KEY POINTS:
The insurance industry is facing tougher times as it is squeezed between a softening business cycle, pressure on prices due to competition, and expensive payouts on weather-related events, many linked to the effects of climate change, a survey has found.
PricewaterhouseCoopers' first Insurance "Banana Skins" Survey, conducted with
the Centre for the Study of Financial Innovation, asked senior industry executives from the life and general insurance sectors in 21 countries to rank the major risks and concerns on which they were likely to slip.
Managing the insurance cycle topped New Zealand insurers' list.
"Certainly when we talk to general insurers," said PricewaterhouseCoopers assurance practice partner Lisa Crooke, "it is what they would call a soft market from a premium point of view.
"It's extremely competitive, and that's not just New Zealand, that's international as well.
"With the market perceived to be softening, some insurers may be striving to maintain revenues by taking on extra risk and cutting prices.
"This raises concerns around profitability and the risk that insurers will be exposed to 'long tail' insurance risks that could take years to materialise."
Investment Savings & Insurance Association chief executive Vance Arkinstall and Tower NZ chief executive Rob Flannagan both linked the prospect of a softening market in the life and general insurance markets to the prospect of a slowdown in the housing market.
Arkinstall said premium income in the life insurance market had been softening for some time, driven by improving mortality and keen competition.
"But a lot of the market is driven by the mortgage cycle. People take bigger and bigger mortgages and take life insurance to cover that."
However, with the prospect of recent interest rate increases finally cooling the housing market: "That would probably result in a slowdown in mortgages and possibly their size, and one of the concerns we would have is that this might lead to an extension of the under-insurance problem we have." Flannagan said home and contents insurance premiums generally tracked gross domestic product (GDP) growth, "but of course the inflation in housing has been rampant over the last few years and has exceeded GDP by quite a bit".
On top of that the industry had been paying out increasing amounts of claims related to unusually extreme weather events.
"As a result, in that market, pretty much everyone is losing money and they pick up the shortfall through their investment income. That's not sustainable forever."
Therefore, Flannagan believed premiums were likely to rise rather than to remain constrained by competition, and policies would need to be redesigned.
The importance of maintaining investment returns to cover shortfalls in premium income appeared to be reflected in the high ranking for equity markets.
Crooke believed that could be also be related to currency risk associated with overseas equity investments.
Meanwhile, despite the survey being conducted at a time when the Government was working on regulations for the finance industry including insurance, which were announced last week, over-regulation did not make it into New Zealand insurers' top 15 concerns, though it did top the international list.