Lowering solvency margins
31 May 2017
The Reserve Bank of New Zealand (RBNZ) warns it’s likely some insurers are becoming more reliant on their shareholders to keep them afloat if they suffer a major loss.
The RBNZ, in its latest six-monthly Financial Stability Report, says general and life insurers’ solvency margins have “stabilised at lower levels”.
While for some this could “point to greater sophistication” in the way they manage their capital, for others it could mean they’re relying on “shareholder support to maintain solvency margins in a period of material loss”.
The RBNZ explains: “In late 2015 and early 2016, aggregate insurer solvency margins in New Zealand fell, due to dividend payouts being in excess of profits. Profits reported in mid-to-late 2016 were stronger and, as a consequence, solvency margins appear to have stabilised at lower levels.”
In the general insurance space, IAG New Zealand’s solvency ratio is down from 282% to 147% in FY16, Vero Insurance New Zealand’s from 180% to 157%, and Tower’s from from 225% to 210%.
Kaikoura to further impact solvency
The RBNZ recognises the 2016 reporting period doesn’t include costs for the Kaikoura earthquake, the Port Hills fires and several storms.
“These events are likely to have significantly reduced profits and to have lowered solvency margins in the sector. Affected insurers will be under operational pressure due to the high claims volumes from these events, as well as the remaining Canterbury earthquake claims and business as usual claims,” it says.
Tower’s 2017 half year results show this, with its solvency as at March 31 dropping to a point only $5.2 million above the RBNZ’s minimum requirement.
The regulator says: “The sequence of these recent events serves to remind all insurers of the need to have sufficient capital and reinsurance to cover a single very large catastrophe event (e.g. a major earthquake or pandemic), as well as to cover several smaller unexpected and unprovisioned losses occurring in a short period of time.”
While the RBNZ recognises there is “substantial uncertainly” around how much the Kaikoura quakes will cost, it says this expenses appears well within all insurers’ reinsurance limits.
“Compared with the Canterbury earthquakes, the insurance sector is much better positioned to absorb these costs due to significantly higher levels of reinsurance and capital.”
The RBNZ believes the total cost of the quake to both private insurers and the Crown will be between $3 billion and $6 billion, which is $2 billion more than industry estimates.
As at March 31, $260 million of claims had been paid. The bulk of claims relate to commercial property in Wellington.