Liquidity risk management for insurers (2024)

FAQs

What is liquidity risk for insurers? ›

Insurers can be confronted with both asset and liability liquidity risks. As regards liability-side liquidity risks, insurers, unlike banks, generally have liabilities with a longer maturity than their assets, which makes them less vulnerable to customer runs.

Manage and Optimise Liquidity Risks

Optimise liquidity through Fund Transfer Pricing and Minimising Cash Drag. Ensure sufficient liquidity is held for collateral or margin calls by managing, monitoring, and reporting on liquidity ratios.

Corporations, too, need to be vigilant in managing liquidity risk to ensure they have adequate cash or credit lines to meet their operational and financial commitments. The ability to manage liquidity risk is essential for ensuring it has enough cash on hand to meet its short term needs and obligations.

By effectively managing a company's liquidity, businesses can ensure that they have the cash on hand to pay for liabilities and avoid having to take on debt or sell assets in unfavorable terms.

Liquidity risk is the risk of loss resulting from the inability to meet payment obligations in full and on time when they become due. Liquidity risk is inherent to the Bank's business and results from the mismatch in maturities between assets and liabilities.

An example of liquidity risk would be when a company has assets in excess of its debts but cannot easily convert those assets to cash and cannot pay its debts because it does not have sufficient current assets. Another example would be when an asset is illiquid and must be sold at a price below the market price.

Today, a typical way for insurance companies to evaluate and manage liquidity risk is to perform stress scenarios around this “negative movement” to assess the potential need for liquidity.

An important piece of managing liquidity risk is to understand how the bank is funding its balance sheet. Typically, banks will fund the balance sheet with a mix of core deposits, noncore deposits, other wholesale funding and equity.

The optimum value of the Absolute Liquidity Ratio for a company is 1:2. This optimum ratio indicates the sufficiency of the 50% worth absolute liquid assets of a company to pay the 100% of its worth current liabilities in time.

Market liquidity risk

When market liquidity begins to falter, financial markets experience less reliable pricing, and can tend to overreact. This has a knock-on effect, leading to an increase in market volatility and higher funding costs.

How to quantify liquidity risk? ›

A liquidity management strategy is a plan that outlines how a company will manage its liquid assets and liabilities to maintain financial stability and support business operations.

Conclusion. Liquidity risk is an important factor in the financial and business world, and its proper management is essential to ensure stability and sustainable growth.

Effective liquidity planning is both a challenge and an opportunity because it's important to maintain a balance between liquidity and profitability through effective cash management while having enough liquid cash to take care of short-term obligations.

The principal reason banks have a liquidity problem is that the amount of deposits is subject to constant, and sometimes unpredic- table, change. Consequently any development that affects the sta- bility of deposits directly involves the liquidity of banks.

Liquidity in life insurance refers to how easy it would be for you to access cash from your policy. While life insurance policies are structured to provide financial security to your beneficiaries upon your passing, some may allow you to access cash while you're still living — they would be considered more liquid.

The three main types are central bank liquidity, market liquidity and funding liquidity.

Solvency measures how well a company can pay its long-term bills. If the firm has more assets and cash flow than overall debt, it is solvent. Liquidity measures how much cash a company has on hand. If the firm has enough cash and cash-like assets to pay its bills over the next 12 months, it is liquid.