S&P sees New Zealand 2023 P&C combined ratio at 98%

New Zealand’s property and casualty (P&C) insurers face “materially lower” earnings, with profitability to dip substantially in the face of record weather-event claims, inflationary pressures and ballooning reinsurance charges, S&P Global Ratings says.

The nation has set a new record for natural hazard claims over each of the past three years, the ratings agency says, and “2023 will top each of these by some margin”.

S&P forecasts a combined ratio of 98% this year and 92% next year for the sector, insurance analyst Michael Vine tells insuranceNEWS.com.au. That compares with 85.1% in 2020, 88.3% in 2021 and an estimated 91% last year.

Climate-related events such as storms and floods are increasing in New Zealand, leading to higher natural hazard claims,” S&P says in a New Zealand Insurance Outlook report.

“We expect earnings to be materially lower in 2023 than in recent years. Rising reinsurance prices will further constrain profitability.”

Claims from multiple large natural catastrophes, including unprecedented flooding around Auckland in January and Cyclone Gabrielle last month, will squeeze insurer margins and weaken profitability. A loss ratio of 71% is forecast this year and 65% next year for the sector. That compares with 56.2% in 2020, 60.8% in 2021 and an estimated 64% last year.

Reinsurance terms will to continue to tighten and costs rise in 2023, straining margins, the ratings agency says, and insurers will increase premium rates and pass higher operating costs onto customers.

“This is likely to be limited because affordability thresholds are down. Higher interest rates and a weaker economic outlook have hit customers. Insurers may adjust their insurance programs and increase retentions to lessen rising (reinsurance) costs,” the report said.

On claims inflation, S&P says high inflation will lead to rising, claims, costs and operational expenses, and damp profitability.

The average cost per claim is likely to increase due to higher labour and material expenses, which have been exacerbated by the recent catastrophe events. Elevated demand in the construction industry due to rebuild and repair of homes will further fuel inflation in New Zealand, it says.

It predicts, the underlying profitability will be strained, and the industries’ combined ratio will drop below 95% in 2024.

New Zealand insurers face rising claims costs and expenses due to unprecedented inflationary pressures and a higher cost of reinsurance, says S&P, which rates the insurance sector “stable”.

New Zealand was hit by several catastrophe events in February 2023, including storms, floods, and earthquakes, it says, resulting in material property insurance claims, and there is “likely to be second round impacts,” driven by supply constraints across services and materials.

Strong reinsurance support from both the private market and Toka Tu Ake EQC will absorb a large portion of claims, it says.

Life insurers should grow steadily and generate “at least modest profit” with earnings set to improve modestly over the next 12 months. It says sound underwriting practices, scale efficiencies, and premium-rate rises across all lines will drive the gains.

Increased insurer scale after five years of industry consolidation should add operational efficiencies, and higher interest rates will also provide some profitability uplift as insurers release reserves on long-tail products and benefit from higher yield on reinvestment.

Capital adequacy continues to be a strength and should remain solid, with ownership largely offshore, S&P says.

On disruption from government policies, S&P says a proposed New Zealand income insurance scheme may impede growth in private sector income protection products but this impact should be low because the private sector offers broader coverage. Tightened industry conduct legislation may also restrain sales growth.

Affordability-related lapses are likely as insurers apply age and inflation based premium rate increases, and customers may also cancel or switch to lower cover amid “less dire” covid sentiment, it says.

Unlike Australia, New Zealand’s claims experience has remained sound over the past five years with strict product features and a backdrop of government schemes. However, S&P says New Zealand is “not immune to rising claims from mental health and from industries with difficult work conditions,” and greater social and media awareness, legal facilitation and economic pressures may fuel the trend.

S&P says New Zealand-based insurers “have adequate capital buffers to withstand the potential challenges ahead,” and strong capital adequacy and access to group and reinsurance resources will underpin their creditworthiness this year.