The New Zealand life industry is financially strong enough to cope with a new pandemic and other shocks such as economic stress and higher mortality rates, a stress test by the central bank has found. 

In the augural test focused on the life sector the Reserve Bank of New Zealand (RBNZ) used a scenario based on a combined economic and insurance shock to assess the industry’s resilience to severe but plausible threats. 

The economic shock consisted of deteriorating conditions with high inflation and rising interest rates and the insurance shock combined long covid, a new pandemic and higher mortality and morbidity rates. 

“Participating insurers were able to pay out substantial claims from policyholders and remain solvent during a hypothetical three-year scenario…the results were reassuring,” Deputy Governor Christian Hawkesby said. 

The five largest New Zealand-incorporated life insurers with a market share of 75% of premiums participated in the test. They are AIA, Asteron Life, Cigna, Fidelity Life and Partners Life. 

RBNZ developed the stress test scenario covering the three years from 2022 to 2025 in consultation with the insurers. 

The participating insurers used their own models to estimate the effect of the scenario on their financial conditions and submitted detailed results for profit, balance sheet and solvency before and after mitigating actions. 

Previous exercises have involved banks or general insurance providers and the 2022/23 Life Insurance Stress Test scenario was influenced by the recent covid pandemic and a worsening economic outlook with 40-year high inflation and rising interest rates, RBNZ 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,” Mr Hawkesby said. 

“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.” 

RBNZ says lessons learned from the test will be used to improve the design of the 2024 exercise. 

Click here for the stress test report.