IAIS published an application paper on liquidity risk management for insurers. As part of the holistic framework for systemic risk in the insurance sector, IAIS enhanced the enterprise risk management requirements in ICP 16 to more explicitly address liquidity risk. The paper provides guidance on supervisory material related to liquidity risk management in the Insurance Core Principles (ICPs) and ComFrame. The guidance relates to the material in ICP standards 16.8 and 16.9 (ICP 16 on enterprise risk management for solvency purposes) and ComFrame 16.9.a–16.9.d.
The key topics covered in the paper include governance, liquidity risk identification, liquidity stress testing, liquidity shortfalls in stress, contingency funding plan, liquidity risk management report, and supervisory review and reporting. The paper includes guidance and examples on the following:
- Considerations on applying liquidity risk management measures in a proportionate way and the ways that supervisors may tailor requirements
- Detailed components of the four elements for “more detailed risk management processes” in ICP standard 16.9: liquidity stress testing, maintenance of a portfolio of unencumbered highly liquid assets, a contingency funding plan, and the submission of a liquidity risk management report to the supervisor
- Integration of liquidity risk into the enterprise risk management framework for insurers, as described in ICP Standard 16.8, including recommendations for governance
The paper specifies that an insurer should report regularly to the supervisor on its liquidity management and planning. Moreover, an Internationally Active Insurance Group should be required to report this annually or more frequently in the event of material changes to its liquidity plan or liquidity risk profile. The report and other related information may be shared within the insurer’s supervisory college, where relevant. The insurer should ensure consistency between its liquidity risk management report and all other required supervisory documents, such as recovery and resolution plans or Own Risk and Solvency Assessments (ORSAs). However, to the extent that elements of the report are incorporated in other material, the supervisor may allow an insurer to satisfy the reporting requirement by reference to those other risk management materials and/or the ORSA. The application paper should be read in the context of the proportionality principle, which acknowledges the flexibility among supervisors to tailor the application of supervisory requirements to achieve the outcomes stipulated in the principle statements and standards.
Keywords: International, Insurance, ICP 16, ComFrame, Proportionality, Stress Testing, Governance, Liquidity Risk, Enterprise Risk Management, Reporting, IAIS
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