Cyclone Gabrielle: Property and casualty insurers face weaker profitability this year

The Ngaruroro River in Hawke's Bay during Cyclone Gabrielle. Photo / Dawson Bliss

Higher claims from Cyclone Gabrielle and the North Island storms will squeeze the margins and weaken profitability for New Zealand’s property and casualty insurers, according to S&P.

But the rating agency believes the insurers have adequate capital buffers to withstand the potential challenges.

In its New Zealand Insurance outlook report, S&P analysts Michael Vine and Julian Nikakis noted the storms and cyclones that hit New Zealand in January and February had resulted in material property damage.

But they added second-round impacts were likely, driven by supply constraints across services and materials.

“Property/casualty insurers benefit from strong reinsurance support from the private market and Toka Tu Ake EQC, which will absorb a large portion of claims. However, we expect earnings to be materially lower in 2023 than in recent years. Rising reinsurance prices will further constrain profitability.”

They said the claims would largely be absorbed through current-year earnings and reinsurance cover.

But the sector faced potential obstacles including growing natural hazard claims, the rising cost of reinsurance and claims inflation.

“Climate-related events such as storms and floods are increasing in New Zealand leading to higher natural hazard claims. The country has set a new record for natural hazard claims over each of the past three years, and 2023 will top each of these by some margin.”

The analysts said they expected reinsurance terms to continue to tighten and rise in 2023, straining margins.

“Insurers will increase premium rates and pass higher operating costs on to customers, but this is likely to be limited because affordability thresholds are down.”

Insurers may adjust their reinsurance programmes as a consequence and increase retentions to lessen rising costs.

They also warned that the average cost per claim was likely to increase because of higher labour and material expenses.

“Elevated demand in the construction industry due to rebuild and repair of homes will further fuel inflation in New Zealand.”

But the news was better for health and life insurers.

Profitability for life insurers was set to improve modestly over the next 12 months.

“Sound underwriting practices, scale efficiencies and premium-rate rises across all lines will drive the gains.”

The analysts also said increased insurer scale after five years of industry consolidation should add operational efficiencies.

However, the industry faced potential obstacles from an increase in policy lapses because of people being no longer being able to afford the insurance.

“Customers may also cancel or switch to lower cover amid less dire Covid sentiment.”

Meanwhile, the profitability of the health insurance sector was set to remain modest over the coming year with Southern Cross Healthcare - the largest player - likely to drive the industry’s profitability.

“Normalisation of claims frequency post-pandemic will depend on capacity in the healthcare system. Profitability will be supported by premium growth and higher investment earnings.”

The analysts said the main obstacles for the sector were prolonged claims inflation, slower premium growth and health reforms.

“Higher medical system inflation could escalate the cost of claims. While some insurers can negotiate contracts with hospitals and healthcare providers, contract renewals are likely to be more challenging in 2023, straining profitability.”

They also warned that some customers and employer group may switch to lower health insurance cover or cancel their cover to save money. “Additionally, penetration remains low in New Zealand due to various government schemes.”

Most New Zealanders relied on the public health system, they said. “While this lowers exposure for health insurers, it lessens the demand for private cover.”