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NAIC Panel Eyes Liquidity Risk

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Insurance regulators are trying to figure out ways to take more types of risk into account when looking at insurance company investment portfolios.

An arm of the Invested Assets Working Group at the National Association of Insurance Commissioners, Kansas City, Mo.. – the Risk Other Than Credit Technical Subgroup – has posted two comments about the topic.

One comes from Matti Peltonen, a regulator in the New York State Insurance Department, and the other from Andrew Melnyk, managing director for research at the American Council of Life Insurers (ACLI), New York.

Peltonen says regulators do not have good tools to assess asset liquidity.

He has proposed creating a numeric liquidity index that would regulators to compare different companies and identify outliers. Indexers could assign each asset class a number rating from 1 to 10 to reflect how easy it ought to be to convert the security into cash, then calculate an insurer’s liquidity by weighing the insurer’s exposure to each asset class, Peltonen says.

“For example, real estate has shown a lot of price volatility during the past few years, and can require a long time to liquidate,” Peltonen says. “”Corporate bonds have normally a larger issue size and deeper market than most structured bonds – so their liquidity is assumed better even when their credit quality sinks.”

Melnyk reported that the ACLI has received several comments from member companies.

The technical subgroup had suggested that commenters talk about categories of risk such as call risk, deferral risk, extension risk and liquidity risk.

ACLI member companies have proposed that other types of risk worth consideration include reinvestment risk, interest rate risk, rating downgrade risk and asset-liability mismatch risk, Melnyk says.

In discussions of liquidity risk, one company told the ACLI that there “is no true measure of liquidity which is universally agreed upon in the market,” Melnyk says.

“Percentage ownership of an issue is a good starting point,” Melnyk says. “Volatility and liquidity premiums are ingredients but they are only as good as the trade data, which may be few and far between for the specific instrument in question, which in turn may be an indicator of illiquidity. For example, this risk could be measured by identifying the percentage of 144A/true private placements that an insurer may hold in their portfolio. However, this measurement is meaningless without stress testing the portfolio as it relates to the liquidity premium which is assigned to these types of securities.”


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