S&P issues prognosis for ‘buffeted’ NZ non-life sector

S&P issues prognosis for ‘buffeted’ NZ non-life sector | Insurance Business

S&P issues prognosis for ‘buffeted’ NZ non-life sector
A soft-pricing environment which shows no signs of reversing, increasing competition from new players and continued Canterbury uncertainty are the forces buffeting the New Zealand non-life insurance sector hard, according to a new Standard & Poor’s report.

However, the ratings agency said it viewed the rated insurers in the market as resilient, and that their underlying earnings performance would remain ‘generally sound’ with ‘reasonable underwriting profits’ predicted over the coming year.

The spate of new entrants, particularly Berkshire Hathaway Specialty Insurance (BHSI), Ando Insurance and Ironshore, would result in subdued revenue growth overall and was exacerbating competitive tensions, but that wasn’t necessarily bad, said S&P analyst and the report’s author, Mark A Legge.

“We also view it as something of a testament to the perceived attractive underlying margins available in the sector,” he said in his report, New Zealand’s Non-Life Insurance sector is holding up well amid soft pricing and increased competition.

Prices in commercial property related lines had been the hardest hit in recent times with prices now back at levels seen before the earthquakes in 2010 and 2011, and Legge said S&P did not expect a short-term recovery.

Similarly for personal lines, he predicted only modest growth in the short term, although pricing was faring better.

“That said, rated New Zealand non-life insurers’ operating performance, measured by returns on revenue, has generally remained very strong in recent years.

IAG New Zealand Ltd is an exception; at times it has been affected by significant Canterbury-earthquake-related reserve strengthening.”
Legge said gross written premium was flat in the year to September 2015 and he anticipated it would expand only marginally in 2016 by around 2%.

“This trend is consistent with our expectation that New Zealand’s real GDP growth will slow to 2.3% in 2016, from around 3.0% in recent years, on the back of anticipated continued weakness in dairy prices,” he said.

“While the anticipated lack of material growth, combined with heightened competition, sets the scene for muted earnings for the sector over the coming 12 months, we believe a net combined operating ratio of around 95% can be sustained for 2016.

“This reflects our opinion that the sector will maintain strong underwriting and risk management discipline.”

Legge said the ratings agency expected Canterbury earthquake claims to be ‘more or less’ fully paid by the end of this year. However, there was still some risk of further reserve strengthening if more over cap claims came through from EQC.

“Such a reserving challenge was very evident in 2015, with some material increases in prior year claims related to the February 2011 earthquake, in particular,” Legge said.

“We also saw inflated repair and rebuild costs, as well as some adverse legal outcomes.”

Legge acknowledged there had been 1,425 over cap claims from EQC in 2015.

“It was challenging for insurers to anticipate the volume of claims that exceeded the EQC home cap several years after the events.

“While this risk has gradually fallen, with only about 1% of EQC building related claims yet to be settled, it has been material enough to prompt several insurers to purchase additional adverse-development reinsurance to mitigate it.”

There was also the potential for future litigation on a minority of unresolved claims and for claims settled earlier with case, where the litigant believed a replacement settlement could have been higher.

The report also referred to the uncertainty from the ongoing EQC review, but Legge said any changes were ‘unlikely to be detrimental’ to private insurers operating in New Zealand.

“Indeed, reforms could result in an improved operating model for all parties,” he said.
 
The rated insurers included IAG New Zealand, Vero Insurance, AA Insurance, Medical Assurance Society, ACE Insurance (NZ), AIG Insurance NZ and Teleco Insurance (NZ).