S&P Global Ratings recently raised New Zealand’s credit rating to AA+, praising its handling of the pandemic and strong economic recovery - however, the insurance sector across the APAC region will be facing more scrutiny from ratings agencies over the next year, with stress testing for COVID-19-related scenarios on the cards as ratings are re-assessed.
Commenting on New Zealand’s position, S&P said it was confident that the country could “withstand potential damage from negative shocks to the economy” and maintain its new AA+ rating, even if the real estate market happened to weaken.
It also noted that it has been the first country to get an upgrade on its financial rating since the pandemic began.
“New Zealand’s monetary flexibility, wealth economy and institutions are conducive to swift and decisive policy actions, and offset the country’s external imbalances,” S&P commented.
“While the downside risks persist, such as another outbreak, we expect New Zealand’s fiscal indicators to recover during the next few years. New Zealand’s net general government debt is much higher than in the past, but remains lower than most of its peers.”
Finance Minister Grant Robertson said the positive comments from S&P were the direct result of the government’s handling of the pandemic, and praised its “fast action” and public-health focused response.
For the insurance sector, S&P Global Ratings said it will be conducting a range of stress tests to measure the impact of different scenarios on financial stability - something it said is particularly important as insurers have faced significant costs over the past year.
“We need to build an understanding around how the insurance sector responds to particular events,” director Craig Bennett said.
“That’s quite important when you look at the scale of the impact that some insurers have faced over the last year, as it’s been quite large.”
“One of the things we’re going to be doing a lot more of is stress testing the portfolios held by insurers against a range of measures, and we’ll be doing that not only to understand the absolute impact of that measure, but also the relative impact compared to the peers we rate,” he explained.
“The life insurance sector in particular has seen a disproportionate impact in relation to the market volatility, and for some regions like Australia, we’ve had a negative outlook on that sector for quite a few years. Part of that is reflective of the amount of total permanent disability claims that have been coming through.”
Bennett noted that for New Zealand general insurers, having crown entity backup in place for catastrophe-related claims may also be beneficial to ratings, though he admitted that it can also make things more difficult, as seen in the aftermath of previous large-scale events.
“In New Zealand, we have the EQC providing the first level of cover for property and natural catastrophe-type risks,” Bennett said.
“We look at the extent to which there has been a risk transfer from the primary insurers to, in this case, a federal government entity. To the extent that that’s achievable, you would then expect to look at lowering the cost of reinsurance for those private insurers, which would have a positive impact on overall earnings.”
“But looking at past experiences in other areas, there can be complications if there are multiple insurers involved in assessing particular claims - so it’s not all happy days,” he added.
“There are other complications to be had when adding other parties into sharing that risk, but I think from our perspective, an improvement in earnings would lower the risk retention, so I think that would be an overall positive.”
New Zealand is currently rated AAA by Moody’s with a stable outlook, and AA by Fitch, also with a stable outlook.