New Zealand’s life insurers ‘well placed’ to withstand severe shocks

Written by Adam Cadle

09/08/2023

New Zealand’s life insurers are “well placed” to withstand severe economic and insurance shocks, while continuing to pay out on policy claims, the Reserve Bank of New Zealand’s first life insurance stress test has revealed.

The country’s five largest life insurers with a market share of 75% of premiums participated (AIA, Asteron Life, Chubb Life, Fidelity Life and Partners Life), and the stress test scenario covered three years from 2022 to 2025 consisting of a combined economic and insurance shock. The economic shock consisted of worsening economic conditions with high inflation and rising interest rates, and the insurance shock combined long COVID, a new pandemic and higher mortality and morbidity rates. Both shocks included ratings downgrades for reinsurers.

Insurers used their own models to estimate the effects of the scenario on their financial conditions, and submitted detailed results for profit, balance sheet and solvency before and after any mitigating actions. The results found that insurers overall were well positioned to withstand the economic shock, despite some recording losses on their long-term bond portfolios. However, the insurance shock had a much greater impact due to higher claims expenses, higher apse rates, and lower new business volumes.

All insurers were able to remain solvent. However, the combined effects of the scenario caused the solvency margin of some insurers to fall outside their own risk appetite and triggered mitigating actions. These actions included cost reductions, premium increases, reductions to commissions and changes to reinsurance arrangements.

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