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Insurance Industry And Country Risk Assessment: New Zealand Property/Casualty


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Insurance Industry And Country Risk Assessment: New Zealand Property/Casualty

Key Factors

  • Strong profitability in recent years
  • Sound market growth prospects
  • Benefits from the nation's well-developed and stable economy
  • Exposure to natural catastrophes
  • Small market compared with others in the region


S&P Global Ratings assesses the industry and country risk of New Zealand's property/casualty (P/C) insurance sector as intermediate. This assessment is the third lowest on our scale and is in common with Japan, Korea, Taiwan, U.K., and U.S. (see chart 1). The intermediate risk assessment derives from our view of the sector's moderately low industry risk and New Zealand's low country risk.

Chart 1


We expect New Zealand's P/C insurers to perform strongly over the next two to three years. The sector proved to be highly resilient during calendar 2020, with no material impact for local insurers from the COVID-19 pandemic and the ensuing economic downturn. This was due to several factors, including local P/C insurers' limited exposure to the most affected lines of business, as well as the New Zealand government's ability to contain the virus and implement sound fiscal responses.

Country Risk: Low

Our assessment of the low country risk for New Zealand (foreign currency ratings AA+/Stable/A-1+) is based on our favorable view of its economic risk, institutional risk, financial system risk, payment culture and rule of law.

We expect New Zealand's P/C insurance sector to continue to benefit from the nation's well-developed economy and its sound and stable institutional settings. In our view, these factors moderate the risk of significant and sustained downturns. This was borne out during calendar 2020 following the onset of COVID-19 and the ensuing lockdown, with New Zealand's economy bouncing back strongly after a brief downturn. We anticipate GDP growth of 4.6% in calendar 2021, and for the unemployment rate to return to pre-pandemic levels over the next one to two years.

On Feb. 22, 2021, we raised our foreign currency sovereign rating on New Zealand to 'AA+', from 'AA'. The upgrade reflects our view that the government's credit metrics can withstand potential damage from negative shocks to the economy given New Zealand's quicker recovery from the COVID-19 pandemic than most advanced economies.

Key Indicators 2018 2019 2020 2021f 2022f 2023f
Nominal GDP (bil. US$) 211.5 208.1 201.2 233.9 249.2 265.3
Real GDP growth (%) 4.3 3 -1.2 4.6 2.8 2.9
CPI Inflation (%) 1.6 1.6 1.7 2.3 2.2 2.2
Unemployment (%) 4.3 4.1 4.6 4.6 4.3 4.1
Policy rate (%) 1.75 1 0.25 0.25 0.5 1

P/C Insurance Sector Industry Risk: Moderately Low

We assess the industry risk for New Zealand's P/C sector as moderately low. Barriers to entry, market growth prospects, and the institutional framework are factors that we view as supportive of industry profitability. We consider the sector's product risk to be a challenge to its profitability.

In our view, New Zealand's P/C insurance market will maintain strong profitability over the next three years. The sector achieved a return on equity (ROE) of 20.5% in 2020, which compared favorably with peers. Profitability was aided by benign natural hazard experience over the year, as well as lower frequency claims in motor insurance due to COVID-related lockdowns. However, much of the latter benefit was offset by the premium refunds and rebates extended by a number of New Zealand's P/C insurers to their policyholders.

We anticipate the sector's profitability will remain at or above current levels for the next three years, with ROE expected to be in the low-to-mid 20% range over this period. At the same time, we forecast the net combined ratio of the industry to be about 80%-85%. The industry's earnings will be supported by solid premium growth, strong underwriting and claims practices, and supplemented by sound investment earnings. However, the sector's profitability remains vulnerable to volatility arising from the country's earthquake exposure.

Chart 2


Factors supporting profitability
  • We view the market growth prospects for New Zealand's P/C sector as sound and expect annual premium growth to be in the mid-single digits over the next three years. In calendar 2020, the sector saw modest growth of 1.1% in gross written premiums (GWP), affected by reduced mobility and the premium rebates offered by insurers due to COVID-related lockdowns. In the three years prior, the sector had average GWP growth of 8.5%, despite the mature nature of the market. We expect premium growth to return to similar levels in calendar 2021, buoyed by moderate premium rate increases.
  • We assess barriers to entry for the New Zealand P/C insurance sector as moderate. Although there have been several new entrants to the market in recent years, we consider the licensing requirements of the prudential regulator, Reserve Bank of New Zealand (RBNZ), to be reasonably onerous. These include areas such as minimum capital, risk management, governance, and fit and proper standards. We believe operational barriers are modest, with a range of distribution options including direct telesales and finance company or other retail affiliations.
  • We regard New Zealand's insurance institutional framework as sound. In recent years the RBNZ has increased its oversight and supervision of local insurers. We consider this, as well as the current review of the Insurance (Prudential Supervision) Act and insurer solvency standards, as strengthening the framework for New Zealand's insurers. While recent reviews carried out by the RBNZ have identified some shortcomings, we have not observed any material deficiencies in governance or transparency for the sector's insurers.
Factors limiting profitability
  • New Zealand's earthquake exposure increases product risks for the country's P/C insurers, in our opinion. While the New Zealand P/C sector typically has strong profitability, the Christchurch and Kaikoura earthquakes hit the industry's earnings for several years. We expect future catastrophes would affect profitability although this risk is moderated by proven access to reinsurance capacity, with insurers increasing coverage since these events. The government's Earthquake Commission also provides an additional layer of protection for natural disasters, covering the first NZ$150,000 of losses on residential properties. Lowering product risks, New Zealand is primarily a short-tail market with little exposure to long-tail liability classes in the private sector. Bodily injury cover is provided by the public sector Accident Compensation Commission, and there is no ability to sue for damages or court-awarded injury payments, reducing unpredictable settlement risk.

Chart 3


This report does not constitute a rating action.

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