S&P Ups NZ P/C Insurance Sector Credit Risk to ‘Moderately Low’

August 8, 2005

Standard & Poor’s Ratings Services announced that it has revised the industry risk on the New Zealand nonlife insurance sector to “moderately low” from “moderate.”

“This improvement places New Zealand alongside Australia & Japan as the countries with the best industry risk profile for nonlife insurance in the Asia-Pacific region,” the bulletin noted. “The improvement in New Zealand’s property and casualty insurance market follows sustained operating profitability among participants, solid premium volume increases in the past two years after a period of stagnation, and strong Australian ownership and regulation,” stated S&P credit analyst Kate Thomson, Financial Services Ratings, in S&P’s “Asia-Pacific Insurance Outlook 2005-2006” publication.

“Importantly, Standard & Poor’s believes that New Zealand’s exposure to natural disasters continues to be well managed through catastrophe reinsurance by offshore providers,” Thomson added. S&P said its “assessment of industry risk and economic risk (both ‘moderately low’ in New Zealand) sets the framework for ratings on individual companies in that market. Broadly speaking, the lower the industry and economic risk, the higher the potential rating of companies in that sector.

“The ‘moderately low’ industry risk assessment reflects the New Zealand market’s mature and developed characteristics.” Thompson noted that “adoption levels for insurance is solid relative to other markets in the region, and a sophisticated full-service market operates. The New Zealand market is a strong performer and generates relatively stable profits, establishing a long track record of solid operating profitability.”

S&P also indicated that “recent consolidation in the market has resulted in Australian ownership of about 60 percent of the total market, as well as larger, more robust New Zealand operations. This level of Australian ownership has benefited the industry in New Zealand. The Australian nonlife regulatory regime has indirectly, and positively, influenced the largely unregulated New Zealand market. Australian capital methodology and requirements, reserving practices, and risk management improvements, which recently have been implemented in Australia, are applied to many Australian-owned New Zealand insurance companies.”

S&P also noted, however that the New Zealand market “has a high level of exposure to catastrophe, in particular to earthquake risk. The provision of a base level of cover to retail customers by government-owned Earthquake Commission (AAA/Stable/—) helps to ameliorate this risk for the nongovernment insurance sector, as does the extensive level of catastrophe reinsurance purchased by insurers. Supporting New Zealand’s ‘moderately low’ industry risk for nonlife insurance is the market’s limited exposure to long-tail lines, such as motor liability and workers compensation.

“These lines are traditionally more volatile and, in other markets such as Australia, have accrued large losses in past years. The nonlife market is relatively small, and highly concentrated. Through consolidation, the top-two players control just more then 50 percent of the market. Barriers to entry remain low however, with a proliferation of small-specialized insurers entering the market in the past year, and the continual participation of foreign domiciled insurers, which together ensures a healthy level of competition.”

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