More insurance companies may require bailouts as a result of the Christchurch earthquakes the Reserve Bank said this morning, but it will likely be parent companies providing the cash rather than the Government.
At its twice yearly report on the health of New Zealand's financial system, the Reserve Bank this morning said the Christchurch earthquake had presented fresh challenges and increased domestic risks just as international markets were showing signs of improvement.
In the Financial Stability Report, Governor Alan Bollard said the risks facing the financial system which were highly elevated during the financial crisis had continued to reduce over the past year but they remained above normal in several areas, while the earthquake related challenges had pushed the domestic environment risks up slightly.
In particular, the Christchurch earthquakes had tested the insurance sector which the Reserve Bank recently assumed regulatory oversight of.
"Damage from the earthquake is large relative to the size of the economy and insurers face substantial logistical issues dealing with the consequent flow of claims," said Dr Bollard.
Other insurers could face difficulties
Last month the Government announced a backup funding package for AMI Insurance which is heavily exposed to residential property damage resulting from the quakes. While the package provides for an initial injection of $500 million if required, Finance Minister Bill English has said the Government's liability could be as high as $1 billion.
This morning, Dr Bollard said other insurers would face similar difficulties but fresh Government support was unlikely to be required.
"The level of claims isn't clear yet. It's possible that it could put stress on solvency on a couple of specialist insurers but we'd expect that wouldn't cause particular problems for their parents, so it's more likely parental support that you'd be looking at."
The RBNZ said the overall level of insurance and the amount of reinsurance taken out with large international firms, "makes the financial consequences of the earthquake more manageable for New Zealand".
In light of the quakes and the subsequent Government support for troubled insurer AMI the Reserve Bank had now accelerated its supervisory work for the sector.
"While there remains considerable uncertainty over the extent of total final claims, we believe the overall industry is sound," Deputy Governor and head of financial stability Grant Spencer said.
However, Mr Spencer said the bank expected some smaller insurers would not be able to meet the requirements of the RBNZ's new regime and it was possible there would be "some shake out and some consolidation" in the industry.
Financial system 'more resilient'
Meanwhile, Dr Bollard said the financial system was "more resilient and positioned to support economic growth, but still faces a volatile and uncertain environment".
Although the global economic recovery was now broader, with strong growth in Asia supporting commodity producers like New Zealand and Australia, international wholesale financial markets, where local banks raise much of their funds,"remain fragile given stretched fiscal positions and banking sector problems in some European countries".
Mr Spencer said New Zealand's banking sector had continued to strengthen over the previous six months with profits recovering and bad debt charges falling.
Dr Bollard noted New Zealand's economic recovery last year had been weaker than expected partly due to the lingering effects of high levels of debt among some households and businesses after years of heavy borrowing.
The challenging conditions and market volatility of recent years had made households and firms more cautious resulting in efforts to reduce or constrain debt, leading to weak household and business spending.
"If sustained, this will assist in improving New Zealand's external imbalances and moderate the financial system's exposure to international credit markets," said Dr Bollard.
While that was desirable, "an excessively cautious approach to debt could delay the return to a more fully-employed economy".