Your browser is not supported

Our website does not support the browser you are using. For a better browsing experience update to a compatible browser like the latest browsers from Chrome, Firefox and Safari.

Outcomes of our first Life Insurance Industry Stress Test (LIIST)

This Bulletin article looks at our inaugural stress test focussed on the life insurance sector.

Ken Nicholls, Tom West, Adrian Allot

Executive summary

  • Our industry stress test programme now covers the 3 main financial sectors we regulate – banking, general insurance and now life insurance. We have established a regular pattern of stress testing as noted on our website with bank stress tests carried out annually and general insurance and life insurance alternating every second year.

  • The 2022/23 Life Insurance Stress Test was our inaugural stress test focussed on the life insurance sector. It was designed to assess the resilience of life insurers to severe but plausible shocks, develop a platform for future stress tests of the life sector, and improve stress test capability of insurers. It was not a pass or fail exercise.

  • We would like to acknowledge the contributions and efforts of the 5 life insurers — AIA, Asteron Life, Chubb Life, Fidelity Life and Partners Life — that participated in the 2022/23 stress test.

  • The stress test scenario comprised an economic shock and insurance shock. The economic shock consisted of worsening economic conditions with high inflation and rising interest rates. The insurance shock combined long COVID, a new pandemic and higher mortality and morbidity rates. Both shocks included ratings downgrades to reinsurers to the New Zealand market. The scenario covered 3 years from 2023 to 2025. It is hypothetical and does not represent the Reserve Bank’s most likely case.

  • Insurers used their own models to estimate the effect of the scenario on their financial conditions. They submitted detailed results for profit, balance sheet and solvency before and after mitigating actions. The Solvency Margin (SM) was used to measure the resilience of insurers to these shocks. The stress results were benchmarked against a base case submission which was absent the prescribed shocks.

  • The results showed that all insurers could maintain their SM above zero under the stress scenario and still pay out elevated claims costs to their policy holders. The aggregate SM remained well above the regulatory minimum of zero in all years but was over 50% lower in Year 3 (Y3) than the base case as shown in figure 1. Insurers were well positioned to withstand the economic shock, despite unrealised losses on long-term bonds. However, the insurance shock had a much greater impact due to higher claims expenses than the base case.

  • The effects of the scenario caused the SM of some insurers to fall outside their own risk appetite and triggered mitigating actions. These actions included, cost reductions, premium increases, reductions in advisor commissions, changes to reinsurance arrangements and dividend cuts.

  • Lessons learned here will be used to improve the design of the 2024 stress test.
Figure 1: Aggregate Solvency Margin for base case and stress scenario