Liquidity risk in insurance
Authors
- Pages
- 32
- Published in
- Switzerland
Table of Contents
- LIQUIDITY RISK IN INSURANCE 3
- Contents 5
- Executive summary 6
- The insurance sector has shown strong resilience to rapidly rising interest rates and associated liquidity risk. 6
- Introduction 7
- Liquidity risk differs between insurance and banking due to the distinct nature of liabilities in the two sectors. 8
- Introduction 8
- Defining liquidity risk 9
- Distinct features of the insurance business model limit the scope for liquidity issues in the sector. 10
- Defining liquidity risk 10
- Liquidity risk refers to the inability of an entity to meet its short-term financial obligations due to a lack of readily available funds. 10
- Compared to banking the insurance industrys exposure to liquidity risk is more product-specific and less structural. 11
- Liability-side liquidity risk 12
- Liquidity risk in the life insurance sector is influenced by product design external economic factors and policyholder behaviour. 13
- Liability-side liquidity risks in insurance are influenced by factors including product design and market conditions and differ for PC and life lines of business. 13
- Liability-side liquidity risk 13
- Liquidity needs in non-life insurance are linked to claims volatility arising from natural disasters large-scale accidents or sudden legal changes which are unpredictable. 16
- Life savings products that allow early withdrawal without penalty are more susceptible to liquidity risks than term life or other protection products. 16
- Asset-side liquidity risks A focus on alternative assets 18
- Asset-side liquidity risks A focus on alternative assets 19
- Insurers can mitigate liquidity risks from illiquid alternative assets by adhering to strict asset-liability management standards. 21
- Liquidity risk management and regulation 22
- Stress testing strong governance processes and liquidity contingency plans help insurers manage liquidity risk. 23
- Conclusion 26
- Insurers can largely avoid liquidity risk by following asset-liability management principles. 27
- Conclusion 27
- References 28
