New Zealand’s life and health insurers would need to be hit by several severe shocks at once before breaching their solvency requirements, a Reserve Bank stress test has found.
The Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) asked participating insurers to work backwards for its Life and Health Insurance Industry Reverse Stress Test. Each insurer had to find the severe but plausible scenarios that would break its business model, then set out how it would respond. Five life insurers and three health insurers took part, representing more than 70% of premiums in each sector.
The RBNZ stressed that the scenarios were hypothetical. They are not forecasts, and they don’t suggest any participant is expected to fail.
Life insurers’ scenarios typically combined a pandemic with either a disruption to reinsurance or investment losses. Insurers with large health books were more exposed to a sustained rise in medical claims costs. Some participants also modelled cyberattacks and operational failures.
The health findings match recent experience. The RBNZ said in its May Financial Stability Report that health insurers had raised premiums and adjusted policies after several years of high claims costs, which had improved their solvency margins.
Angus McGregor, the RBNZ’s assistant governor for financial stability, said the exercise had led to changes.
“The exercise prompted some insurers to strengthen their risk management in response to vulnerabilities they identified,” he said.
He said those steps included stronger capital triggers, reviews of reinsurance arrangements, more cyber cover and better recovery plans.
The central bank also reviewed how participants run their own stress testing. It found room for improvement in data and modelling, governance and independent review, and in how insurers use stress testing in business decisions. It will give each participant individual feedback and track progress. The findings will feed into supervision, policy and future tests, and the RBNZ encouraged non-participating insurers to apply them as well.
The exercise is a change of approach. The RBNZ’s first life insurance stress test in 2022 gave every insurer the same scenario: an economic shock, an insurance shock from long COVID, and a new pandemic. This year’s reverse test asked each insurer to find its own breaking point, and it is the first to include health insurers. General insurers are next, in a test starting in 2027.
The vulnerabilities insurers identified are the same pressures that reach clients through pricing and product terms. Sustained medical cost inflation has already driven health premium increases. Reviews of reinsurance arrangements can feed into product design and pricing over time.
In the 2022 test, the management actions insurers said they would take under stress included premium increases and reductions to commissions. Advisers should watch how insurers’ strengthened capital triggers and recovery plans translate into practice. Those plans set out what an insurer would change first if conditions turned.
