Gross earned premiums in the insurance industry increased by 9% over the year to June 2017 to NZ$9.1 billion (US$6.3 billion), whereas gross incurred claims increased by 52% to NZ$8 billion, according to the Reserve Bank of New Zealand (RBNZ) in its latest biannual Financial Stability Report.
The industry’s gross loss ratio increased sharply over the year from 63% to 88%. After taking into account reinsurance premiums and claims, the insurance sector’s net loss ratio increased by less, from 61% to 66%. The reduction in profit margins over the past year largely reflects an increase in claims associated with the 2016 Kaikoura earthquake and a number of significant weather-related events in 2017.
In addition, general insurers have also been experiencing higher claims in their motor insurance portfolios. This partly reflects higher costs associated with repairing modern vehicles.
The commercial insurance market remains very competitive, particularly for commercial property, and insurers’ underwriting discipline is being tested as they try to balance sales objectives and underwriting quality.
Aggregate insurer solvency margins – a measure of the strength of insurers’ capital buffers held to cover losses from extreme events – have also declined further over the past six months. While minimum solvency margins are set by licence conditions, insurers are encouraged to consider potential risks when setting target capital buffers above the minimum requirement.
The claims cost impact of the 2010-11 Canterbury earthquakes has highlighted how catastrophes can put pressure on solvency margins long after the event. It also reinforced the importance of insurers protecting future solvency margins following an extreme event or a series of smaller events. As a risk-based supervisor, the Reserve Bank has been working with several larger insurers that have relatively small buffers, to improve their resilience, says the report.
The sector remains well supported by international reinsurers. A series of extreme events, including hurricanes in the Caribbean and the United States and earthquakes in Mexico, has significantly impacted the profits of international reinsurers. At an aggregate level, recent events have the potential to impact reinsurance pricing and the scope of cover. For New Zealand, a more immediate issue for general insurers is likely to be the need to review levels of reinsurance in light of updates to catastrophe risk models following the Canterbury earthquakes. General insurers are required to hold catastrophe protection for a 1-in-1,000 year event, and insurers will be reviewing their catastrophe cover to ensure they continue to meet this requirement. Claims processes have improved following the Canterbury earthquakes.
Insurers have made significant progress in settling claims from the 2016 Kaikoura earthquake, with NZ$900 million of claims paid as at 30 September 2017, out of an estimated total cost of at least NZ$3 billion. Under a Memorandum of Understanding between insurers and the Earthquake Commission (EQC) for Kaikoura claims, insurers are managing claims from the outset rather than responding to referrals from EQC once claims go over the EQC limit. This arrangement appears to have significantly improved the efficiency of claims processing. At end-September 2017, total claims of NZ$33.9 billion had been paid (including EQC). The Reserve Bank’s estimate of ultimate claims costs, including EQC, remains unchanged at NZ$36-40 billion.
The life insurance sector continues to face headwinds. The low interest-rate environment and high levels of broker commission continue to present challenges to life insurers. Some Australian banks have been reviewing their strategies in relation to life insurance. One factor influencing this trend has been the requirement for Australian banks to increase the amount of capital they hold against their banking exposures. As such, some banks are selling their insurance businesses to release capital and, in the process, simplifying their business by offering insurance as an intermediary service rather than as an underwriter. The AIA Group is set to become the largest life insurer in Australia and New Zealand through its proposed buyout of Commonwealth Bank of Australia’s insurance units, which includes Sovereign Assurance in New Zealand.
Strong interest from potential new entrants
The number of licensed insurers in New Zealand has declined over recent years, reflecting consolidation in the industry. However, the RBNZ has received ongoing strong interest from potential new market entrants, suggesting that the New Zealand insurance market is an attractive business proposition. This may reflect a growing population as well as new opportunities for technology-based innovation in the sector, says the report.
In the year to June 2017, the general insurance sector accounted for 61% of total gross earned premiums, life insurance accounted for 24%, and health insurance accounted for 15%, based on data submitted by licensed insurers.