IAIS Consults on Development of Insurance Liquidity Metric
IAIS is published a consultation on the Insurance Liquidity Ratio (ILR) metric, which has been developed as an ancillary indicator for the monitoring of liquidity risk of insurers. The Insurance Liquidity Ratio will use an exposure approach and is the ratio of liquidity sources and needs of an insurer over a one-year assumed liquidity stress. This consultation is a part of the phase 1 of the development of liquidity metrics. The comment period on this consultation ends on February 07, 2021. Over the next year, IAIS will work to further develop other liquidity metrics for monitoring, including the company-projection approach, as part of the phase 2 of the project on development of liquidity metrics. IAIS plans to consult on these other metrics in 2021 and to finalize a set of liquidity monitoring metrics in 2022.
When determining the parameters of the Insurance Liquidity Ratio, IAIS looked at a number of sources, including the approaches of insurance supervisors, rating agencies, and bank supervisors. The Insurance Liquidity Ratio is the ratio of an insurer's liquidity sources and needs based on an exposure approach, which applies factors to balance sheet items and off-balance sheet exposures to measure liquidity risk. Significant sources of liquidity for inclusion in the Insurance Liquidity Ratio include cash; sovereigns and GSE securities with certain ratings and features; investment-grade covered bonds, public-sector entity debt, and corporate debt securities; and common equity. However, liquidity needs stemming from the liability of insurers can originate from claims or policyholder behaviors that diverge from the planned expected cash outflows. Policyholder behavior can trigger surrender payment or return of unearned premiums, whereas liquidity distress from claims might be triggered by payment driven by catastrophic events. Consistent with the treatment of premiums, the Insurance Liquidity Ratio would currently not include as liquidity needs most claim payments and expenses.
The liquidity metrics will serve as a tool for the IAIS to assess liquidity exposures of insurers. The liquidity metrics of IAIS will highlight potential vulnerabilities, risk drivers, and trends of insurers and the insurance sector rather than being binding requirements. During Phase 1, IAIS will leverage current and prior work on systemic risk assessment to develop the Insurance Liquidity Ratio. The previously published assessment work of IAIS included measurements of certain insurers’ biggest potential liquidity needs, including through the use of short-term funding and potential withdrawals from insurance contracts. Phase 1 will refine these measurements and combine them with the measurements of other liquidity needs and the liquidity of assets. The liquidity metrics will rely on data from Individual Insurer Monitoring (IIM) and be computed for each participating insurer on an enterprise-wide basis. In response to the comments and further analysis, IAIS will revise technical specifications for the 2021 IIM Data Collection Exercise. IAIS will also update the technical specifications to collect data needed to implement the proposed Insurance Liquidity Ratio if this data has not previously been collected.
Comment Due Date: February 07, 2021
Keywords: International, Insurance, Liquidity Risk, Insurance Liquidity Ratio, Phase 1, Liquidity Monitoring, ILR, IAIS
Featured Experts
Karen Moss
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
Previous Article
IAIS Consults on Application Paper on Resolution Powers and PlanningRelated Articles
EU Amends CRD4 and CRD5 as Part of Capital Markets Recovery Package
EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.
EU Committee Recommends Systemic Risk Buffer of 4.5% in Norway
The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.
PRA Clarifies Approach to Onshoring of Credit Risk Rules for UK Banks
In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition.
FSB Sets Out Work Priorities for 2021
In a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.
EU Publishes Corrigendum to Revised Capital Requirements Regulation
EU published, in the Official Journal of the European Union, a corrigendum to the revised Capital Requirements Regulation (CRR2 or Regulation 2019/876).
ESAs Issue Statement on Application of Sustainability Disclosures Rule
ESAs published a joint supervisory statement on the effective and consistent application and on national supervision of the regulation on sustainability-related disclosures in the financial services sector (SFDR).
EC Consults on Crisis Management and Deposit Insurance Frameworks
EC published a public consultation on the review of crisis management and deposit insurance frameworks in EU.
HKMA Enhances Loan Guarantee Scheme to Alleviate Pressure on SMEs
HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.
EBA Proposes Standards for Supervisory Cooperation Under IFD
EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.
BoE Addresses Banks in Scope of First Resolvability Assessment
BoE issued a letter to the CEOs of eight major UK banks that are in scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle.
