The Reserve Bank of New Zealand’s (RBNZ) first stress test involving general insurers has highlighted the industry’s reliance on offshore reinsurance and the potential for lower profitability and reduced dividend payments in severe weather scenarios.

Three stress test scenarios modelled covered an economic shock caused by a domestic COVID-19 outbreak, severe weather events over a 12-month period and significant problems in global reinsurance markets due to catastrophic events overseas.

RBNZ says the reinsurance scenario had the most significant impacts of the three, showing the need for significant and timely mitigating actions if arrangements with offshore providers are to be disrupted.

“The test was not intended as a pass or fail exercise, rather its main purpose was to assess the resilience, in particular the solvency, of the large general insurers to three severe but plausible scenarios,” it said.

Balance sheets appeared well positioned to offset a three-year economic shock, with the ability to reduce dividends a potential additional buffer.

In the weather scenario, consisting of three major storms, losses are material but reinsurance arrangements and dividend reductions prevent significant capital level declines.

Deputy Governor and GM for Financial Stability Geoff Bascand says climate change is increasing the intensity of weather events that have material physical and financial impacts.

“The stress test shows that increases in the intensity and/or frequency of weather events lead to lower profitability and dividend payments for insurers,” he said. “If sustained, this could lead to higher premiums in the future.”

Physical and transition risks from climate change will be a focus of industry stress testing in future years, RBNZ says.

The stress test involved the five largest New Zealand insurers, representing around 70% of the sector.