Public Consultation on the Development of Liquidity Metrics: Phase 2
Background information:
The IAIS adopted in November 2019 the Holistic Framework for the assessment and mitigation of systemic risk in the global insurance sector (Holistic Framework) in order to support its mission of effective and globally consistent supervision of the insurance industry to protect policyholders and to contribute to global financial stability.
The key elements of the Holistic Framework are: (1) an enhanced set of supervisory measures for macroprudential purposes, (2) the IAIS Global Monitoring Exercise (GME) and (3) an assessment by the IAIS of the consistent implementation of enhanced ongoing supervisory policy measures and powers of intervention.
As part of the GME, the IAIS’ risk assessment framework, the IAIS also monitors liquidity risk. Capturing liquidity risk in the insurance sector is a complex task due to the many dimensions to consider, such as the variability of insurance products and their liquidity profiles, different liquidity needs of various insurance business models (eg. reinsurers, life and non-life insurers), fungibility of assets, comparability across regions, choice of a time horizon and consideration of capital instruments. According to paragraph 58 of the GME document, in 2020-2022, the IAIS was developing liquidity metrics as an ancillary indicator in the context of the Individual Insurers Monitoring (IIM).
The liquidity metrics will serve (starting in 2023) as a tool to facilitate the IAIS’ monitoring of the global insurance industry’s liquidity risk and for the IAIS to assess insurers’ liquidity exposure, which may be critical as insurers have been exposed to liquidity shortfalls in previous crises. The liquidity metrics highlight potential vulnerabilities, risk drivers and trends of insurers and the insurance sector. They are not intended to be a binding regulatory requirement, rather they are used as a monitoring tool to gather information that will help identify trends in insurer and insurance-sector liquidity.
The IAIS split the development of the liquidity metrics into two phases:
- During Phase 1 (2020-2021), the IAIS developed an Insurance Liquidity Ratio (ILR), which uses an exposure approach (EA); and
- During Phase 2 (2021-2022), the IAIS further developed other liquidity metrics, including a company projection approach (CPA). The CPA approach utilizes insurers’ projections of cash flows to assess liquidity risk. Moreover, Phase 2 also contained refinements to the EA, in particular to the ILR, and work on insurers’ own liquidity metrics.
In November 2020, the IAIS launched an interim public consultation on the “Development of Liquidity Metrics: Phase 1 – Exposure Approach”. The purpose was to consult specifically on the ILR using the EA, which the IAIS has developed as an ancillary indicator for the monitoring of liquidity risk. The 2021 public consultation built on the Phase 1 outcomes and comments received in the interim public consultation and consulted on two approaches that the IAIS had developed to monitor liquidity risk:
- Company projection approach
- Exposure approach including the ILR
In addition to those two approaches, the IAIS consulted on aspects of insurers’ own liquidity metrics that are also a part of Phase 2. The IAIS main goal was to finalise the metrics that would be used as an ancillary indicator for liquidity risk monitoring as part of the GME.
Feedback was invited by 23 January 2022.
Based on the comments received in two public consultations (the interim consultation in 2020 and the final consultation in 2021), the IAIS has released its liquidity metrics as an ancillary indicator for the Global Monitoring Exercise. More details may be found in the Level 2 document below.
A virtual public background session will be held on 10 January 2023, 13:00-15:00 CET.