The Reserve Bank is talking to insurers about whether they have enough capital to withstand another shock like a major earthquake.

The move was revealed by the central bank as part of its six-monthly report on financial stability.

The Reserve Bank said New Zealand's insurance sector was sound, profitable and adequately capitalised, but said some have relatively small capital buffers to meet future disasters.


It didn't name the insurers.

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This year the bank applied to the court to place CBL Insurance, a subsidiary of NZX-listed CBL Corporation, into interim liquidation after concerns about the company transferring $50m offshore.

The regulator had been talking to the company for more than a year before that. A full hearing for putting the company into liquidation is set down for next week.

The central bank said there were also challenges to efficiency in the insurance sector and market share remained concentrated.

"Life insurance commissions are particularly high, which inevitably flows through into higher premiums."

An industry report found life insurers can pay up to 230 per cent of a first year's premium to an adviser who sells their policies.

However the regulator said it believed technology developments would be a key driver of competition in the future.

The central bank said as a whole New Zealand's financial system remained sound.

"The banking system holds sufficient capital and liquidity buffers, guided by our prudential regulatory requirements.

"These buffers reduce New Zealand banks' exposure to adverse shocks."

The Reserve Bank and the Financial Markets Authority have written to banks and insurers in recent weeks demanding proof they are clean after damning revelations that have emerged through a Royal Commission in Australia.

The banks had until May 18 to respond in writing and life insurers have until June 22.

The central bank said the conduct and the culture of the banks and insurers was an ongoing driver of financial soundness.

"These features are being jointly reviewed by the Financial Markets Authority and ourselves, and we will report our findings over coming months."

No change to home loan restrictions

Despite slower lending and house price growth the central bank said it was too soon to further loosen lending restrictions when household mortgage debt remaining high.

In November the Reserve Bank announced it would ease lending restrictions from January 1.

It increased the amount a bank could lend to owner-occupiers with a deposit of less than 20 per cent from 10 per cent of lending to 15 per cent.

Investors were also given more leeway and bank lending is limited to 5 per cent of those with equity of less than 35 per cent - down from 40 per cent.

"Household mortgage debt remains high. However, financial risk has lessened with both lending and house price growth slowing in the past 12 months – in part due to our imposition of loan-to-value (LVR) ratio restrictions."

But it said lending growth needed to be further sustained before it gained enough confidence to ease restrictions again.

The central bank said dairy farm lending also remained high.

"Most dairy farms are currently cash-flow positive, but remain vulnerable to any possible downturn in dairy prices and agriculture shocks.

"Reducing this bank lending concentration risk requires more prudent lending practices."

The Reserve Bank said the high dairy farm indebtedness and the fact that the home lending restrictions were required showed bank's decision making on how much to lend and to whom could be impaired due to the pursuit of short-term gains over longer-term profits.

The bank has launched a new dashboard to help consumers compare banks looking at their capital buffers, non-performing loans and risk concentration.

"Our aim is to improve the public's understanding of their banks, and hence the incentives for banks to operate soundly."