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,
the IAIS is developing liquidity metrics as an ancillary indicator in
the context of the Individual Insurers Monitoring (IIM).
The liquidity metrics will serve 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 is further developing 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 contains 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 builds on the Phase 1
outcomes and comments received in the interim public consultation and
consults on two approaches that the IAIS has developed to monitor
liquidity risk:
- Company projection approach
- Exposure approach including the ILR
In addition to those two approaches, the IAIS consults on aspects of
insurers’ own liquidity metrics that are also a part of Phase 2. The
IAIS plans to progress work further on the liquidity metrics project
during 2022 through consideration of feedback collected in this public
consultation, to finalise the metrics that will be used as an ancillary
indicator for liquidity risk monitoring as part of the GME.
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