Insurers Could be Forced to Hold More Cash

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Some insurance providers could be at risk due to a lack of solvency capital according to a report published by the Reserve Bank of New Zealand (RBNZ) that hints insurers may be forced to hold more cash.

A Bulletin report prepared by RBNZ says some life insurers operate with low solvency margins over the regulatory minimum, “raising questions about their ability to comfortably meet the minimum requirements in the event of an adverse shock”.

The report notes that New Zealand life insurers make greater use of reinsurance than their international peers, and that life insurers primarily reinsure to reduce the volatility of profit – and transfer risk to reinsurers. The report says there has been an increasing reliance on reinsurance as an alternative to holding capital.

The RBNZ began regulating and supervising insurers from 2011 after the Insurance (Prudential Supervision) Act 2010 (IPSA) came into force.

…there has been an increasing reliance on reinsurance as an alternative to holding capital.

Alongside the forthcoming review of IPSA, it will review solvency standards and consider the case for solvency buffers, with the aim of improving resilience in the sector.

The RBNZ and the Financial Markets Authority conducted a thematic review of the conduct and culture of the life insurance sector in 2018, and found “extensive weaknesses in life insurers’ systems and controls, with weak governance and management of conduct risks across the sector and a lack of focus on good customer outcomes”.

The Government has announced a new financial conduct regime in response to the issues identified in the review and gaps in existing regulation.

The report also notes that New Zealand life insurers have a return on equity higher than the median, even after allowing for high expenses – driven by “high commission rates, soft commissions, some policy replacement activity, and a lack of scale”.

The report also says high expenses have a detrimental impact on premium affordability and value for money for policyholders. Some individuals may be priced out of the life insurance market altogether, it says.