The Reserve Bank (RBNZ) has stress tested leading life insurers for the first time and says the results were reassuring.
The life insurance industry stress test was designed to assess the resilience of life insurers to severe shocks, develop a platform for future stress tests of the sector, and improve stress test capability of insurers, the RBNZ says, adding it wasn't a pass or fail exercise.
AIA, Asteron Life, Cigna (now Chubb Life), Fidelity Life and Partners Life, the five biggest New Zealand-incorporated life insurers with a combined market share of 75% of premiums, participated. The stress test scenario was developed by the RBNZ in consultation with these insurers.
"This is the first time we have run a stress test with New Zealand’s life insurance industry and the results were reassuring. Participating insurers were able to pay out substantial claims from policy holders and remain solvent during a hypothetical three-year scenario which included long COVID, a new pandemic and a period of severe economic stress," RBNZ Deputy Governor Christian Hawkesby says.
The RBNZ has previously stress tested banks and general insurers. It says stress tests assess entities’ resilience by demonstrating whether they have enough capital to withstand extreme shocks, and indicate potential impacts on the broader financial system.
"Stress tests play an important role in helping build understanding of how particular risks may impact financial stability as well as building capability across industry to manage these risks...We appreciate the engagement of participants and look forward to building on this experience in 2024, when we carry out the next life insurance Industry stress test," Hawkesby says.
The stress test scenario covered the three years from 2022 to 2025 and consisted of a combined economic and insurance shock. The RBNZ describes this scenario as hypothetical saying it doesn't represent its most likely case.
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 credit ratings downgrades for reinsurers.
Insurers used their own models to estimate the effects of the scenario on their financial conditions. They submitted results for profit, balance sheet and solvency before and after any mitigating actions.
"Insurers are required to maintain a minimum amount of solvency capital as determined by applying the Reserve Bank solvency standards. 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 excluded the shocks," the RBNZ says.
"Insurers overall were well positioned to withstand the economic shock, despite some recording losses on their long-term bond portfolios. However, the insurance shock had a much greater impact due to higher claims expenses, higher lapse rates, and lower new business volumes."
The RBNZ says all five insurers were able to remain solvent.
"However, the combined effects of the scenario caused the solvency margin of some insurers to fall outside their own risk appetite and triggered mitigating actions. These actions included cost reductions, premium increases, reductions to commissions and changes to reinsurance arrangements," the RBNZ says.
"The aggregate SM remained well above the regulatory minimum of zero in all years but was over 50% lower in Year 3 than the base case, excluding shocks. 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 RBNZ says capability for stress testing appeared to vary across the life insurers.
"Insurers were provided with anonymised peer benchmarking of their results and drivers of results. This may assist insurers identify any modelling issues, for example areas where they are outliers to peers," the RBNZ says.
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