Key Factors
Strengths:
Weaknesses:
- Strong profitability.
- Sound market growth prospects.
- Primarily a short-tailed market, with limited long-tailed risks.
- Exposure to natural and geological hazards.
- Small market compared with others in the region.
Rationale
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 China, Japan, Korea, Taiwan, the U.K., and the 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.
New Zealand's P/C insurers should continue to perform soundly in the face of rising challenges. Although the sector recorded strong earnings in the year to September 2022, with a return on equity (ROE) of about 20%, we expect a steep fall in earnings in 2023 due to significant weather-related claims. In February 2023, New Zealand experienced the two largest weather-related insurance events in its history--the Auckland floods and Cyclone Gabrielle. The sector has also been challenged by ongoing claims inflation impacted by supply chain disruptions.
However, stronger investment returns, following interest rate increases, will be a positive factor for the sector's earnings. We expect earnings to bounce back in 2024, with solid premium growth of about 10%, offsetting claims inflation and rising reinsurance costs. Loss ratios will likely be closer to historical levels.
Country Risk
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.
New Zealand's P/C insurance sector should continue to benefit from the nation's well-developed economy and its sound and stable institutional settings, in our view. While New Zealand has faced the same inflationary pressures that are being felt across the globe, and has seen a rapid increase in interest rates over the past two years, we believe the abovementioned factors moderate the risk of significant and sustained downturns.
We forecast real GDP growth in New Zealand will cool to about 0.2% in 2023, bouncing back to 1.7% in 2024. At the same time, we anticipate inflation will moderate somewhat to 5.7% in 2023, after hitting 7.1% in 2022, and to decline further to 3.4% in 2024. We expect the unemployment rate to increase somewhat over 2023 and 2024, but to remain relatively low.
| New Zealand Property/Casualty--Key indicators | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2021 | 2022 | 2023f | 2024f | 2025f | |||||||||
| Nominal GDP (Bil. US$) | 201.7 | 238.4 | 246.8 | 239.0 | 254.3 | 275.8 | ||||||||
| Real GDP growth (%) | (1.1) | 6.0 | 2.3 | 0.2 | 1.7 | 2.5 | ||||||||
| CPI Inflation (%) | 1.7 | 3.6 | 7.1 | 5.7 | 3.4 | 2.6 | ||||||||
| Unemployment (%) | 4.6 | 3.8 | 3.3 | 4.0 | 4.7 | 4.5 | ||||||||
| Policy rate % (EOP) | 0.3 | 0.8 | 4.3 | 5.5 | 5.0 | 4.0 | ||||||||
| EOP--End of period. CPI--Consumer price index. f--Forecsat. Source: S&P Economics, Credit Conditions Asia-Pacific Q3 2023: China Grapples With An Uneven Recovery June 27, 2023. | ||||||||||||||
Industry Risk
We assess the industry risk for New Zealand's P/C sector as moderately low. We view the sector's profitability as strong. Barriers to entry, market growth prospects, and the institutional framework are supportive factors for the industry's profitability. We consider the sector's product risk to be a challenge to its profitability.
New Zealand's P/C insurance market should return to strong profitability in 2024, after taking a hit in 2023. The sector had an ROE of about 20% in 2022; its profitability has consistently compared well with international peers in recent years. The sector had relatively low underlying claims in 2022, and had a combined ratio of 85.0% for the year, down from 88.3% in 2021. This was partly due to reduced mobility during ongoing COVID restrictions across New Zealand.
While the sector's recent profitability has been aided by modest natural hazard claims, these have risen in recent years. Two events in February 2023 generated record claims. We anticipate the sector's profitability will be significantly hit in 2023, although the weaker underwriting performance should be somewhat supported by strong investment returns. We expect profitability to pick up in 2024 with more normalized claims and ongoing rate increases. The industry's earnings are also supported by strong reinsurance coverage from the private market and from the government backed Toka Tu Ake EQC (Earthquake Commission).
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 about 10% in 2023, before reducing to high single digits the following two years. In 2022, the sector's gross written premiums (GWP) grew 11%, due largely to strong rate improvements, with some unit growth. This was higher than the five-year average GWP growth rate of 7.5% for the sector.
- 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. Large and more complex insurers are also required to obtain and disclose a credit rating, supporting policyholder transparency. 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. While the RBNZ was previously a relatively light-touch regulator, it has increased its oversight and supervision of local insurers in recent years. The RBNZ is currently reviewing the Insurance (Prudential Supervision) Act and insurer solvency standards, which should further strengthen the framework for New Zealand's insurers. We have not observed any systemic deficiencies in governance or transparency for the sector's insurers in recent years.
Factors limiting profitability
- New Zealand's earthquake exposure increases product risks for the country's P/C insurers, in our opinion. While the sector typically has strong profitability, the Christchurch and Kaikoura earthquakes hit earnings for many years, with some claims unresolved more than 10 years later. We expect future catastrophes to affect profitability, but this risk has been moderated by proven access to reinsurance capacity, with insurers increasing coverage since these events. Toka Tu Ake EQC also provides an additional layer of protection for natural disasters, covering the first NZ$300,000 of losses on residential properties (up from NZ$150,000 as of Oct. 1, 2022), further lowering P/C insurers' gross exposures. New Zealand is primarily a short-tail market with little exposure to long-tail liability classes for P/C insurers, which moderates product risks. Bodily injury cover is provided by the public sector Accident Compensation Corporation, and there is no ability to sue for damages or court-awarded injury payments, reducing unpredictable settlement risk.
Chart 3
Related Criteria
- Insurers Rating Methodology, July 1, 2019
- Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
Related Research
- Asia-Pacific Insurance Midyear Outlook 2023: Higher Rates And Reinsurance Test Ratings Boundaries, Aug. 1, 2023
- Credit Conditions Asia-Pacific Q3 2023: China Grappled With An Uneven Recovery, June 27, 2023
- Country Risk Assessments Update: June 2023, June 6, 2023
- New Zealand Insurance Outlook: Disaster-Hit P/C Diverges from Life and Health, March 7, 2023
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analyst: | Julian X Nikakis, Sydney (61) 2-9255-9818; julian.nikakis@spglobal.com |
| Secondary Contact: | Craig A Bennett, Melbourne + 61 3 9631 2197; craig.bennett@spglobal.com |
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