Although the International Association of Insurance Supervisors published a set of liquidity metrics in November 2022 to assess insurers’ liquidity risks, today these are not being used in any binding regulatory way. Researchers say a widely accepted approach for quantitatively measuring liquidity risks and liquidity resources is needed.
“Greater attention is now being paid to systemic liquidity issues. In fact, insurers are exposed to various sources of liquidity risk, including a growing exposure to illiquid assets, as private credit rises in popularity,” say Morningstar DBRS researchers in a recent note, entitled Liquidity Risk Under Scrutiny as Insurers Embrace Private Credit. “While regulators are taking notice, supervisory frameworks on liquidity risk in the insurance sector are typically behind relative to those developed for banks.”
The report notes that the Bank of Canada found the COVID-19 pandemic and the subsequent rise in interest rates did not result in liquidity risks materializing for insurers, “Instead, life insurers were providing liquidity to the bond market during both events.”
Alternative asset investment strategies
Still, they say growth in the use of alternative asset investment strategies in the insurance industry has heightened the importance of monitoring liquidity risk.
Morningstar DBRS further says given the growing use of alternative assets and private credit in the insurance industry, it plans to scrutinize insurers’ investment portfolios to better assess liquidity risks going forward.
“Liquidity risk in the insurance sector is getting more attention because of the growing use of private assets,” they write. “There isn’t a widely available, consistent metric to measure liquidity risk exposure for insurers globally.”
