NZ's first insurance stress test highlights reliance on offshore insurers

NZ's first insurance stress test highlights reliance on offshore insurers | Insurance Business New Zealand

NZ's first insurance stress test highlights reliance on offshore insurers

The Reserve Bank of New Zealand (RBNZ) has released the results of its first General Insurance Industry Stress Test (GIIST), which highlighted the industry’s reliance on offshore reinsurance providers.

The GIIST involved the five largest general insurers incorporated in New Zealand, corresponding to around 70% of the market. According to RBNZ, the test was not intended as a pass-or-fail exercise. Instead, it sought to assess the resilience, in particular the solvency, of the large general insurers to three severe, yet plausible, scenarios.

The reinsurance market stress scenario simulated problems in global reinsurance markets due to catastrophic events overseas, making it harder to secure reinsurance capital. RBNZ said this scenario emerged as the most extreme out of the three, showing how much New Zealand insurers rely on reinsurance arrangements, as well as the severe challenges the New Zealand insurance market will face if these arrangements were to be disrupted.

The economic downturn scenario modelled a three-year economic shock caused by a widespread domestic outbreak of COVID-19. According to RBNZ, the general insurers’ balance sheets appeared to be well-positioned to offset such an economic downturn, with their ability to reduce dividend payments potentially providing an additional buffer.

The severe weather events scenario consisted of three major storms occurring in a 12-month period. In this scenario, the industry’s insured losses were material, but catastrophe reinsurance arrangements and reductions to dividends prevented significant declines in the insurers’ capital levels.

“Stress tests serve an important purpose for regulators and financial entities,” said Geoff Bascand, RBNZ deputy governor and general manager for financial stability. “They provide a forward-looking lens on the resilience of an entity’s balance sheet to severe but plausible scenarios and help us assess risks to financial stability.”