AM Best sees mergers between NZ insurers as RBNZ regulatory regime ramps up; NZ has 'too many insurers for its 4.4 mln people'

AM Best sees mergers between NZ insurers as RBNZ regulatory regime ramps up; NZ has 'too many insurers for its 4.4 mln people'

By Gareth Vaughan

New Zealand has too many insurers for its 4.4 million people and mergers were on the cards, even before the devastating series of earthquakes in Canterbury, due to the new Reserve Bank regulatory regime, says A.M. Best, a credit rating agency that specialises in insurance.

In a special report entitled New Zealand's Insurance Market on Cusp of Transformation A.M. Best says licensing rules, minimum capital requirements and higher catastrophe risk capital charges are expected to contribute to consolidation in the sector.

"There are considered to be too many indigenous insurers for New Zealand's 4.4 million inhabitants - a population that is only slightly larger than that of Melbourne," A.M. Best says.

According to Reserve Bank figures, in December 2010 there were about 160 registered insurers, of which 75% were were non-life insurers, including medical insurers, and the rest life insurers.

"While the new Insurance (Prudential Supervision) Act rules are not intended to directly fuel industry consolidation, this consequence is inevitable," A.M. Best adds.

In its annual report, released last month, the Reserve Bank said provisional licensing of insurers under the Insurance (Prudential Supervision) Act was under way, and could lead to some changes in the sector with some insurers merging and others exiting the industry.

Capital beefed up

Interest.co.nz revealed earlier this week that Lumley General Insurance, Vero Insurance and IAG New Zealand - parent of State Insurance and NZI -  have quietly received capital injections from their Australian parents likely to be worth tens of millions of dollars over recent months in the wake of the Christchurch earthquakes and ahead of the implementation of the Reserve Bank's new regulatory regime next year.

The capital injections come on top of the government stepping in after the devastating February 22 Christchurch earthquake with a NZ$500 million support package for mutual insurer AMI, which is now on the block after breaching its Crown Support Deed arrangement through a NZ$76 million shortfall to its NZ$198.6 million regulatory capital requirement. Customers, meanwhile, are facing surging insurance premiums following the earthquakes and insurers such as Ansvar and Zurich are quitting, or scaling back, their earthquake insurance offerings.

In its Financial Stability Report, released last week, the Reserve Bank noted there have been more claims and affected policyholders as a result of the Canterbury earthquakes than from any other insurance event in New Zealand before, and the insurance cost of the earthquakes far exceeds the cost of all previous disasters in New Zealand. The central bank estimates the total cost of property-related insurance claims from the earthquakes at about NZ$30 billion.

Licence needed by March 7

The Reserve Bank's powers under the Insurance (Prudential Supervision) Act come into force next March and once fully licensed, all insurers will be required to hold a specified level of capital under the central bank's solvency standards, with all insurers needing to be fully licensed by September 7, 2013. They must have a licence by March 7 next year to carry out insurance business in New Zealand. See full details of the Reserve Bank's new oversight of the insurance sector here.

A.M. Best maintains the Australian controlled insurers operating in New Zealand are the best placed to meet the new solvency requirements, given they're already complying with the Australian Prudential Regulation Authority's rules.

"Some of the smaller, niche insurers could fall short of new standards under the Act as minimum capital requirements are deemed to be too onerous."

Meanwhile, A.M. Best categorises New Zealand in tier two in terms of its country risk measure, alongside Japan, with moderate levels of economic risk and low levels of political and financial system risk. Australia is a tier one country. Tier one is the top rating and tier five the lowest.

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All these players in the game and yet insurance still costs too much. So much for the vaunted "free market".