Investment losses from the decline in asset values and falling investment income due to the low interest rate environment will have the largest impact on New Zealand P&C insurers’ earnings in 2020, says S&P Global Ratings.
However, in its report “Insurance Industry And Country Risk Assessment: New Zealand Property/Casualty”, the international credit rating agency says that it expects that some of these unrealised losses will be wound back before the end of the year.
S&P expects the impacts of the COVID-19 pandemic and the economic downturn to be relatively minor for New Zealand’s P&C insurers, which have limited exposures to the most impacted lines of business. In addition, any increase in claims as a result of the pandemic should be largely offset by a reduction in claims in the large lines of home and motor, with a significant decrease seen in motor claims frequency during the lockdown, which was more severe than in most countries.
The report adds that S&P also expects the measures taken by insurers to assist customers, such as premium deferrals or rebates, to impact the sector’s combined ratio for 2020 by several percentage points. However, these actions should also increase customer sentiment and aid retentions.
S&P assesses the industry and country risk of New Zealand’s P&C insurance sector as intermediate. This assessment is in common with Japan, Korean, Taiwan, UK, and US. The assessment derives from S&P’s view of the sector’s moderately low industry risk and New Zealand’s low country risk.
Country Risk: Low
S&P assesses the country risk for New Zealand (foreign currency ratings AA/Positive/A-1+) as low, based on its favourable view of the economic risk, institutional risk, financial system risk, and payment culture and rule of law.
In S&P’s opinion, New Zealand’s P&C insurance sector benefits from the nation’s open, flexible and well-developed economy and its relatively high income levels. These factors moderate the risk of significant and sustained downturns that could adversely impact the P&C insurance segment.
P&C Insurance Sector Industry Risk: Moderately Low
S&P assesses the industry risk for the P&C sector as moderately low. Product risks, barriers to entry, market growth prospects, and the institutional framework are factors S&P views as supportive of sector’s profile and industry profitability. S&P expects the P&C insurance segment will continue to post solid underlying results over the next couple of years, although results in 2020 will likely be subdued due to the COVID-19 lockdown and resultant economic slowdown.
Nevertheless, S&P expects rate increases to support premium growth of about 2%-3% in 2020, with a return on equity (ROE) of about 8% and a net combined operating ratio of around 90%-95% for the year. S&P expects premium growth and profitability to improve in 2021 as the economy rebounds from the downturn, with premium growth of about 6% in calendar 2021 and 2022, and ROE of about 12% over the same period.
Factors supporting profitability
In S&P’s view, the P&C sector’s high earthquake exposure is moderated by proven access to reinsurance capacity and the government sector’s Earthquake Commission coverage. S&P expects reinsurers to remain active and offer capacity in the region with primary insurers continuing to benefit from ample capacity, albeit with hardening prices. Most home insurance is on a “sums insured” basis, which assists with improving claims certainty at the time of catastrophic events. Unpredictable settlement risk is low, with bodily injury cover provided by the public sector’s Accident Compensation Commission, and there is no ability to sue for damages or court-awarded injury payments. New Zealand is primarily a short-tail market with little exposure to long-tail liability classes in the private sector.
Barriers to entry
S&P considers the barriers to entry for the New Zealand P/C insurance sector as moderate. The licensing requirements by the prudential regulator, Reserve Bank of New Zealand, are considered reasonably onerous, covering areas such as minimum capital adequacy, risk management, governance, and fit and proper standards. S&P believes operational barriers are modest, with a range of distribution options including direct telesales and finance company or other retail affiliations.
While the P&C sector is mature and highly developed, S&P views market growth prospects as solid. Gross written premiums have grown by an average of 8.5% over the past three years, and S&P expects similar growth over the medium term. However, premium growth for 2020 will be muted due to the COVID-19 pandemic and resultant lockdown. In particular, S&P expects unit growth to be softer in 2020, due to affordability constraints, but for rate increases to support modest growth.
S&P regards New Zealand’s insurance institutional framework as sound. S&P has not observed any material deficiencies in governance or transparency over this period.