A recent webinar, hosted by Morningstar DBRS on the liquidity resilience of Canadian life insurers – from regulator’s point of view – included comments from an Office of the Superintendent of Financial Institutions (OSFI) representative who says liquidity risk will be a priority part of the regulator’s inquiries in the coming year.
Morningstar’s analysts note that among the big four life insurers who dominate the life insurance sector in Canada, more than 57 per cent of investment portfolios are allocated to what the research firm calls liquid investments.
Kliti Droboniku, director of insurers’ financial resilience with OSFI says the regulator is focused on insurer’s financial resilience with particular emphasis on investment risk, asset liability management and liquidity risks. “This includes assessing whether insurers are prepared for low probability, high impact liquidity events,” he says. “In practice, we look at whether institutions can meet cash flow needs in business as usual and other severe, but plausible stress, and whether governance data and contingency actions are credible and executable.”
He notes that liquidity resilience is not demonstrated by one single ratio, it is instead evident in how elements work together, across the institution and over time.
He explains that OSFI evaluates insurers using the Overall Risk Rating (ORR) which includes four categories, including business risk, financial resilience, operational resilience and risk governance. “Liquidity risk for insurers is embedded within the financial resilience category, alongside capital insurance risk, investment risk, asset liability management and counterparty credit risk,” he says.
Proportional examinations and expectations
He adds that examinations and expectations are proportional, based on the insurer’s size, complexity, systemic impact, product mix and asset composition. He also notes that there can be different triggers of liquidity risk for different insurers.
Later in the presentation he added that institutions should be able to articulate what actions should be taken at different trigger points and demonstrate that those actions are operationally feasible.
“The sophistication of liquidity stress testing should be commensurate with the institution size, complexity and risk profile. That said, proportionality does not mean the absence of stress testing where liquidity risks may be material,” he states.
The “next stress,” meanwhile, can transmit through different channels than those which played a role in the past. Vulnerabilities can build quietly through more complex products, derivatives and collateral needs.
“The key question is whether stress testing and assumptions capture these dynamics credibly and whether buffers and actions are sufficient and appropriate to remain liquid under severe but plausible conditions.”
He adds that capital adequacy is not a substitute or replacement for liquidity risk management.
In discussing insurers’ growing investment in private assets, he also notes that OSFI’s plans include prioritizing reviews in such areas where there is less liquid exposure. “As part of our supervisory plan for the fiscal year 2026-2027, we’ll be focusing more on liquidity risks and intend to engage with insurers in this area to better understand their practices.”
