S&P Global Ratings assesses the industry and country risk for the life insurance sector of New Zealand (foreign currency ratings AA+/Stable/A-1+) as low risk. We base the assessment on our view of New Zealand's low country risk as a reasonably high-income economy with a stable policy environment and low industry risk with strong returns and relatively less exposure to interest rate and longevity risks than other life insurance markets.
Chart 1
Country Risk: Low
We assess the country risk of New Zealand as low, based on our positive view of the country's economic risk, political risk, financial system risk, payment culture, and rule of law. S&P Global Ratings considers that the life insurance sector benefits from the nation's open, flexible, and well-developed economy and its reasonably high personal income levels. These factors mitigate the risk of significant and sustained downturns, and provide a stable operating environment for the life insurance industry.
Chart 2
| 2018 | 2019 | 2020 | 2021F | 2022F | 2023F | 2024F | |
|---|---|---|---|---|---|---|---|
| GDP nom. (Bil. US$) | 211.5 | 208.1 | 201.2 | 233.9 | 249.2 | 265.3 | 280.2 |
| GDP (Real, YOY%) | 4.3 | 3.0 | -1.2 | 4.6 | 2.8 | 2.9 | 2.8 |
| CPI (Avg, YOY%) | 1.6 | 1.6 | 1.7 | 2.3 | 2.2 | 2.2 | 2.1 |
| Average Policy Rate (%) | 1.8 | 1.4 | 0.4 | 0.3 | 0.5 | 0.9 | 1.0 |
Life Insurance Sector Industry Risk: Low
We view profitability (measured largely by return on equity and return on assets) and product risk favorably, with barriers to entry and market growth prospects as benign to our assessment. The institutional framework is moderately strong.
Chart 3
We assess New Zealand Life insurers to have limited exposure to the effects of COVID-19 as the industry's overall product portfolio predominantly consists of traditional individual risk protection (term life), which is largely unaffected due to the low mortality rate of COVID-19 in New Zealand.
Chart 4
Claims pressure may persist in the income protection product line, however, as a result of potential social and economic pressures, although this remains a small proportion of the overall portfolio. That said, the broader COVID-19 recovery is occurring faster than in most advanced economies, and our previous expectations. This should moderate claims pressure and lapse experience. We expect growth in written premiums for the sector to be in the low single digits, lower than prior to 2019, as a result of softer economic conditions.
Factors Supporting Profitability
- We expect the industry to maintain a return on equity of approximately 13%-14% over the next three years. Top-line premium volumes may experience low single digit growth as the economy recovers, while claims are projected to remain stable.
- We assess the potential for product risks to trigger profit volatility in New Zealand's life insurance sector as low. Partly supporting this view is the sector's low asset-liability mismatch risk, minimal exposure to guaranteed rate products or longevity risk associated with annuity products, and the industry's low exposure to other product risks. We see other product risks such as underwriting practices and exposure to pandemics as low. Mortality risk is highly predictable and well understood and managed by the life insurance sector. Our view is unchanged by the COVID-19 pandemic given the very low exposure in New Zealand and the backstop of reinsurance protection.
- We forecast the market to grow annually by approximately 2.3%-2.5% over 2021 to 2023, following modest growth of 2.4% and 2.1% for fiscal years 2019 and 2020. Term and trauma products, which comprised about 68% of total premiums for 2020, experienced modest increases of 3.8% and 2.2% respectively. Premium declines occurred in some classes such as consumer credit insurance and accidental death (decrease of 24.1% & 6.8%), as lenders moved away from offering these products under conduct and culture reviews. However, these classes make up a very small portion of the total premium income.
Chart 5
- Life insurance penetration (premium to GDP) is likely to remain low compared with other jurisdictions due to the government's Accident Compensation Corp. (ACC), a compulsory universal no-fault accidental injury scheme covering all work and nonwork injuries.
Chart 6
- We consider barriers to entry for the New Zealand life insurance sector as neutral, driven by regulatory barriers that we view as moderate and operational barriers, which we view as low. While establishing a new license is reasonably onerous, in recent years there has been a degree of consolidation and ownership changes within the existing market. Several formerly bank-owned life insurers have now been sold to insurance groups. Most recently, Westpac Life-NZ-Ltd. announced its sale to locally owned Fidelity Life, subject to regulatory approval. Other divestments in the past few years include OnePath Life (NZ) Ltd. sold to U.S.-based Cigna Corp., Sovereign Assurance Co. Ltd. sold to Hong Kong-based AIA Group, and AMP Life Ltd. (New Zealand Branch) sold to U.K./Bermuda closed-fund consolidator Resolution Life Group. We doubt these transactions will have a material impact on the industry given ongoing broad coverage and competition.
- We regard New Zealand's insurance institutional framework as mildly supportive. This is based on our assessment of the sector's regulatory framework and robust track record. We see ongoing regulatory developments and scrutiny over life insurers regarding solvency standards, and culture and conduct to customers. There is no evidence of poor standards of governance and transparency in the New Zealand market.
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analyst: | Kelvin J Bannan, Melbourne + 61 2 9255 9895; kelvin.bannan@spglobal.com |
| Secondary Contact: | Michael J Vine, Melbourne + 61 3 9631 2013; Michael.Vine@spglobal.com |
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