A new commentary from Morningstar DBRS outlines some of the stress testing it says insurers in Canada should undergo to strengthen liquidity resilience.

“Our assessment of insurers’ liquidity risk considers potential mismatches between their liquidity needs and available resources, as well as their scenario analysis and stress testing practices,” the report’s author’s write.

In a look at Canada’s four largest life insurers, they say Sun Life has a diversified distribution of obligations across multiple categories, compared with its peers. Great-West Lifeco’s liquidity needs are primarily tied to investment contracts in its U.S. retirement services business. Manulife and iA Financial Group have relatively higher concentrations of obligations payable upon request. (Manulife’s mainly arise from its Asia business where products with withdrawal and surrender features are more prevalent.)

The report adds that its authors observed that features in Canada, such as withdrawal restrictions and surrender charges, help mitigate liquidity risk. 

The firm notes that Canada’s ‘Big Four’ have adequate liquidity stress testing practices in place. They also note that there have never been mass policyholder actions in Canada, historically.

The report makes a number of stress testing recommendations: 

  • Robust liquidity stress testing scenarios should capture the risk of weaker premium inflows, lower new business and higher lapse rates.
  • Insurers should consider both systemic and idiosyncratic liquidity events – those affecting the whole financial system and those affecting individual companies, respectively.
  • Stress testing should reflect the complexity of large insurance groups operating across different jurisdictions “in the context of asset fungibility,” they write.

“Most insurance regulators, including the Office of the Superintendent of Financial Institutions (OSFI), have not prescribed quantitative liquidity coverage ratios for insurers,” they add. “The lack of formal regulation leaves discretion to life insurers in how liquidity risks are measured and reported.”