The aggregate solvency ratio of New Zealand’s life insurance sector has declined in recent years, raising questions about the ability of some insurers to cope in the event of an adverse shock.
These factors and more are explored in the Reserve Bank’s latest Bulletin article by Financial System Analyst Jinny Leong.
Life insurance coverage softens the financial impact of events such as death, disablement and major illness, allowing insured individuals and their families to maintain their living standards. However, life insurance penetration in New Zealand is well below the OECD average, which may be partly explained by the low proportion of savings products in New Zealand and New Zealanders’ reliance on the government (ACC cover) to mitigate some risks that would otherwise be in the purview of the life insurance sector, Miss Leong writes.
New Zealand life insurers have a return on equity higher than the median, even after allowing for high expenses. The high expenses are driven by high commission rates, soft commissions, some policy replacement activity and a lack of scale. High expenses have a detrimental impact on premium affordability and value for money for policyholders.
The aggregate solvency ratio for the life insurance sector has declined in recent years and is low relative to other countries. 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, such as further sharp falls in long-term interest rates.
The Reserve Bank began regulating and supervising insurers from 2011 after the Insurance (Prudential Supervision) Act 2010 (IPSA) came into force. The Act is being reviewed by the Reserve Bank, with further information to follow later this year. Alongside the forthcoming review of IPSA, the Reserve Bank will review solvency standards and consider the case for solvency buffers, with the aim of improving resilience in the sector.