Reserve Bank assesses state of insurance sector

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.