Insurers' solvency ratios are low by international standard and may be compressed further in the low interest rate environment, says the Reserve Bank of New Zealand (RBNZ) in its November 2019 Financial Stability Report.
Given the situation, the RBNZ says that it will consider the case for a requirement for insurers to maintain additional solvency buffers in New Zealand, alongside the forthcoming review of insurance legislation.
The RBNZ sets minimum solvency requirements for insurers, and insurers maintain voluntary buffers over these minimum requirements. However, reported solvency ratios have declined for many life and general insurers, leaving low buffers over minimum requirements.
The Reserve Bank requires New Zealand insurers to maintain a solvency ratio above 100% and further falls are likely for some life insurers due to recent falls in interest rates. Solvency ratios are risk adjusted. As such, decreasing solvency ratios generally translate into a riskier operating landscape, the report says.
However, many factors affect the risk profiles of individual insurers and solvency ratios need to be considered alongside any forward-looking mitigation strategies that insurers have in place.The recent trend, though, contributes to the weak aggregate solvency ratios for New Zealand insurers relative to international comparators and exceptionally low solvency buffers do raise concerns about the ability of insurers to meet the minimum requirements in the event of an adverse shock or a major loss event.
The report says that long-term interest rates have declined sharply to historically low levels. While some insurers benefit from low interest rates, others are adversely affected.
Some of the adverse impacts arising from a fall in interest rates may be a reduction in net assets due to mismatches between assets and liabilities, and reduced future profitability due to a lower investment return on cash and fixed interest investments.
To understand the impacts, the Bank has sought information from 22 life insurers on their sensitivity to interest rate movements, and detail on how they are managing the risks. Initial analysis shows material impacts on the solvency positions of some New Zealand life insurers. The Reserve Bank is actively discussing the impacts with the most affected insurers and has requested that they prepare plans to mitigate and manage the impacts.