Are NZ insurers prepared to weather the storm amid threats to profitability?

Are NZ insurers prepared to weather the storm amid threats to profitability? | Insurance Business New Zealand

Are NZ insurers prepared to weather the storm amid threats to profitability?

Claims inflation and increased natural hazard losses are just some of the things that property & casualty insurers in New Zealand are having to contend with at present. Are they ready to weather the storm? Insurance Business spoke with analyst Michael Vine (pictured) to find out.

“Certainly, underwriting profit has held up reasonably well,” noted Vine, insurance ratings director at credit rating agency S&P Global Ratings. “We’re forecasting combined ratios of around 87% to 90%, and maintaining that level does require premium rate increases to be passed on.

“For property insurance, from October 1, the Earthquake Commission (Toka Tū Ake EQC) is increasing its level of cover up to $300,000. So, it’s taking risk off the private insurers, but on renewal they will likely not lower their premiums. So, they’ll have less risk but maintain premium – in effect, it really is an overall increase in premium, but it’s based on the claims pressure.”

Read more: NZ government, insurers still feeling COVID symptoms – report

Vine, who is based in Australia but is in New Zealand this week, said the rise in flood events is pumping up the cost as well. Over the past two years, insurance losses from natural hazards in the country have jumped by nearly 60%.  

The S&P director highlighted: “A third La Niña has been declared… These weather-related events are expected to continue, as well as issues from just ongoing heavy rain including landslip and the like. So, it’s going to be a continued difficult wet season, leading to that chart of natural hazard losses to keep increasing.”

In other areas, such as car insurance, Vine pointed to the double whammy of higher repair costs and longer repair times. “Delays in repairs means insurers might have to pay for replacement hire cars for longer,” he said. “Also, the cars are more expensive to fix in terms of more expensive parts... It’s adding to cost pressures.

“The bottom line, as well, is it’s been a difficult 2022 in terms of investment performance, largely on the bond side. That will be a hit to bottom line profit that should be recouped, but it’s also pushing insurers to maintain premium rate adequacy to cover those issues.”

Read more: Global reinsurance outlook negative, but turnaround is possible – S&P

In S&P’s view, “solid” premium growth for the current year should be able to get insurers through.

Vine told Insurance Business: “How big of a threat is claims inflation? This is something that has crept up over the last three years. It started with the COVID disruption. Although the benefit of that year was that mobility was down and there were less road accidents, etc. But inflation started in terms of access to labour and some supply constraints with raw materials, and then it edged up.

“I think insurers are prepared to a degree in that they have been passing on premium rate increases and they have been accepted by the market. In terms of the threat to profitability, yes, it is, but at the moment we see the premium rate increases of 7% or 8% as broadly covering that claims pressure.”

The trajectory of pressure remains on the rise, said Vine, but property & casualty insurers in New Zealand are expected to maintain strong operating performance in the medium term.