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Financial strength of some insurers here could be sapped in short term

Market observers say that while insurers' investment portfolios differ, prolonged volatility from Brexit could lower their capital adequacy ratios

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The capital adequacy ratio (CAR) or financial strength of some insurers in Singapore is expected to suffer in the short term, following the United Kingdom's decision to leave the European Union (EU) - and this is especially the case with those who hold substantial equities.

Singapore

THE capital adequacy ratio (CAR) or financial strength of some insurers in Singapore is expected to suffer in the short term, following the United Kingdom's decision to leave the European Union (EU) - and this is especially the case with those who hold substantial equities.

The full impact of "Brexit", however, remains to be seen.

Although investment portfolios vary from insurer to insurer, analysts and observers agree that prolonged volatility in the stock market would lower an insurer's CAR, which is a buffer to absorb losses.

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Philip Chung, S&P's insurance analyst, told The Business Times that non-life insurers have high liquidity needs, so their investment portfolios are more conservative than those of life insurers. Life insurers generally have more risk exposure than their non-life counterparts, but most of their investments are in the Asia-Pacific, so the impact of Brexit would not be significant.

Still, insurers who offer universal life policies would be more likely to feel the impact of Brexit, he said, adding that the question then is whether this business is large.

Observers said those who offer several universal life products would suffer from the move to safe havens such as government bonds, because when US treasury yields drop, their insurance liabilities would rise faster than the value of the bonds held.

Woo Shea Leen, insurance leader at PwC Singapore, said that the high-net-worth business, including universal life, is usually backed by US investment and bonds that are subject to quite a bit of volatility.

"There is a chance that Brexit would increase the volatility further. Most insurers are considering financial reinsurance or derivatives as a means of managing that volatility and capital position, so we might see more traction in that space," she said.

In Singapore, Transamerica Life provides mainly universal life and term-life products. AIA Singapore has a significant business in this segment, and Great Eastern Life has been trying to grow this business, observers noted.

Insurers who invest in corporate bonds might not be spared either. Observers said these insurers' financial strength would suffer if the credit spread widens. In the short term though, they said insurers who have already moved to safe havens are likely to benefit; their CARs might be less affected.

General insurers' liabilities turn around quickly, so the question is whether the volatility would affect their ability to pay off large losses or catastrophes if any happen, said Ms Woo.

"The soft market (small number of large losses and catastrophes) is creating more strain on liquidity, so the immediate action might be to re-look at their portfolio to manage that risk. I doubt any insurer will change their mix so immediately, but it will definitely change their investment plans going forward. There is nothing much they can do about the short-term impact of the losses on capital."

Financial strength aside, Antony Eldridge, financial services leader at PwC Singapore, said the events in the UK could mean a net talent benefit here, so insurance capabilities in the region could improve. "For example, we may see underwriting, currently dominated through London, being sited more in our local markets."

US-based ratings agency A.M. Best said in a report released on Friday that the financial market volatility could have a material impact on insurers' half-year results and balance sheets, with most companies reporting their positions as at June 30, 2016. It added that Solvency II - European insurance requirements to ensure the financial strength of insurers - would mean that financial market volatility would be reflected closely in these insurers' reported solvency capital ratios.

Meanwhile, Moodys said the impact on the UK insurance industry would be "manageable, unless passporting (rights to the EU) is significantly disrupted". It added that significant market volatility would weigh on UK insurers' Solvency II capital ratios.

In Singapore, based on the latest regulatory filings, UK-based insurer Aviva Singapore had the highest CAR - at 267 per cent - among the nine major life insurers here last year.

NTUC Income was ranked second, and UK-based Prudential Singapore third, with a CAR of 228 per cent. British insurer HSBC Insurance had the lowest CAR at 204 per cent.

The mandatory requirement is 120 per cent. The average CAR among the nine key life players last year was 229 per cent.

The CARs for most key life players varied between the years 2011 and 2015, but that of Canadian insurer Manulife and Japanese insurer Tokio Marine Life went into a decline.

For more coverage of the EU referendum, visit bt.sg/BrexiT

 

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