The Reserve Bank of New Zealand (RBNZ) has highlighted that financial stability risks remain elevated, citing a combination of global and domestic factors that continue to influence the country’s financial system.
Governor Christian Hawkesby, in the latest Financial Stability Report, noted that ongoing disruptions in international trade and finance, along with uncertainty in global markets, are contributing to a heightened risk environment for New Zealand. “Financial stability risks remain higher than in recent years,” Hawkesby said, pointing to high valuations in global equity markets, particularly in the technology sector, and increasing government debt in advanced economies as vulnerabilities that could impact New Zealand.
As a small, open economy, New Zealand is susceptible to shifts in global economic activity and financial market volatility.
Sector performance and banking system outlook
Domestically, certain sectors, including retail and hospitality, are experiencing subdued performance, which is placing pressure on both households and businesses. While there has been an uptick in loan defaults, these remain below the levels observed during the Global Financial Crisis.
At the same time, some sectors such as agriculture are benefiting from favourable commodity prices and lower interest rates. The banking sector, according to the RBNZ, is well-positioned to absorb shocks. “Strong lending standards, including loan-to-value limits, have helped to restrict the amount of high-risk lending in the system,” Hawkesby said.
Stress testing indicates that banks possess sufficient capital buffers to withstand a significant economic downturn and continue lending to support recovery.
The Reserve Bank is currently reviewing industry feedback on proposed capital requirements, with a decision anticipated in December.
The introduction of the Depositor Compensation Scheme in July has also led to changes in deposit patterns, as some non-bank deposit takers have seen increased inflows from customers seeking to maximise coverage.
Insurance sector trends: property, health and cyber risk
In the insurance market, property insurers have experienced a period of relatively low claims and have benefited from improved global reinsurance conditions. However, health insurers are facing rising claims costs, which have led to operating losses and higher premiums for policyholders as companies seek to restore profitability.
Hawkesby also addressed cyber and operational risks, referencing the Reserve Bank’s 2024 Cyber Capability survey.
“Regulated entities report they are generally aligned with our guidance on cyber resilience. However, there is room for improvement, with cyber and operational risks remaining focus areas of our supervisory work,” he said.
Reinsurance: a cornerstone of financial resilience
Reinsurance plays a vital role in New Zealand’s insurance sector, enabling insurers to manage large and infrequent risks by transferring them to global capital markets.
This mechanism is especially important for covering catastrophic events such as earthquakes and severe weather, which are significant exposures for the country.
The global reinsurance market is dominated by a small number of major firms, and most large New Zealand insurers access reinsurance through arrangements with their Australian parent companies.
The cost and availability of reinsurance are largely determined by international factors, including the frequency of major loss events and prevailing financial market conditions.
Recent years have seen a global increase in reinsurance pricing, although this trend has eased somewhat, helping to moderate premium increases for New Zealand policyholders.
Implications for insurance professionals
Insurance professionals are encouraged to closely monitor developments in reinsurance markets, as these can have direct implications for premium rates and coverage terms in New Zealand.
Enhanced risk modelling and data analytics are supporting a shift towards more risk-based pricing, particularly in property insurance, and insurers with robust risk assessment capabilities may be better positioned to negotiate favourable reinsurance terms.
The Natural Hazards Commission (NHC) continues to provide a stabilising influence by offering first-loss cover for residential properties and directly engaging with global reinsurers. This approach, in combination with private sector arrangements, helps to broaden reinsurance capacity and manage costs for New Zealanders.
Reinsurance remains a critical element in the country’s insurance framework, supporting the sector’s ability to
absorb shocks and maintain financial stability. However, the influence of global market dynamics underscores the need for ongoing vigilance and adaptability among insurers and regulators alike.
