EIOPA Sets Out Principles for Liquidity Stress Test for Insurers
EIOPA published a paper that sets out the methodological principles of insurance stress testing with a focus on the liquidity component. The paper sets out methodological principles that can be used to design bottom-up stress test exercises to assess the vulnerability of insurers to liquidity shocks. This second methodological paper is part of a series of papers, has been published post a stakeholder consultation, and represents a further step in enhancement of the stress testing framework of EIOPA.
The Solvency II regime is designed to ensure a sound capital position of insurance and reinsurance undertakings but it does not include quantitative requirements and relative metrics with respect to liquidity position. The absence of a commonly agreed approach to assess the liquidity sources and needs of insurers and reinsurers, the subsequent absence of standardized metrics such as Solvency Capital Requirement (SCR) for the capital position, and the lack of a specifically designed data collection makes a methodological discussion on the liquidity stress test more difficult. Considering this, the paper proposes a definition of “liquidity position” and specific metrics to measure this position for an insurance and reinsurance undertaking. Amid the increasing consideration given to liquidity risk by the insurance industry and by the supervisors at European and global levels as well as in the absence of a commonly adopted liquidity framework for industry in EU, the paper presents a conceptual approach to the assessment of the liquidity position of insurers under adverse scenarios.
The paper provides the background on liquidity risk in the insurance industry as well as a definition of liquidity risk for the sector. The paper describes the micro- and macro-prudential objectives of liquidity stress test exercise and elaborates on the scope of a stress test exercise. It further describes the building blocks of a liquidity stress test exercise starting from the exposures of insurers to liquidity risk and the potential metrics to measure them. The paper also presents the proposed approach to the design of scenarios to be used in liquidity stress test, including narrative, shocks, and their calibration. The guidelines on the application of the shocks with some examples on potential analysis and presentation of results are also included in the paper. The conclusions are based on the current understanding and knowledge of the liquidity risk in the insurance industry. Hence, this might evolve in the future to reflect the experience gained in the assessment of such risk at European and global levels. Other topics such as climate change and multi-period framework for the bottom-up insurance stress testing will be published at a later stage.
Related Links
Keywords: Europe, EU, Insurance, Stress Testing, Liquidity Risk, Solvency II, Liquidity Stress Test, EIOPA
Featured Experts

Metin Epözdemir
Metin Epözdemir helps European and African banks with design and implementation of credit risk, stress testing, capital management, and credit loss accounting solutions.

Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist

Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
Previous Article
EC Consults on Crisis Management and Deposit Insurance FrameworkNext Article
BIS Launches Euro Green Bond Fund for Central BanksRelated Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
HKMA Announces Launch of Data Repository on Sustainable Finance
The Hong Kong Monetary Authority (HKMA) announced that the Green and Sustainable Finance (GSF) Cross-Agency Steering Group has launched the information and data repositories and outlined the progress made in advancing the development of green and sustainable finance in Hong Kong.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
NGFS Report on Integration of G-Cubed Model into NGFS Scenarios
The Network for Greening the Financial System (NGFS) published a report that explores the feasibility of integrating the G-Cubed general equilibrium model into the NGFS suite of models.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.