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
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
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
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Previous Article
EC Consults on Crisis Management and Deposit Insurance FrameworkNext Article
BIS Launches Euro Green Bond Fund for Central BanksRelated Articles
CFPB Finalizes Rule on Small Business Lending Data Collection
The Consumer Financial Protection Bureau (CFPB) published a final rule that sets out data collection requirements on small business lending, under section 1071 of the Dodd-Frank Act.
BCBS to Consult on Pillar 3 Climate Risk Disclosures by End of 2023
The Bank for International Settlements (BIS) published a summary of the recent Basel Committee (BCBS) meetings.
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
US Congress Report Examines Data Privacy and Cybersecurity Regulations
The U.S. Congressional Research Service published a report on banking, data privacy, and cybersecurity regulation.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
EU to Conduct One-Off Scenario Analysis to Assess Transition Risk
The European authorities recently made multiple announcements that impact the banking sector.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
