Liquidity Risk Is Still A Fluid Issue For Regulators

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The goal of measuring an insurer’s liquidity risk continues to receive general support from companies, but there are disagreements over how this should be achieved.

When the National Association of Insurance Commissioners meets in early December, regulators will continue to discuss ways to track liquidity risk, ranging from issuing a circular letter similar to the one that New York now uses, to including disclosure of liabilities in the statutory financial statements or blanks, that companies are required to file.

During a discussion on the issue, Larry Gorski, chief actuary with the Illinois insurance department, raised the possibility of having a company point person regulators could go to with questions about an insurer’s liquidity.

Insurers would be required, Gorski said, to come to regulators with information on liquidity risks, if there were any new developments.

This was discussed in addition to the blanks proposal. Companies say there are better ways to monitor liquidity risk without requiring disclosure on the blanks. The possibility was raised that a liquidity report filed with the blanks could be kept confidential.

Another suggestion was made that the liquidity filing could be used in conjunction with a circular letter to ease any regulatory concerns.

William Schreiner, a life actuary representing the American Council of Life Insurers in Washington, asked why a circular letter would not be sufficient to meet regulators’ needs.

New York regulators use Circular Letter 33 as one way to monitor liquidity risk. Issued in November 2000, it requires life insurers and reinsurers to file a report with regulators that answers interrogatories such as how a company would respond to an immediate cash demand.

After reviewing the New York approach, regulators supported the circular letter concept both for its use in determining stress liquidity risk and in identifying a management plan to mitigate such risk.

Industry comments have run the gamut over solutions and their effects. Some have said that if risk is being assessed, it is important to evaluate assets as well as liabilities. Risk arises when assets and liabilities are not matched, this argument goes.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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