The inaugural stress test for life insurers was reassuring, says Christian Hawkesby, RBNZ’s deputy governor. It was not a pass or fail exercise.

“Participating insurers were able to pay out substantial claims from policy holders and remain solvent during a hypothetical three-year scenario which included long Covid, a new pandemic and a period of severe economic stress,” he says.

The five biggest New Zealand-incorporated life insurers with a market share of 75% of premiums participated - AIA, Asteron Life, Chubb Life, Fidelity Life and Partners Life. The stress test scenario was developed by the RBNZ in consultation with participating insurers.

Previous stress tests have involved banks or general insurance providers, but this was an inaugural stress test for life insurers. Stress tests assess entities’ resilience by demonstrating whether they have enough capital to withstand extreme shocks. They also indicate potential impacts on the broader financial system.

Insurers are required to maintain a minimum amount of solvency capital as determined by applying the Reserve Bank solvency standards. The solvency margin was used to measure the resilience of insurers to these shocks. The stress results were benchmarked against a base case submission which excluded the shocks.

The test scenario covered three years from 2022 to 2025 and consisted of a combined economic and insurance shock.

The economic shock consisted of worsening economic conditions with high inflation and rising interest rates. The insurance shock combined long Covid, a new pandemic and higher mortality and morbidity rates. Both shocks included ratings downgrades for reinsurers.

Insurers used their own models to estimate the effects of the scenario on their financial conditions. They submitted detailed results for profit, balance sheet and solvency before and after any mitigating actions.

During the test all insurers were able to remain solvent. However, the combined effects of the scenario caused the solvency margin of some insurers to fall outside their own risk appetite and triggered mitigating actions.

These actions included cost reductions, premium increases, reductions to commissions and changes to reinsurance arrangements.

Hawkesby says overall insurers are well positioned to withstand the economic shock, despite some recording losses on their long-term bond portfolios. However, the insurance shock had a much greater impact due to higher claims expenses, higher lapse rates, and lower new business volumes.

He says stress tests play an important role in helping build understanding of how particular risks may impact financial stability as well as building capability across industry to manage these risks.

“Insurers recognised the value of participating in the stress test and we identified areas of good practice from some insurers that could be considered by others.”