Can local insurers survive interest rate hikes?

Investment portfolios might be at risk.

Local insurers are fairly resilient against the normalisation of US interest rates, according to the latest Financial Stability Report by the Monetary Authority of Singapore.

This is because guaranteed benefits provided by Singapore insurers are low, and local insurers have been prudent in their pricing assumptions.

However, the expected rise in US interest rates could pose near-term risks to insurers’ investment performance and balance sheets, particularly for life insurers, 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,” the MAS said. 

“MAS’ 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,” the report noted.