The Reserve Bank of New Zealand (RBNZ) has published the results from the 2024 General Insurance Industry Stress Test. The exercise assessed insurers' responses to a major earthquake and severe but plausible cyber-risk incidents.
The exercise was conducted to examine how insurers would respond to a high-impact earthquake and escalating cyber threats. The results reveal that while policyholder claims would be paid in full, insurers would require significant financial support to maintain their solvency and continue underwriting in the aftermath of such events.
According to a media release by RBNZ the seismic scenario was based on a magnitude 8.7 earthquake along the Hikurangi Subduction Zone off the east coast of the North Island. The scenario was designed to simulate an event well beyond our solvency requirements to enable testing of insurers’ preparedness and recovery plans.
This scenario would result in widespread damage and a sharp decline in GDP. Participating insurers modelled property losses of NZ$62bn, which rose to around NZ$100bn if extrapolated out to cover the whole market.
RBNZ director of financial stability assessment and strategy Kerry Watt said, "Despite the severity of the scenario, policyholder claims would have been met. This is a sign of the resilience that’s been built into the system since the Canterbury earthquakes, including strengthening of solvency requirements, increased coverage by the Natural Hazards Commission and improved loss estimation modelling.”
The severity of the test did mean substantial mitigating actions were required to return insurers to required solvency positions. Capital injections from their parent companies and ongoing availability of reinsurance were identified as critical to enabling insurers to continue to offer cover following such an event. The exercise provided valuable insights to feed into our review of solvency standards and our recovery planning.
The stress test noted the significant impacts beyond the insurance industry. This includes costs to the Crown through funding of the Natural Hazards Commission and meeting recovery costs for damage to uninsured assets and any economic support programmes. This highlights the importance of the government maintaining sufficient fiscal buffers to manage such shocks.
Mr Watt said, “The exercise was challenging and required a significant collaborative effort across industry and government. Ultimately, the scenario highlights the importance of all stakeholders, individually and collectively, understanding the risks and preparing for these types of severe events.”
The stress test also included a number of cyber scenarios, including a major data breach, a critical cloud services outage, and a ransomware attack. Insurers demonstrated resilience to claims arising from large cyber events, though these could have a significant impact on profitability.
“Cyber risks are growing and evolving quickly. This exercise helped insurers identify where they are most exposed, and where more work is needed to understand and model these risks. We encourage the industry to build on these insights to improve resilience in this rapidly changing space,” Mr Watt said.
The Reserve Bank will continue to work closely with insurers and relevant government agencies to support New Zealand’s preparedness for seismic and cyber risks.