A COVID-19 induced recession would see a reduction in insurance premiums in New Zealand as customers in financial hardship reduce costs, hitting personal lines and commercial SME classes the hardest, actuary Taylor Fry says.

New Zealand’s general insurers should brace for the impact of an economic downturn, Wellington-based Director Ross Simmonds says, noting a recent coronavirus outbreak in Auckland signals strong border controls will need to remain in place for the foreseeable future.

With tourism playing a large part in the New Zealand economy, the longer these restrictions remain in place, the larger the financial impact on the country.

“It’s likely more financial pain lies ahead,” Mr Simmonds says. “It’s vital insurers continue to manage their claims and expense costs to maintain capital levels.”

Economic downturns can increase fraudulent claims, which may result in an increase in claim frequency for personal contents and commercial property claims. Claims under credit insurance policies will also increase as unemployment starts to rise, he says, although this is a relatively small class of business in the New Zealand market.

General insurers in New Zealand have enjoyed 2019 property risks for personal lines and commercial lines recording at their lowest loss ratios in the past five years but Mr Simmonds warns that the premiums New Zealand homeowners pay are strongly influenced by the global reinsurance market, and “globally, reinsurance losses have been increasing.”

“We expect New Zealand property risks to continue to increase as reinsurance costs increase,” the Taylor Fry report says.

Longer term, climate change, with its associated natural perils, and regulation are the two main issues for insurers despite being “overshadowed” by COVID-19 over the last six months.

While insurance losses for bushfires in the Port Hills district in 2017 and Tasman district last year were smaller than other weather-related events, a bushfire in a more densely populated region could result in higher losses.

On the regulatory front, insurers have “plenty of activity to keep a close eye on,” including possible higher capital ratios being imposed by the Reserve Bank of New Zealand.

“The RBNZ views the current solvency levels of insurers as being too low, despite an increase in solvency capital over the past two years for all insurers that comply,” Mr Simmonds says.

Insurers will also be watching out for any revision to RBNZ expectations of the Appointed Actuary role and its review of the Insurance (Prudential Supervision) Act 2010. RBNZ Deputy Governor Geoff Bascand said to expect “more intense supervision, particularly in relation to verifying information received from insurers, and concluding enquiries more efficiently”.

A public inquiry into the EQC recommended the current EQC cap on cover be lifted from $NZ150,000 ($138,432) to $NZ400,000 ($369,188) which, if undertaken, would have a “substantial impact” on home insurance, Taylor Fry warns.