The Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) has completed its inaugural stress test for the life insurance industry, known as the Life Insurance Industry Stress Test (LIIST). The assessment evaluated how well the sector can withstand extreme but plausible economic and insurance-related shocks over a three-year period from 2022 to 2025.
The test involved five major insurers: AIA, Asteron Life, Cigna, Fidelity Life, and Partners Life. It was designed to measure the sector’s resilience and its potential impact on the broader financial system.
Dual Shock Scenario: Economic and Insurance Pressures
The stress test applied a dual shock scenario combining:
- A severe economic shock marked by high inflation and rising interest rates
- An insurance shock driven by a new pandemic wave, long COVID, and elevated mortality and morbidity rates
Both shocks also included assumed credit rating downgrades of key reinsurers, adding further pressure on insurers’ risk exposure.Insurers used their internal models to project the impact on profits, balance sheets, and solvency. Results were submitted both before and after potential mitigating actions, allowing the RBNZ to assess real-world response strategies.
Strong Overall Solvency Despite Significant Pressure
All participating insurers remained solvent and fully operational throughout the simulated crisis. The solvency margin (SM), a key metric aligned with RBNZ standards, was used to evaluate resilience.
While the economic shock had a manageable impact, the insurance shock significantly affected results due to:
- Higher claims expenses
- Increased policy lapse rates
- Reduced new business volumes
Some insurers saw their solvency margins fall below internal risk tolerance levels, prompting proactive measures to stabilise their positions.
Mitigating Actions Taken to Maintain Stability
In response to the stress scenario, insurers implemented a range of actions including:
- Cost reduction initiatives
- Adjustments to premiums and commissions
- Revisions to reinsurance arrangements
These steps helped restore solvency margins and demonstrated the industry’s capacity to adapt under pressure.Deputy Governor Christian Hawkesby highlighted the importance of the exercise, noting it was the first stress test specific to New Zealand’s life insurance sector. He expressed confidence in the industry’s overall resilience and emphasized the value of stress testing in strengthening risk management and financial stability.
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