Featured Product

    EIOPA Sets Out Principles for Liquidity Stress Test for Insurers

    January 26, 2021

    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
    Related Articles

    UK Authorities Consult on Implementation of Basel 3.1 Standards

    The UK authorities have published consultations with respect to the Basel requirements for banks. The Prudential Regulation Authority (PRA) published the consultation paper CP16/22 on rules for the implementation of Basel 3.1 standards.

    November 30, 2022 WebPage Regulatory News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News

    FSB and NGFS Publish Initial Findings from Climate Scenario Analyses

    The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.

    November 15, 2022 WebPage Regulatory News

    FSB Issues Reports on NBFI and Liquidity in Government Bonds

    The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.

    November 14, 2022 WebPage Regulatory News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News

    EU Finalizes Rules Under Crowdfunding Service Providers Regulation

    The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.

    November 08, 2022 WebPage Regulatory News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8597