Reserve Bank assesses state of insurance sector
The insurance sector, which is set to come under Reserve Bank supervision later this year, poses "little systemic risk" to the country's financial system, according to the bank regulator.
Wednesday, May 19th 2010, 8:10PM
by Paul McBeth
The central bank says relatively small size of most insurance institutions and the wider sector would damp any impact a "failure would have upon the financial system and macroeconomy." Similarly, the financial linkages between insurers are less than in the banking system, and any distress of failure would develop more slowly, potentially giving regulators "time to mitigate" its impact.
The bank's financial stability report noted weak economic conditions have a "limited impact" on insurers' profitability and there was a resilient trend of premium income for all insurance subsectors through the global financial crisis and into 2009.
"Any future volatility of investment markets can potentially affect insurers' capital strength, although in general the New Zealand insurance sector has a relatively conservative allocation," the report said. "Apart from AIG, the ratings of insurers operating in New Zealand have generally been stable."
Bringing insurers under the Reserve Bank's umbrella will pull New Zealand into line with the international community, and the bank expects legislation to be enacted near end of the third quarter this year.
The new supervision will require insurers to be licensed by the Reserve Bank by satisfying solvency standards and complying with a risk management programme. The regulator is in the process of developing the solvency standards.
The bank will also require licensed insurers to obtain and publish a financial strength rating, prepare an annual financial condition report along with its full and half-year financial statements, and life insurers will have to maintain at least one statutory fund to meet its liabilities.
Paul is a staff writer for Good Returns based in Wellington.
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