Liquidity within the Life Insurance industry

A risk or an opportunity?

Liquidity risk within the life insurance industry has long since flown under the radar of executive management and regulators alike. This is primarily due to the large quantity of liquid assets traditionally held on life insurers' balance sheets, combined with the long-dated nature of underlying liabilities.

In the last 10 years, however, several factors have led to an increase in the liquidity risk profile of insurers. These include the increased use of derivative transactions, a search for yield uplift in a low interest rate environment, with a resultant increase in investment in illiquid assets, and a significant increase in claims cost due to the COVID-19 pandemic. As a result, the spotlight has started to shift.

In this article we unpack how investing in a liquidity risk management capability will not only increase resilience to withstand a crisis event but could also hold the key to unlocking new value generating opportunities for the benefit of both shareholders and policyholders.

Furthermore, how incorporating such a capability into a robust "three­ manager model" construct will enable insurers to further enhance balance sheet management capabilities in the second manager and potentially benefit from this.

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