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The life insurance industry would be strongly tested but would cope with a period of extreme economic stress and a resurgence of the Covid-19 pandemic, the Reserve Bank (RBNZ) says.
The RBNZ's first stress-testing of the five largest life insurance companies has found they would all remain solvent from a severe economic shock as well as an insurance sector downturn.
The exercise, similar to those done on the banking and general insurance sectors, assessed the financial strength of the sector to pay claims at a time of weak growth, high unemployment, rising interest rates, falling house prices, rising claims and a return of Covid-19.
Deputy Governor Christian Hawkesby said the results were reassuring.
"Participating insurers were able to pay out substantial claims from policyholders and remain solvent during a hypothetical three-year scenario which included long Covid, a new pandemic and a period of severe economic stress."
The companies managed the economic shock, although there were some losses of long-term bond investments.
When the insurance shock was added, the companies' solvency levels were squeezed and for some companies was below their own limits, as they faced higher claims expenses, higher lapse rates and lower new business volumes.
That forced some companies to cut costs and commissions, increase premiums, and change their reinsurance arrangements.
The five companies involved in the stress testing were AIA, Asteron, Cigna, Fidelity Life and Partners Life, which account for about three-quarters of the life insurance market.