The Reserve Bank of New Zealand (RBNZ) has warned that it is likely some insurers are becoming more reliant on their shareholders to keep them afloat if they suffer a major loss.
The RBNZ, in its latest six-monthly Financial Stability Report, says general and life insurers’ solvency margins have “stabilised at lower levels”.
While for some, this could “point to greater sophistication” in the way they manage their capital, for others it could mean they are relying on “shareholder support to maintain solvency margins in a period of material loss”.
The RBNZ said: “In late 2015 and early 2016, aggregate insurer solvency margins in New Zealand fell, due to dividend payouts being in excess of profits. Profits reported in mid-to-late 2016 were stronger and, as a consequence, solvency margins appear to have stabilised at lower levels.”
Kaikoura to further impact solvency
The RBNZ recognises the 2016 reporting period did not include costs for the Kaikoura earthquake, the Port Hills fires and several storms.
“These events are likely to have significantly reduced profits and to have lowered solvency margins in the sector. Affected insurers will be under operational pressure due to the high claims volumes from these events, as well as the remaining Canterbury earthquake claims and business as usual claims,” it said.
The regulator added: “The sequence of these recent events serves to remind all insurers of the need to have sufficient capital and reinsurance to cover a single very large catastrophe event (e.g. a major earthquake or pandemic), as well as to cover several smaller unexpected and unprovisioned losses occurring in a short period of time.”
Risk management frameworks need to be ‘tailored’
Overall, the RBNZ is satisfied with the way insurers are assessing their exposures to catastrophic risks. Yet it noted: “Many insurers’ assessments of catastrophe risk are anchored to the solvency standards, for example, in terms of the types of catastrophe risks that they consider.
“It is important that risk management frameworks are tailored to each insurer’s own circumstances.”