PRA published a policy statement (PS18/19) that contains the final supervisory statement (SS5/19) on liquidity risk management for insurers. PS18/19 also provides feedback to responses to the consultation paper CP4/19 on liquidity risk management for insurers. PS18/19 is relevant to all UK Solvency II firms, including in respect of the Solvency II groups provisions, the Society of Lloyd’s and its managing agents, and non-directive insurers.
The areas addressed in SS5/19 include the following:
- Development and maintenance of proper policies, systems, controls, and processes (Chapter 2)
- Identification of material liquidity risk drivers (Chapter 3)
- Design and undertaking of forward-looking scenario analysis and stress testing programs (Chapter 4)
- Considerations for the inclusion of highly liquid assets in the liquidity buffer (Chapter 5)
- Use of quantitative metrics and tools for measuring and monitoring liquidity risk drivers (Chapter 6)
- Effective contingency planning (Chapter 7)
PRA received thirteen responses to CP4/19. Respondents generally welcomed the proposals, and made a number of observations and requests for clarification. PRA’s feedback to these responses is set out in Chapter 2 of PS18/19. After considering the responses, PRA has made some changes to the draft policy. The most significant amendments involve clarifying expectations of PRA on the definition of risk limits within the liquidity risk appetite framework of an insurer and the role of the board in managing liquidity risk. In addition, the function and characteristics of the liquidity buffer have been clarified. A number of editorial amendments were made to improve the clarity of SS5/19 and are not explicitly addressed in PS18/19.
The expectations set out in SS5/19 and the withdrawal of Legacy Supervisory Statement (LSS) 2/13 on expectations in relation to firms' risk management practices have immediate effect. SS5/19 should be read in conjunction with SS1/19 on the PRA approach after the withdrawal of UK from EU and with the joint BoE and PRA Statement of Policy (SoP) on interpretation of EU guidelines and recommendations related to the BoE and PRA approach after the withdrawal of UK from EU.
Effective Date: September 24, 2019
Keywords: Europe, UK, Insurance, Solvency II, Stress Testing, Liquidity Risk, PS 18/19, SS 5/19, Liquidity Risk Management, PRA
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