Insurance sector sound, says RBNZ

Wednesday 11th May 2011

The Reserve Bank sees the insurance sector overall as being sound and functioning well, following the devastating Christchurch earthquake in February.

Despite that, some insurers may fall short of standards expected under new licence requirements, which could lead to some industry consolidation and exits, the Reserve Bank said in its Financial Stability Report, published today.

The Reserve Bank supported the Government's move early last month to provide a support package to AMI Insurance, which was concerned its reserves and reinsurance might not be sufficient to cover the total value of claims resulting from earthquakes in Christchurch.

If called on as a last resort, the support package will involve the Government investing up to $500 million of equity in AMI Insurance, with the right to take ownership and assume control of the company if needed.

AMI Insurance is the second largest residential insurer in this country with 485,000 policyholders and 1.2 million policies across the country.

Also, at the start of April, Western Pacific Insurance, with about 7000 policyholders in this country, went into liquidation. It had significant financial exposure as a result of the Christchurch quakes.

Today's Reserve Bank report said the Canterbury earthquakes had resulted in exceptionally high levels of claims, in terms of both quantity and cost.

While insurers would be directly liable for some of the cost, most would be covered by reinsurance, which would test the adequacy of reinsurance arrangements, the twice-yearly stability report said.

Even with substantial use of reinsurance, the size of the earthquake had created doubts about the ability of AMI to meet its claims.

Without the government support package, the associated uncertainty could have disrupted the rebuilding of Christchurch by delaying and possibly reducing payouts to AMI customers.

The Reserve Bank is in the process of implementing a new supervision regime for the insurance industry, and is now processing licensing applications from insurers.

The assessment so far was that the insurance sector overall was sound and functioning well, the report said.

It also noted that substantial temporary migration out of Christchurch could plausibly lead to some sustained reduction in population and reduce post-quake reconstruction in the city.

The deadly earthquake that struck Christchurch on February 22 was arguably the largest natural disaster to hit this country in terms of overall economic impact, as well as being one of the costliest in terms of lives lost, the report said.

In an overall view of the financial sector, Deputy Governor Grant Spencer said bank profits had recovered in the past six months and bad debt charges declined. Bank funding had moved to a more stable footing and capital ratios were relatively high.

While non-performing loans were elevated, they remained manageable, he said.

Commenting on the strength of the New Zealand dollar, Reserve Bank Governor Alan Bollard said: "We think that it would be better for the New Zealand economy if the NZ dollar was not so high."

But he also said that while the kiwi was high against most trading partners, it was very low against the Australian dollar which opened up interesting export opportunities.

NZPA

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