Managing liquidity risk in a volatile market and improving returns

Insights from EY Global Liquidity Risk Management Survey 2016 for insurers

Historically, insurers have regarded liquidity risk as a benign risk, given the nature of the business model. For example, it often takes liabilities longer to mature than it takes assets; life insurers receive upfront periodic payments; general insurers receive premiums before claims are paid; and, in general, assets are relatively liquid.

Recently, regulators have become increasingly concerned about liquidity risk management issues, such as insurance cycles where companies sell assets in a downturn and search for yield in an upturn, increased liquidity exposures through margin calls on derivatives, mass lapses where surrender penalties are low, insufficient working capital to fund critical services in a crisis and the inability to service debt due to trapped liquidity.

We surveyed some of the world’s largest insurance groups to determine their priorities and concerns. Three key themes emerged from our discussions:

1. Governance, roles and responsibilities in liquidity management are not always clearly defined. 

2. Liquidity risk management infrastructure relies heavily on spreadsheet solutions based on manual input. 

3. Stress testing, metrics and consistency need to be enhanced. 

It is clear that strides made in improving visibility will help insurers not only survive a crisis but also improve their risk-adjusted return on capital by optimizing use of liquid assets.This report presents the findings of our survey and insights for insurers as they look to enhance their liquidity risk management frameworks.

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