If the valuation of liabilities rises, the net asset value (which is assets less liabilities, and equivalent to shareholders’ equity) of the insurer is likely to fall. As a result, low interest rates drive down NAV and capital, affecting the solvency ratio and the capital adequacy ratio of insurers.
Ronnie Tan, group CFO of Great Eastern Holdings (GEH), has seen the insurance industry change dramatically since joining the life insurer in 2002. “Beyond the technical aspect of implementing IFRS 17, I think one of the biggest achievements I am proud of is being able to navigate Great Eastern through multiple crises,” he tells The Edge Singapore.
Apart from the Global Financial Crisis, Covid-19 provided multiple challenges. For one thing, interest rates fell to 1%. “When interest rates are low, it puts a lot of stress on the solvency of life insurance companies. We need to discount our liabilities, which are very long-term, using a very low rate, increasing the valuations of the liabilities,” Tan says, referring to the discounted cash flow model for valuations. The lower the discount rate, the higher the value.
