How resilient is the NZ life insurance sector?

RBNZ has published the results of its first industry stress test

How resilient is the NZ life insurance sector?

Life & Health

By Kenneth Araullo

The Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) has published the results of its first life insurance industry stress test (LIIST), revealing just how resilient the sector is against economic and insurance shocks while still paying out on claims.

This is the inaugural stress test for the industry, with previous tests having been completed on banks and general insurers. The aim of the tests is to assess the resiliency of entities by putting them in scenarios that demonstrate whether they have enough capital to withstand extreme shocks.

Five of the country’s largest life insurers – AIA, Asteron Life, Chubb Life NZ, Fidelity Life, and Partners Life – participated in the stress test scenarios laid out by RBNZ.

How resilient is the country’s life insurance sector?

According to the official results posted by RBNZ, all participating insurers were overall well positioned to withstand economic shock despite some losses on their long-term portfolios. That said, the report noted that the insurance shock had much greater impact due to higher claims expenses, higher lapse rates, and lower business volumes.

The insurers consulted with RBNZ on the scenarios, covering three years (2022 to 2025) and consisting of combined economic and insurance shock. The economic stress came from worsening conditions with high inflation and rising interest rates. The insurance stress, on the other hand, comes with long COVID, a new pandemic, and higher mortality and morbidity rates. Both shocks resulted in downgraded ratings for reinsurers.

To calculate their respective results, insurers used their own models to estimate the effects of the scenario on their finances. Going by Reserve Bank solvency standards, each had to maintain a minimum amount of solvency capital, with solvency margin (SM) being used to measure the resilience of insurers to these shocks.

In the end, the results showed that all insurers were able to remain solvent despite the scenarios presented. However, the combined effects of the stress test caused the solvency margin of some insurers to fall outside their own risk appetite, triggering mitigating actions including cost reductions, higher premiums, commission reductions, and changes to reinsurance agreements.

RBNZ deputy governor Christian Hawkesby said that stress tests assess how the finance sector can cope with severe but entirely plausible scenarios.

“Stress tests play an important role in helping build understanding of how particular risks may impact financial stability as well as building capability across industry to manage these risks,” Hawkesby said. “Insurers recognised the value of participating in the stress test and we identified areas of good practice from some insurers that could be considered by others. We appreciate the engagement of participants and look forward to building on this experience in 2024, when we carry out the next life insurance Industry stress test.”

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