Increased regulation of New Zealand's insurance market and the rising costs of securing reinsurance cover will probably lead to a spate of mergers in the market, according to credit rating agency AM Best.
The introduction of prudential supervision by the Reserve Bank is expected to increase the costs facing local insurers to meet minimum capital requirements at a time when reinsurance costs have soared, the insurance industry ratings company says in a report on New Zealand's non-life insurance market.
That leaves the sector open to consolidation as smaller firms struggle to keep pace in the tougher environment.
"While the new IPSA (Insurance Prudential Supervision Act) rules are not intended to directly fuel industry consolidation, this consequence is inevitable," the report said. Along with increasing costs of buying reinsurance, "the combination of these factors will make it harder for insurers to survive independently."
The Reserve Bank will assume full supervision of the insurance sector form March next year, and will introduce solvency and capital requirements for all insurers, as well as introducing a licensing regime.
AM Best says some of the smaller insurers may fall short of the minimum requirements, which may be too onerous, and larger firms are likely to "be in position to increase their presence and acquire smaller players."
Insurance Australia Group, Vero Insurance New Zealand, AMI Insurance, Lumley General Insurance and Tower Insurance control about three quarters of the non-life market.
The local non-life insurance sector has been in a quandary since September last year when the first of the Canterbury earthquakes struck, in what has become a serious of temblors causing an estimated $30 billion in claims and killing 181 people.
New Zealand's natural disasters, along with the March tsunami in Japan and flooding and cyclones in Australia, have caused global reinsurers to reassess their exposure to the Asia Pacific region, and some insurers have withdrawn earthquake cover from New Zealand.
"Most insurance costs for the recent earthquakes are expected to fall on international reinsurers or the government," the report said. "Many (reinsurers) are setting lower limits on their exposures to New Zealand risks and are pricing risks according to sector and region."
The quakes also forced global insurers to inject capital into their New Zealand branches to help meet claims, and local firm AMI Insurance had to seek government assistance to remain solvent.