New Zealand’s insurance profitability remains subdued – Reserve Bank

Regarding regulatory updates, progress has been made in two reviews of insurance regulation. 

The recent severe weather events have likely significantly reduced the profitability of general insurers, stemming from both direct claims costs and notably higher reinsurance renewal expenses, according to the Reserve Bank’s latest Financial Stability Report. 

Despite this, insurers have managed to secure additional coverage, maintaining solvency positions above regulatory requirements. 

Property insurance premiums have surged due to increased reinsurance costs passed on to policyholders. The severe weather events are expected to prompt greater use of risk-based pricing, impacting the long-term cost and availability of property insurance. 

Life insurers have seen reduced profitability over the past two years due to investment losses from rising interest rates. Despite profit challenges, solvency positions across the three main sectors remain robust.

Regarding regulatory updates, progress has been made in two reviews of insurance regulation. 

The Insurance (Prudential Supervision) Act 2010 (IPSA) review is exploring the primary legislation supporting prudential supervision, with proposed changes outlined in a September omnibus consultation. 

These changes aim to enhance the proactive and intensive approach to supervision, introducing a broader range of tools. The Interim Solvency Standard, a result of the solvency standards review, took effect in January 2023. 

Work on the second stage of the solvency review, focusing on calibration capital charges, has commenced.

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Other impacts

Despite declining profitability, aggregate solvency positions for the three main insurance types remain comfortably above regulatory requirements. 

The increase in reinsurance costs is driven by a global trend of reinsurers reducing risk appetites and re-evaluating risks after large weather-related losses. 

The operational strain on property insurers is evident with significantly higher claims volumes for various policies, akin to challenges faced during the Canterbury earthquakes.

Lasting effects on the financial system are anticipated, including changes in insurance availability and a greater reliance on risk-based pricing. 

Additionally, cyber-attacks persist in the financial sector, including insurers, prompting increased monitoring of cyber risks and incidents by regulatory authorities.