Holistic Framework for Systemic Risk represents a significant improvement on the previous entity-based approach. The International Association of Insurance Supervisors (IAIS) is currently developing liquidity metrics to assess insurers' liquidity exposures which aims to assess and mitigate the potential build-up of systemic risk in the global insurance sector.

Insurance Europe has published its response to a consultation by the IAIS on its proposal for an insurance liquidity ratio (ILR) and considers that its nature would have limited value as a reliable ancillary indicator that would achieve the IAIS's stated aims.

"The limitations of the proposed ILR are such that it would have limited value", as mentioned by Insurance Europe. 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.

Source: Insurance Europe