The Reserve Bank says it has 'intensified its supervision' of the 'under strain' health insurance sector; health insurance premiums up 19% in past year

The Reserve Bank (RBNZ) says it has "intensified its supervision" of the health insurance sector and is closely monitoring solvency trends as the sector comes under strain - with sustained operating losses reducing solvency margins by nearly 40% over the past two years.

In its latest six-monthly Financial Stability Report (page 48), the RBNZ says while health insurers’ capital levels remain well above regulatory minimums, ongoing cost pressures mean premium increases will be needed to restore profitability "so that the sector can sustainably provide services to policyholders and support the wider health system".

It noted that health insurance premiums have increased around 19% over the past year, as health insurers face pressure from increasing claims costs.

"Capacity pressures in private healthcare services are pronounced. Deferred medical procedures following the Covid-19 pandemic and the stretched capacity of the public health system have contributed to a shift towards the private health system," the RBNZ said.

"Growth in claims cost has resulted in health insurers generating operating losses. Insurers’ solvency positions remain above our requirements. However, further increases in claims costs could increase operating losses and exacerbate financial stress in the sector."

Health insurers are now being included in the Reserve Bank’s stress-testing programme to assess resilience under scenarios of continued escalation of these pressures, the RBNZ says.

"The Reserve Bank is also engaging directly with health insurers to ensure that responses support both the long-term sustainability of the sector and the resilience of households and the broader financial system."

Escalating claims costs have been the dominant source of strain in the sector, the RBNZ says.

From 2020 to 2022, medical cost inflation was within a typical range, accompanied by "broadly proportionate premium increases".

However, in recent years, capacity pressures in the public health system have resulted in more people turning to the private system.

"This increased utilisation of private health care has added to claims cost inflation. These domestic pressures are reinforced by global cost drivers, including the adoption of high-cost technologies, supply-chain disruptions, and rising labour costs," the RBNZ says.

It says by 2023, "many" health insurers were reporting quarterly losses. Claims cost escalation intensified during 2024.

"The persistence of these pressures required insurers to reprice substantially," the RBNZ says.

From the second half of 2024, materially larger premium increases were implemented across the industry, both to recover earlier shortfalls and to restore profitability on a forward-looking basis.

This contributed to strong growth in insurance revenue, with each of the past four quarters roughly 15% higher than the same quarter a year earlier.

"Despite this, the health insurance sector has continued to make losses to date. This reflects the lag between premium increases and the corresponding uplift in revenue, as policies are repriced gradually," the RBNZ says.

In response to recent claims cost escalation, health insurers are repricing premiums, redesigning products, and implementing cost-management strategies. These measures intend to ensure products remain affordable and available in a high-inflation environment, "but can result in narrower benefits or higher cost-sharing for customers".

The RBNZ notes that profitability in the general insurance sector has remained strong, supported by premium increases implemented following the severe weather events of early 2023.

"While the pace of repricing has since eased from its peak, earnings have been sufficient to fund substantial dividends and a strengthening of solvency margins across the industry."

Profitability in the life insurance sector has been improving from previously subdued levels. However, returns on equity remain low compared with other sectors and with alternative uses of capital, maintaining pressure for further pricing or product adjustments.