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IAIS proposal for insurance liquidity ratio is an inappropriate tool to assess insurers' liquidity exposures

Insurance Europe has today published its response to a consultation by the International Association of Insurance Supervisors (IAIS) on its proposal for an insurance liquidity ratio (ILR). The IAIS is currently developing liquidity metrics to assess insurers' liquidity exposures, as part of its holistic framework, which aims to assess and mitigate the potential build-up of systemic risk in the global insurance sector.

Insurance Europe stressed that the proposed metric would have limited value. It's weaknesses include a loss of information on mismatches between liquidity needs and sources, and a lack of risk sensitivity. It would, in particular, be inappropriate to apply the ILR beyond the global monitoring exercise for the purposes of micro-prudential regulation.

A thorough understanding of liquidity sources and needs is required to understand insurers' individual liquidity risk profiles, which a blunt factor based ILR would fail to do. Liquidity risk is already well managed due to the insurance business model, existing regulatory provisions and insurers' integrated approach to liquidity and risk management. Furthermore, insurance groups have established liquidity risk management practices and liquidity frameworks tailored to the characteristics and nature of their business.

To avoid an unjustified increase of burden on firms, Insurance Europe proposes that the IAIS instead leverages on insurers' existing internal liquidity frameworks and promotes industry best practices.

Published 15 February 2021