Increased Liquidity Burden for Insurers Amid Rising Interest Rates

The Insurance Research Institute has diagnosed that the short-term liquidity burden on insurers may increase during periods of rising interest rates. Insurers with a high proportion of long-term bond holdings need to assess the impact of bond valuation losses due to rising rates, as well as the potential for policy cancellations and margin calls on derivatives. Researcher Park Hee-woo stated that rising interest rates could lead to policy cancellations and margin calls on derivatives, resulting in short-term burdens. If the interest rates on savings and deposits rise faster than the declared interest rates offered by savings insurance contracts, there may be an increase in policy cancellations, leading to a higher demand for cash surrender values and thus increasing cash liquidity burdens. Additionally, substantial cash margin payments may be required for derivatives contracts established for interest rate risk management. While rising interest rates can increase the yields on new bonds, they can also pressure investment profits due to the decreased valuation of existing bonds. The capital impact varies depending on the asset-liability management (ALM) level of each company, and insurers with well-established ALM may experience less capital volatility. Researcher Park emphasized the need for insurers to assess the impacts on investment profits, financial soundness, and liquidity, and mentioned the necessity of mechanisms to reduce temporary liquidity shortages from a regulatory perspective.

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