New Zealand insurers comfortably withstood a stress test simulating a huge earthquake and severe cyber incidents.  

The results confirm the industry is well-equipped to handle extreme shocks and disruptions, according to the Reserve Bank of New Zealand.

“Despite the severity of the scenario, policyholder claims would have been met,” the regulator’s director of financial stability assessment and strategy Kerry Watt said.  

“This is a sign of the resilience that’s been built into the system since the Canterbury earthquakes, including strengthening of solvency requirements, increased coverage by the Natural Hazards Commission and improved loss estimation modelling.”  

The quake scenario involved a magnitude-8.7 event off the east coast of the North Island. It simulated losses that went beyond the RBNZ’s solvency requirements, to check insurer preparedness and recovery plans.  

Participating insurers – AA Insurance, AIG, IAG, Tower, Vero, Chubb and QBE – account for about 70% of the market. Modelled property losses were $NZ62 billion ($57.21 billion), rising to $NZ100 billion ($92.28 billion) if extrapolated to the whole market.

About half the losses were covered by the government-guaranteed NHC, 39% by reinsurance arrangements and 8% retained by policyholders, with the remainder covered by the insurers.

The stress test also included a major data breach scenario, a critical cloud services outage and a ransomware attack. Losses were much lower than the quake scenario, but the relative effect on profitability was significant, reducing annual aggregate profit by one-third in the cloud outage scenario. Reinsurance covered a large portion of cyber claims.  

Mr Watts says the test highlighted different industries’ exposure to cyber risks and the need for greater clarity on coverage in policy wording. Insurers used the exercise to improve data collection, develop modelling and inform risk appetite.

“We encourage the industry to build on these insights to improve resilience in this rapidly changing space,” he said.

Capital injections from parent companies and the availability of reinsurance have been identified as critical to insurers continuing to offer cover following catastrophes.  

The quake scenario included a tsunami followed by a magnitude-7.7 aftershock one month later, and smaller tremors for 12 months.

The RBNZ says the high proportion of claims covered by reinsurers and the NHC suggests policy changes since the 2010-11 Christchurch quakes – including the one-in-1000-year loss solvency standard and NHC payments of up to $300,000 per home – have lifted resilience.

The aggregate solvency ratio fell from 168% at the start of the stress test to 11% (the minimum requirement for licensed insurers is 100%) at the end of year one.  

Insurers identified actions to recover including capital injections, repricing, reinsurance cover adjustments and cost cuts.

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