Industry consolidation in New Zealand is likely because there are too many insurers for the size of the market, says AM Best.

The ratings agency says the major trans-Tasman companies which dominate the New Zealand insurance market are best placed to take over smaller companies that will struggle to comply with tighter regulations.

“Some of the smaller, niche insurers could fall short of new standards under the Insurance (Prudential Supervision) Act (IPSA) as minimum capital requirements are deemed to be too onerous,” it says in a special report.

It says smaller New Zealand insurers will also find it hard to remain independent when the Reserve Bank of New Zealand imposes its new catastrophe risk charge.

“While the new IPSA rules are not intended to directly fuel industry consolidation, this consequence is inevitable,” AM Best says.

IAG, Vero, AMI, Lumley and Tower control about 75% of the non-life market in New Zealand, while the state-owned Earthquake Commission and Accident Compensation Corporation account for about half of all non-life premiums.

AM Best says higher rates and more onerous terms and conditions have prompted some larger brokers to start feasibility studies for the use of captives, possibly domiciled in Singapore.

There is also interest in catastrophe bonds, although traditional insurance and reinsurance are still favoured for risk transfer.