Increased regulations, competitive pressure and economic uncertainties created by COVID-19 have produced “fresh headwinds” for the New Zealand life insurance industry, AM Best warns in a new report.

The industry will need to develop and strengthen its risk management capabilities to overcome the challenging conditions. It also must become more innovative, especially when it comes to digital offerings.

“Weakened economic fundamentals and the prospect of lower for longer interest rates, both consequences of the COVID-19 pandemic, present fresh headwinds for life insurers operating in New Zealand,” AM Best said.

“These insurers are also facing up to existing regulatory and competitive challenges, which when combined, create a testing operating environment for the country’s life insurers.

“In AM Best’s view, adapting to regulatory developments, competitive conditions and market consolidation, along with the side effects of the COVID-19 pandemic, will remain central themes for life insurers operating in New Zealand over the coming years.”

Despite the testing challenges, AM Best believes the industry is up to the task given its track record of robust performances and adequate capital reserves to buffer against any potential shocks.

In the last financial year the industry managed to achieve a profit margin of 10.9%, AM Best says, citing data from the Reserve Bank of New Zealand. Operating returns were underpinned by favourable underwriting results and positive net investment returns despite the pandemic disruption that unfolded in late March.

“The segment’s product mix is an important driver of underwriting profitability,” AM Best said.

“The business mix of the New Zealand life insurance segment is dominated by personal protection products with yearly renewable terms, for which the premium rates are not guaranteed and are reviewed periodically.

“The market has seen consistently favourable claims experience on these products as a result of these features.”

AM Best does not expect COVID-19 to have a material impact on the industry’s underwriting results, as the country has successfully contained the virus transmission with aggressive measures.

“Notwithstanding expected reductions in investment returns over the near term, and the potential for a slowdown in sales as a result of the pandemic, AM Best expects life insurers in New Zealand to continue to generate robust underwriting returns, ultimately supporting operating earnings for the segment over the coming years,” the ratings agency said.