Singapore insurers, which have been resilient against low interest rates as guaranteed benefits provided by Singapore insurers are low, will remain resilient against increases in interest rates, according to the Monetary Authority of Singapore (MAS).
The normalisation of US monetary policy could pose near-term risks to the investment performance and balance sheets of insurers in general, and life insurers in particular which tend to hold longer-duration fixed-income securities to match longer-term liabilities. Rapidly rising interest rates will reduce the mark-to-market value of insurers’ fixed-income instruments and could prompt a potential increase in policy surrenders from policyholders searching for higher yield from capital markets.
Life insurers hold sufficient liquid assets
However, MAS said in its November 2015 Financial Stability Review that its liquidity stress test indicates that life insurers in Singapore hold sufficient liquid assets to meet cash outflows under a stress scenario that included a mass lapse event, coupled with investment shocks, reduction in new business and reinsurance recoverables, and increased management expenses.
Around 60% of the life insurance business in Singapore comprises participating policies, for which insurers have the discretion to adjust future non-guaranteed bonuses. In addition, the guaranteed benefits for the in-force and new participating policies are low in Singapore, at around 1–2% on average. Investment-linked and non-participating products each accounts for around 20% of the market. For investment-linked policies, the investment risks are borne by the policyholders, not the insurers.
With the exception of universal life policies, non-participating policies are mostly protection-oriented such as term and medical policies, which are not sensitive to interest rates. For universal life policies, the guaranteed rates are low, at around 2% currently.
Insurers’ balance sheets expected to improve
In the longer-term, a higher interest rate environment is expected to improve insurers’ balance sheets. Insurers may start offering more savings-oriented products and higher bonus rates for participating products that may attract more investors, said the report. Insurers will also receive higher coupon income from new fixed income assets. In addition, insurers’ liabilities will be discounted at a higher interest rate, which would enhance their solvency positions.