensive risk coverage and strong governance, placing Australia among the leading jurisdictions globally. New Zealand, on the other hand, while less so aligned with international standards at present, are moving towards greater alignment with international best practices, though the current regime is less prescriptive than Solvency II.

(23:56):
In September 2025, the New Zealand government agreed to RBNZ recommendations to reform IPSA, which are likely to be enacted after the election planned in late 2026. These reforms aim to move from the current relatively light-touch model to a more proactive, intensive and risk-based one, more closely aligning New Zealand with international practice in selected jurisdictions, especially Europe. The proposals are grouped into nine high-level areas of legislative change and are designed to ensure the maintenance of a sound and efficient insurance sector, as well as promoting public confidence in the sector. In both cases, international insurance groups are likely to find many of the concepts we’ve discussed today familiar.

Rob Chaplin (24:36):
Thanks for joining me, Connor, for a comprehensive overview of the prudential solvency regimes in Australia and New Zealand. And thank you to our listeners. Stay tuned for our next episode, the last in the series, where we’ll explore major insurance markets in east and southeast Asia.

Voiceover (24:53):
Thank you for joining us on The Standard Formula. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don’t miss any future episodes. Additional information about Skadden can be found at skadden.com. The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher and Flom LLP and affiliates. Skadden is recognized for its deep experience in representing insurance and reinsurance companies and their advisors on a wide variety of transactional and regulatory matters. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.