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RBNZ says it's 'imprudent' for insurers to pay dividends at the moment; Announces major insurance capital review to resume in October

RBNZ says it's 'imprudent' for insurers to pay dividends at the moment; Announces major insurance capital review to resume in October
Geoff Bascand

Reserve Bank (RBNZ) Deputy Governor and Manager of Financial Stability, Geoff Bascand, is discouraging insurers from paying dividends.

“Our stance in relation to prudential risks to insurers from Covid-19 is that there are many unknowns still to play out in terms of flow-on impacts from what we have already experienced, as well as the potential for new outbreaks,” Bascand said in a speech to the Insurance Council of New Zealand (ICNZ) on Monday.

“This caution is also reflected in our stance on capital retention and dividend payments, which we regard as being imprudent under these conditions.

"We will update insurers on our stance on this at or before publication of the next Financial Stability Report in November.”

ICNZ Chief Executive, Tim Grafton, said the RBNZ privately delivered the same message to the sector in April.

Then in July, it wrote to insurers reaffirming its position that they "will refrain from the payment of dividends or other unnecessary reductions in insurer capital amounts until the Reserve Bank advises a change in this position".

The RBNZ took a harder line with banks, on April 2 publicly announcing it was restricting all locally-incorporated banks from paying dividends on ordinary shares “until further notice”.

An RBNZ spokesperson told interest.co.nz it will update this policy by the time it releases its November 25 Financial Stability Report.

Insurers likely to have to hold more capital

Separately, Bascand on Monday announced the review of the Insurance (Prudential Supervision) Act (IPSA) and the associated Solvency Standard review, would resume in October.

The review, which started in 2017, was put on hold in March due to Covid-19.

Bascand again signalled insurers would be required to hold more capital.

“Over the years, we have observed a declining trend in solvency margins that may be illustrative of a key difference in approach between insurers and the prudential regulator,” Bascand said.

“Higher levels of capital make for a more resilient insurer but at the cost of lower return on equity...

“The risk-appetite of equity-holders will not always be compatible with the risk-appetite of society.

“The outcome of this is that solvency buffers above the minimum are getting thinner which, by definition, means that the risks of insurers breaching minimum solvency requirements are increasing.

“The retention of capital, largely because of dividend payments being withheld, has seen a recent, but probably temporary, change in this overall trend.”

Bascand also expressed the RBNZ’s intention to take a more graduated approach towards solvency.

“A criticism of the approach towards capital adequacy within the current solvency standards is that it represents something of an “all or nothing” solvency measure whereby a solvency ratio above 100% (or any alternative regulated figure) is taken to be adequate and a ratio of less than 100% is taken to be inadequate,” Bascand said.

“Thought will be given to a more graduated approach where there is more than one level of capital requirement.

“Using such an approach, the different levels of capital requirement provide trigger points for intervention."

RBNZ staying out of issues around risk-based pricing affecting insurance accessibility

Bascand said that while he wants to “see insurance remain available and affordable”, the RBNZ has not sought to influence the trend towards risk-based pricing.

Insurers’ moves to more accurately price risk, rather than spread the cost of this risk across customers, has seen some property owners’ premiums sky-rocket. It’s also seen Wellingtonians - apartment owners in particular - find it more difficult to get cover.

“It is important to emphasise that the role of prudential supervision and regulation has not been to dictate the commercial terms on which insurers should be providing insurance,” Bascand said.

“Rather, our involvement has been to better understand what is going on, and to consider its impacts on soundness and efficiency.”

Bascand said the RBNZ would release an initial overview paper on the IPSA review in October. 

"We envisage a staggered implementation of changes, ranging from operational changes that might be relatively easy to implement, through to legislative changes that require decisions from Parliament," he said. 

"This impacts on timeframe and our estimated completion date is 2024."

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5 Comments

Prudent? Probably. Seem to recall Tower paid out a whopping dividend shortly after the Canterbury EQs got rolling? May have mitigated some of the subsequent aggressive denial & handling of some claims if more $ had been available in kitty one might think.

Some Kiwi insurers like AA are dishing out premium rebates to their customers to the tune of 19.5 million or up to 42% of base premiums in these tough times.

Meanwhile our RB has to discourage foreign insurers from paying dividends.

Yet neoliberal economists and short-sighted centre-right pollies want us to believe that all foreign investment, particularly M&A is a positive for our economy.

The neoliberal economists are largely employed by banks, as marketing tools. Rock Star economy anyone.

Sounds like a good plan to close the door to short term offshore dividend investors, especially when they have been abusing their cartel positions. Nothing but fair weather sailors, who held up insurance claims in Chch for a decade or more.

What a flamin' idiot. The insurance companies are making money hand over fist at present. Their divvies have to reflect this.

Low interest rate environments are toxic to insurers. Their business is essentially just covering a series of calculated future cash outflows. Now what is the net present value of some future cashflow if interest rates are halved? Quartered? Their future obligations blow out.

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