Life insurers under threat – or are they?

The Reserve Bank came out swinging at life insurers in its latest Financial Stability Report, warning that they faced insolvency challenges as low interest rates, minimal growth in premiums and higher rates of cancellation combined.

Thursday, May 28th 2020, 6:00AM 2 Comments

Adrian Orr, RBNZ

The RBNZ warned that some life insurers were operating with low solvency levels and buffers. It had conducted preliminary stress testing of insurers' exposure to a range of channels through which Covid-19 could affect them.

“We are continuing to work with insurers to see them build better resilience and maintain a strong focus on long-term customer outcomes.”

“Insurers are exposed to economic conditions through the value of their investment portfolios. Most insurers operate conservative investment portfolios, and solvency stresses at insurers do not primarily arise from losses on their investments.

“However, life insurers with higher-risk investment portfolios including large equity investments that are not part of investment-linked insurance products are exposed to further declines in equity prices. Corporate bond defaults and increased credit spreads on a scale larger than observed during the GFC would see stresses spread to several insurers.”

The Reserve Bank said sales volumes of new policies had slowed and insurers were reporting more cancellations and surrenders of policies. Increasing numbers of customers were applying for help on hardship grounds.

But under further scrutiny, Governor Adrian Orr admitted that insurers, all of which have strong credit ratings, were not under immediate threat.

He said consumers should not be particularly worried about the potential for a claim from a life insurer not being paid.

Deputy governor and head of operations Geoff Bascand said the insurance sector overall was in good shape. “It's just a very big sector ... within that there are some firms a bit closer to the margin. We're making sure we are working with those firms to build up their capital.”

He said the bank had proposed additional capital requirements on some insurers to make them more resilient to potential shocks.

Bascand could not say how many insurers had been asked.

He said the sector was not in any danger right now.

“We have to look at not just how they are now – they are all in a fine state now ... It's how will they be if this goes on for another year or more with low premium growth, low sales of product, increasing claims, low interest rates on the investment side.

“We are not saying they are in danger of any weakness right now, we're making sure they can stay strong and keep doing business well over next few years.

“We're confident the sector overall is in good shape. We're just bolstering any of the parts that are a bit weaker than others.”

He said the Reserve Bank would work with insurers to ensure they were acting in the long-term best interest of clients.

The direct impacts of the outbreak on insurers were likely to be modest because of the limited impact on New Zealanders’ health so far, the Reserve Bank said.

“However, Covid-19 could play out in a number of ways, and it remains possible that a second or further wave of the pandemic will occur in New Zealand.

“The Reserve Bank’s life insurance solvency standard requires reinsurance and capital to meet the cost of pandemic death claims for 0.1% of insured lives, which equates to at least several thousand deaths in total in New Zealand.”

Tags: insurance insurers Life insurance RBNZ Reserve Bank

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Comments from our readers

On 28 May 2020 at 10:05 am RWAW said:
These guys are unreal! Orr came out publicly last year with the idea banks needed to increase solvency by 20 billion so they could cope with a 1 in 100 year financial shock. If this pandemic isn't the shock they were talking about then what the hell is? The banks have coped just fine (as they said they would) without the 20 billion dollar increase in solvency. So having been proved wrong in their assumptions they now try to have a kick at the Insurance industry, always an easy target it seeems. I wonder how much longer NZ is going to have to put up with a RB Governor who seems to have a personal vendetta against almost everyone in the financial services sector?
On 28 May 2020 at 11:20 am All hat no cattle said:
Orr: Insurers are facing tough times, solvency challenges. (We have to make sure they don't go broke)

Also Orr: They have strong credit ratings and are not under immediate threat. (Probably a tough year or two, but they won't go broke)

Is now the time to be building "better resilienence"?
Since when has surviving when thousands of other businesses failed, while paying claims, actively supporting clients, and in some cases waiving some of their premiums, not been good enough?

Even if we did a Sweden and let Covid19 wipe out 400 per million, or 2,000 deaths (so far) most of those would be over 70. Mostly uninsured or making small claims on old conventional policies.

Even AMP could survive that.

FFS give us a break.

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