The Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) has conducted its inaugural stress test for the country’s life insurance sector, revealing that the largest insurers are well-equipped to weather severe economic and insurance shocks while ensuring policyholders’ claims are met.
The stress test, known as the Life Insurance Industry Stress Test (LIIST), assessed the industry’s ability to withstand hypothetical yet plausible scenarios, shedding light on its resilience and impact on the broader financial system.
Deputy Governor Christian Hawkesby emphasised the importance of stress tests in gauging financial stability and enhancing the industry’s capability to manage risks.
He noted that this marks the first time a stress test has been conducted specifically for New Zealand’s life insurance industry and expressed satisfaction with the results.
The stress test scenario, developed in collaboration with the participating insurers – AIA, Asteron Life, Cigna, Fidelity Life, and Partners Life – covered a three-year period from 2022 to 2025.
It encompassed a dual shock scenario, featuring worsening economic conditions with high inflation and rising interest rates (economic shock), as well as challenges stemming from a new pandemic, long COVID, and higher mortality and morbidity rates (insurance shock). Both shocks also factored in ratings downgrades for reinsurers.
Insurers utilised their individual models to estimate the potential effects of the scenario on their financial positions.
Detailed assessments of profit, balance sheets, and solvency were submitted, both before and after any mitigating actions. The resilience of insurers was measured using the solvency margin (SM), which takes into account the Reserve Bank’s solvency standards. The stress test results were compared against a base case that excluded the shocks.
While the economic shock showed insurers to be well-positioned to weather the challenges, the insurance shock had a more pronounced impact due to increased claims expenses, higher lapse rates, and decreased new business volumes.
Despite these challenges, all insurers maintained solvency and remained operational. However, some experienced a decline in their solvency margin beyond their risk appetite, triggering a series of mitigating actions. These actions included cost reductions, premium adjustments, changes to commissions, and modifications to reinsurance arrangements.
