The Reserve Bank of New Zealand (RBNZ) is engaging with insurers and reinsurers to better understand premium changes in high-risk areas such as Wellington.
The changes are expected to make prices materially higher for a small proportion of customers, but precise effects are uncertain given limited information on reinsurance costs and insurers’ strategies, the central bank says in its Financial Stability Report.
“We are working with industry to understand the impacts this will have on insurance provision more broadly, but for now insurance appears to be available for all but the riskiest properties,” Governor Adrian Orr said.
Risk-based pricing leads to a transfer of risk from insurers to affected households and businesses and the institutions that lend to them, and is likely to reduce the value of some assets, the report says.
A rapid and disorderly change in the insurance market could reduce efficiency and competition, with impacts likely to be amplified by the degree of concentration in the New Zealand sector.
The Financial Stability Report also says the findings of an independent review of the failure of CBL Insurance will be released “as soon as possible”.
The findings will feed into an RBNZ review of its regulation and supervision of insurers.
“This will include a consideration of whether insurers should be required to maintain solvency buffers above the minimum solvency capital requirements,” Mr Orr said.
The potential change would reflect regulations in Australia, which can require insurers to build or maintain buffers over the minimum.
RBNZ says CBL is the only insurer known to be in breach of the New Zealand minimum solvency requirements, but solvency ratios have continued to decline for both life and general insurers.
“Currently, some insurers should increase their solvency buffers to improve their resilience to financial shocks,” Mr Orr said.
Overall solvency ratios have fallen for larger insurers but held steady or increased for small insurers, while New Zealand branches of Australian companies have seen increasing ratios.