Quake hangover propels NZ general insurance premiums up much more than in Aust. and big, developed countries

The Canterbury earthquake hangover has seen New Zealand’s general insurers grow their earnings from premiums by at least double the rate of other countries in the OECD.

Figures provided by Davies Financial and Actuarial Ltd for interest.co.nz show earnings from fire and general insurance premiums increased by 9.2% in 2014.

This is up from 6.4% in 2013 and -3.7% in 2011, but down from 11.7% in 2012.

Statistics included in the Bank for International Settlements’(BIS) latest annual report show that in 2014, non-life insurance premiums only increased by 1.6% in Australia, 1.7% in France, 3.7% in Japan, 3.9% in the UK, 4.0% in Germany and 5.9% in the US.

While there isn’t a direct correlation between premium and profit growth, we can conclude New Zealand insurers are receiving more in premiums than insurers in the six countries mentioned in the BIS report.

The Insurance Council of New Zealand puts this difference largely down to the fact the industry’s still recovering from the hit it took from the Canterbury quakes.

‘100% wrong’

Chief executive Tim Grafton says reinsurers around the world have had to re-access New Zealand’s riskiness, after they completely underestimated the cost of the Canterbury quakes.

“The reinsurance markets of the world got a very big surprise… they got their estimates for Canterbury 100% wrong in terms of the costs. So there was a recalibration of the risk of potential costs that attach to New Zealand,” he says.

“Higher reinsurance costs for New Zealand have seen an increase in the total premium written, and that’ll probably explain some of the differences between us and countries like France and Germany, and even Australia to some extent.”

Furthermore he says the Reserve Bank has toughened its solvency standards, requiring insurers to go from having enough capital to meet a one in 250-year event, to having enough capital to meet a one in 1000-year event by 2017.

Grafton says, “That is way above any other country in the world. Canada has one in 500, and in Australia it is one in 200 or 250”.

Outgoings of 102%

When factoring in losses and expenses as well as premiums earned, figures provided by Davies Financial and Actuarial suggest the picture isn’t as rosy as it may appear for insurance companies.

The sector had a combined ratio of 102% in 2014, meaning that for every $100 it received in premiums, it had outgoings of $102 from losses and expenses.

The combined ratio was better in 2013, at 97%, but general and fire insurers were back in the red in 2012 and 2011, with the quake aftermath producing combined ratios of 132% and 168%.

Commenting on the situation overseas, the BIS report says, “Property-and-casualty firms’ subdued performance in 2014 was the outcome of opposing forces.

“For instance, strong premium growth supported profitability in a number of countries. Between mid-2013 and mid-2014, it contributed to a slight drop, to 94%, of European non-life insurers’ combined ratio.

“However, elevated expenses and catastrophe losses at US companies wiped out much of their gains from premium growth, leading to a 99% combined ratio.”

NZ insurers getting top end returns from investments 

Looking at investment returns, Davies Financial and Actuarial says those in the fire and general insurance industries increased by 4.0% in 2014 – a standard increase compared to the previous few years. However, the increase was impressive when compared to almost all the other OECD countries profiled in the BIS report.

Investment returns in the non-life sector increased by 6.0% in Australia, 3.0% in Germany, 2.9% in the US, 2.7% in the UK, 1.7% in France and 1.2% in Japan. Grafton says this is largely due to New Zealand having higher interest rates than other parts of the world (despite them being low compared to where they’ve been historically). 

“New Zealand also has had one of the highest levels of growth of developed countries in recent years”, he says. “It’s fared through the GFC particularly well compared to other countries and certainly our interest rate environment is higher than many other countries, and until recently we’ve had a very strong New Zealand dollar. 

“All of that is translated into a higher investment return than elsewhere.

“It’s a long game for insurers, so you’ve got to accept there will be years where you get a massive hit – as happened in 2010 and 2011 – and you may have more benign years. But you need those benign years in order to be in a strong position to meet the challenges that come from the Annus horribilis.” 

Looking overseas, the BIS report says, “While the impact of low interest rates has not played out fully in the banking sector, it has already generated important headwinds for insurance companies. 

“For one, the persistence of low rates has taken a toll on companies’ profitability by depressing the yield on new investments. “Against this backdrop and despite favourable investor sentiment in equity markets, credit ratings signal concerns about insurers.”

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