IAIS Consults on Development of Insurance Liquidity Metric

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