Inaugural Insurance Stress Test highlights reliance on reinsurance
The first General Insurance Industry Stress Test (GIIST) from the Reserve Bank of New Zealand – Te Pūtea Matua has highlighted the industry’s reliance on offshore reinsurance providers.
Stress tests serve an important purpose for regulators and financial entities. They provide a forward-looking lens on the resilience of an entity’s balance sheet to severe but plausible scenarios and help us assess risks to financial stability, Deputy Governor and General Manager for Financial Stability Geoff Bascand says.
The GIIST involved the five largest New Zealand incorporated general insurers - representing around 70 percent of the sector. The test was not intended as a pass or fail exercise, rather its main purpose was to assess the resilience, in particular the solvency, of the large general insurers to three severe but plausible scenarios.
The reinsurance market stress scenario envisaged significant problems in global reinsurance markets due to catastrophic events overseas that would make reinsurance capital harder to attain. This scenario emerged as the most extreme out of the three considered, and highlighted insurers’ reliance on reinsurance arrangements, and challenges for the insurance market in New Zealand if these arrangements were to be disrupted.
The economic downturn scenario modelled a three-year economic shock caused by a widespread domestic outbreak of COVID-19. General insurers’ balance sheets appeared to be well positioned to offset such an economic downturn, with their ability to reduce dividend payments potentially providing an additional buffer.
The severe weather events scenario consisted of three major storms occurring in a 12 month period. In this scenario, industry insured losses were material, but catastrophe reinsurance arrangements and reductions to dividends prevented significant falls in the insurers’ capital levels.
“As the release of yesterday’s Climate Changed report showed, climate change is increasing the intensity of weather events in New Zealand which have material physical and financial impacts,” Mr Bascand says.
“The stress test shows that increases in the intensity and/or frequency of weather events lead to lower profitability and dividend payments for insurers. If sustained, this could lead to higher premiums in the future. Physical and transition risks from climate change will be a focus of our industry stress testing over coming years.”
- Reserve Bank Bulletin: Outcomes of the 2021 General Insurance Industry Stress Test
- Stress testing background
- Video: What is Stress Testing?