1. In view of the recent market volatility, how do regulators ensure that insurers have the necessary liquidity to pay policy owners in a timely manner?
Life insurers are subject to significant regulatory scrutiny. Their activities are closely monitored and they must comply with strict capital adequacy frameworks, investment limitations, risk management protocols, and reporting and disclosure obligations.
The solvency of an insurer is a critical indicator of its stability, and regulators require insurers to maintain a certain amount of capital (determined in accordance with the relevant capital adequacy framework) to ensure that they can meet their obligations to policyholders.
Major insurers generally maintain higher solvency ratios and equity capital than is required under the relevant regulatory capital adequacy frameworks.
2. If there is a surge in policy surrenders (i.e. a “run” on an insurer), how do insurers manage their liquidity to ensure they fulfil their obligations?
If there is a surge in policy surrenders, insurers have various ways to manage their liquidity to ensure they can fulfil their obligations to policyholders.
Firstly, insurers are required to maintain high levels of reserves according to capital adequacy requirements to handle possible claims and surrenders. This provides them with a substantial buffer to meet their obligations, as a significant portion of these reserves is usually invested in liquid assets.
Secondly, insurers often share the risks from claim events with reinsurers, reducing the counterparty risk of one insurer shouldering all obligations alone.
Thirdly, insurers can manage the pace of claims payouts as they have discretion with administrative processing times, which can range from 20 to 90 days depending on the completeness of required documents. Some insurers may also retain the right to defer payment of surrender proceeds for a certain amount of time, which helps manage their liquidity.
Overall, insurers have multiple tools at their disposal to manage liquidity during a surge in policy surrenders.
3. What do insurers invest in, and are such investments liquid enough to fulfil their obligations?
Most insurers commonly adopt an investment strategy that achieves stable returns over a long-term horizon. This is supplemented by strict asset-liability management to ensure that the assets mature in time to adequately cover the insurers’ liabilities.
Recent events have highlighted the danger of relying too heavily on any single asset class. Even conservative investments carry a certain degree of risk, and in an uncertain world, it is essential to mitigate these risks by diversifying one’s investment portfolio.
Adding life insurance solutions from reputable insurers to your portfolio can help diversify your assets, strengthen its resilience, and reduce overall risk exposure.
Marketing Disclaimer: The views expressed in this media does not necessarily reflect the views of PFPFA Pte Ltd (“PFPFA”). The information provided herein is intended for general circulation and not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use will be contrary to local laws or regulation. You should also note that the information presented does not have regard to the specific investment objectives, financial situation or the particular needs of any specific individuals; and therefore, may not be appropriate to your individual needs. You should seek the advice of your financial adviser representative or a professional before making any commitment to purchase or invest in any investment product.