The Reserve Bank of New Zealand said that its stress testing showed that all policyholders' claims could be met in a potential 1-in-1,200-year loss event.

The 2024 general insurance stress test included seismic and cyber risk scenarios, and seven large insurers, which accounted for around 80% of the general insurance market, participated in this stress test.

The seismic scenario was based on a very severe event to test insurers' preparedness and recovery plans. The event included a magnitude 8.7 earthquake, a subsequent tsunami, and major aftershocks.

This represented a 1-in-1,200-year loss event, beyond the level of risk required to be covered by insurers' solvency requirements.

Insurers, representing around 70% of the general insurance market, modeled NZ$62 billion of losses.

Around 50% of the claims were paid by the government-guaranteed Natural Hazards Commission, 39% were covered by reinsurance arrangements, and 8% were retained by policyholders, with the remainder covered by the insurers.

Given the severity of the selected scenario, locally incorporated insurers modeled a significant fall in their capital, with the aggregate solvency ratio falling from 168% at the start of the stress test to 11% at the end of year one.

In response, participants identified a range of actions to rebuild their capital levels, including capital injections, repricing, adjustments to reinsurance cover, and cost-cutting. More accurate loss estimation should aid pre-event planning, the central bank noted. Capital injections from parent companies and ongoing availability of reinsurance were identified as critical to enabling insurers to continue to offer cover in such a scenario.

The stress testing also included scenarios involving a series of coordinated cyberattacks targeting large organizations across the country, resulting in a major data breach, underwriting losses resulting from a two-day outage of a major cloud service provider, and underwriting losses from a widespread systemic ransomware event.

The results indicate that insurers are generally well protected against losses arising from cyber-related claims. The cyber insurance market in New Zealand is relatively small but is expected to experience steady growth, it noted.