22 October 2014
Dear IAIS Members:
Please find attached the guidance on liquidity management and planning that was drafted by
the IAIS Financial Stability Committee and approved by the IAIS Executive Committee.
This document builds on the G-SII Policy Measures, which were published on the IAIS
website on 18 July 2013 (http://www.iaisweb.org/G-SIIs-988) and which state that the groupwide supervisor is responsible for evaluating and monitoring liquidity management andplanning on a group-wide basis. The purpose of this document is to provide further guidance
to group-wide supervisors on how they could direct G-SIIs to develop their liquidity
management.
Not all members are, or may become, group-wide supervisors of G-SIIs. However, it isimportant that a common understanding develops amongst all supervisors on what is
expected from insurers that have been designated as G-SIIs. Furthermore, the cross-borderactivities of G-SIIs make the guidance on liquidity management and planning also relevant
for host jurisdictions/supervisors.
Jurisdictions that are group-wide supervisors of G-SIIs are requested to provide copies of theguidance to those G-SIIs. It is intended that the guidance will be made available on the IAIS
public website by early November.
Should you have any questions with respect to the guidance, please refer them to John
Maroney, Head of Financial Stability, at the IAIS Secretariat (john.maroney@bis.org).
Best regards

Elise Liebers
Acting Chair, Financial Stability Committee

International Association of Insurance Supervisors
c/o Bank for International Settlements, CH-4002 Basel, Switzerland
Telephone: +41 61 225 7300 Telefax: +41 61 280 9151 Website: www.iaisweb.org E-mail: iais@bis.org

Guidance on Liquidity Management and Planning1.

Purpose of the guidance
The International Association of Insurance Supervisors (IAIS) released its Policy
Measures for global systemically important insurers (G-SIIs) on 18 July 2013
(henceforth: The G-SII Policy Measures document) 1. It states that group-wide
supervisors should require G-SIIs to have adequate arrangements in place to plan forand manage liquidity risk for the whole group 2. The purpose of this document is toprovide guidance to group-wide supervisors in the application of these requirements to
G-SIIs. The guidance is principles-based and outlines the key supervisory features thatwould be expected in the liquidity management planning of a G-SII. These plans should
complement any existing liquidity arrangements.
The current guidance addresses the following components which are deemed as thecore elements of an effective liquidity management and planning:
•
•

•
•

2.

A statement of policy containing the liquidity risk tolerance of the insurer.
A description of the corporate governance and management that will establish
the risk tolerance, manage the level of liquidity risk given that threshold, andmonitor the effectiveness of that management.
A means of assessing the insurer’s liquidity adequacy across various suitable
time horizons and under current and plausible stress scenarios
Reporting by the G-SIIs on these activities.

Rationale
While in the normal course of business insurers 3 typically rely on premiums, income frominvestment and other sources, they nevertheless need to maintain adequate liquidity tofulfil expected and unexpected payment obligations and meet funding shortfalls. Liquidity
management is key to the proper operation of the insurer, the protection of policyholders

1

Cf. http://www.iaisweb.org/Supervisory-Material/Financial-Stability-Macroprudential-Policy-Surveillance-988
This guidance will also be relevant for the preparation of liquidity risk management plans in the context ofrecovery and resolution.
3
Where we refer to insurer in the document, both single entities and groups are meant. Insurance businessrefers to the business of insurers and reinsurers, including captives.
2

Page 1 of 9and financial stability. Accordingly, insurers are expected to exercise sufficient andregular reviews of their liquidity adequacy.
Mismanagement of liquidity and liquidity risks has contributed to distress and failure in
the financial services industry. In the past, some instances of insurer distress or failure
have been the consequence of concentrated investments in illiquid assets backing
liability structures of which the payment obligations accelerated in a time of distress 4.
This exemplifies the risk that otherwise solvent insurers can find themselves short ofcash or funding options to meet their liabilities as they fall due. Also, when confronted
with stress events, insurers with insufficient liquidity may be forced to take remedialactions that may amplify or accelerate financial stresses through the financial system.

3.

Concepts
Liquidity risk is the uncertainty, emanating from business operations, investments orfinancing activities, over whether the insurer will have the ability to meet payment
obligations in a full and timely manner in current or stressed environments. Liquidity risk
is concerned both with assets and liabilities as well as their interplay 5.
Financing risk is an important part of liquidity risk; it is specifically the uncertainty of theability to obtain sufficient funding in due time and on non-punitive terms. Financing risk
can arise from external events such as disruption in the markets for commercial paperand securities financing transactions or in other securities markets that may reduce theability to raise funds. It can arise from internal events such as the loss of sufficientcreditworthiness that is needed to access credit markets.
Liquidity adequacy is a measure or assessment of the ability of the insurer to meetpayment obligations in a full and timely manner. It is a function of its sources of liquidity
relative to its liquidity needs. Liquidity sources can be internal and external and include
all funds, assets and arrangements that allow an insurer to meet its liquidity needs.
Liquidity needs include all payment obligations, including on- and off-balance sheet
obligations.

Contingency funding plan should include the strategies for responding to any liquidity
gap under stressed circumstances. This should consist of establishing lines of authority,
procedures to trigger the emergency plans, and guidance to manage funding needs
across a range of stressed conditions.
A comprehensive understanding of the insurer’s sources and needs of liquidity and theinterplay thereof are instrumental in liquidity management. An insurer should have asound understanding of the ways in which its activities and decisions affect its liquidity
risk profile under current and stressed conditions, and how outside influences may affectits liquidity risk position. A pre-condition for an effective liquidity measurement is for a
4
5

Cf. Annex of IAIS (2011): Insurance and Financial Stability
This is distinct from Asset/Liability Matching, which focuses on duration.
Page 2 of 9

firm to continually assess its liquidity sources and liquidity needs and to maintain acomplete inventory thereof, including their characteristics. For instance, aggravated or
stressed conditions will affect liquidity sources and needs differently.
Current and possible future liquidity inflows and outflows, notably those from business,investment and (re-) financing activities, are to be categorised into liquidity sources andliquidity needs. Liquidity sources include, among others, the following:
o
o
o
o
o
o

Cash
Cash flows from financial assets and sales of financial assets
Inflows from business operations, such as premium payments and reinsurance
recoverables
Access to short-term credit markets, for instance by means of commercial paperand securities financing transactions (security lending or reverse repo) andestablished lines of credit
Receipt of liquid assets as collateral for derivatives and other transactions
Collateral held under reinsurance arrangements

The level of liquidity of those sources varies and can be circumstance-specific. For example,
encumbered assets, such as those used as collateral for reinsurance and derivativetransactions, cannot be counted as liquidity sources but for the purpose of the gap analysis
can be used to offset liquidity needs of the underlying contract commitment
Liquidity needs include, among others, the following:
o
o
o
o
o
o
o
o
o

On balance sheet liabilities, such as those required to meet (re-) insurance andbenefit payment obligations
Other outflows from business operations
Off balance sheet contingent claims and obligations, such as derivatives
payments and collateral (margin) calls
Assets purchased but not settled, repos
Debt service (principle and interest)
Corporate and other taxes.
Pensions liabilities (on- or off-balance sheet)
Additional liquidity requirements for capitalisation (or other purposes) of group
entities
Dividend declared but unpaid

An insurer should consider not only its current liquidity position, but how existing
activities and operational/management decisions may affect its liquidity profile in the
future. Projected future liquidity adequacy should consider several potential states of theworld and not restrict itself to historical data. Hence, the insurer should look at different
scenarios, covering both current and stressed conditions, and considering both internal
events and external market conditions that may trigger changes in the insurer’s liquidity
profile.
An assessment of liquidity risk should include the following considerations. The list is
non-exhaustive and the importance of each will vary across insurers.
oooNature, frequency, and severity of exposures to insurable events, including
catastrophic events
Features of insurance policies and products
Depth and liquidity of capital markets, including liquidity characteristics of theassetsPage 3 of 9

o
o
o
o
o
o
o
o
o

(Changes in) behaviour of policy holders and other market participants, both
gradual and sudden(Changes in) market conditions that will affect payment obligations
Risk of non-convertibility of currencies
Concentration in exposure in certain assets and to certain counterparties; having
particular regard to the illiquidity of assets and counterparties with lower credit
ratings under stressed conditions(Changes in) own credit worthiness, including rating downgrades; both gradualand sudden
Trigger clauses and other contingent obligations for cash or collateral
Encumbrances on assets and re-hypothecation of assets
The specific liquidity characteristics of any non-traditional or non-insurance
activities
Interaction (potential correlation) of liquidity sources and liquidity needs

In addition to the above, a liquidity assessment should consider the legal organisation of
the insurer and intra-group transactions (including reinsurance transactions). In
particular, potential legal and economic impediments to inter-affiliate transactions bothvertically and horizontally should be considered. The extent to which liquidity is fungible
or not within the G-SII (within and across jurisdictions), currently and during times ofstress, needs to be considered. For G-SIIs a prudent assumption should be that understressed conditions liquidity is non-transferable across legal entities, unless the G-SII isable to provide robust rationale for alternative assumptions such as the existence of
written and legally binding documents. These assumptions should be discussed andagreed between the group-wide supervisor (GWS) and the relevant national supervisors
before recognising any fungibility claimed by the G-SII. In addition, national supervisors
should be consulted by the GWS with respect to other requirements as well whereapplicable.
If the G-SII is a group, strategic considerations regarding the provision of liquidity to specificgroup entities in times of stress should be aligned with the recovery and resolution plans. To
that effect, the liquidity assessment should consider if and to what extent entities or subgroups of entities within the group are self-sufficient or dependent on liquidity support fromother parts of the group (before and after any off-setting transactions). Complex groupstructures may require liquidity plans for both the group and its entities or sub-group ofentities to allow a full understanding of the group’s liquidity risk.

4.

Liquidity management and planning
Firms may achieve effective liquidity management and planning in various ways
accounting for differences in scale, nature and complexity of the insurer and its businessmix..
The insurer, at the minimum addresses the following aspects of liquidity management as
described further in this guidance:•

Statement of objectives: This would typically be in the form of liquidity risk policy(ies)and would include a clear articulation of risk tolerance and the governancearrangements around liquidity management. Depending on the insurer’s funding
structure, such policies could be articulated at the level of the group, entity or othersubset of the group.
Page 4 of 9•Plans for execution: This would include liquidity risks management plan(s) and cover
all aspects of identification, measurement, monitoring and mitigation of liquidity risk,
as well as contingency funding plans.

4.1.

Statement of objectives

Liquidity Policy
The G-SII needs to establish and maintain a policy for the day-to-day and long-term
management of liquidity risk. The policy should state the G-SII’s risk tolerance in regard
to liquidity, including quantitative targets, such as excess liquidity and liquidity coverage
ratio, and qualitative objectives. It should also explain how it ties in with the insurer’s
overall risk tolerance. The policy should explain how breaches of targets are escalated
within the group.
The policy should address both liquidity sources and liquidity needs. It should also
address how assumptions and expert judgment under normal and stressed conditions(e.g. market haircuts, management decisions like capital repatriations and dividends) are
documented and justified. The policy should address responsibility for decisions on
critical assumptions, the nature of risk tolerance and responsibility for contingency
funding plans. The policy should be communicated to all relevant functions within theinsurer.
Governance
The G-SII’s Board should approve the liquidity risk policy and is responsible for its
effectiveness on an on-going basis. It should also approve the liquidity contingency
funding plans. Execution and elements of the liquidity risk framework, for instance dayto-day monitoring of its effectiveness, may be delegated to risk committee/investmentcommittee/executive management, as appropriate to the structure and complexity of the
G-SII. The relevant committee should report to the Board on a regular basis, including
any significant changes to the liquidity risk profile of the G-SII.
The G-SII should establish and document a clear allocation of responsibilities regarding
the management of liquidity risk, including reporting lines. In addition, internal controls
and governance requirements related to liquidity should also be documented.
The G-SII shall demonstrate how the liquidity risk policy is applied, in particular how it
integrates into the risk management of the firm and how it informs business decisions(“use test”).

4.2.

Plans for execution

The liquidity risk management plan should consist of both quantitative and qualitative
elements. In doing so, the plan should state and justify all assumptions, in particular
those underlying “liquidity impairments”, scenarios and projections and the judgements
Page 5 of 9applied in the scenarios that are to be used for liquidity planning. In particular, it should
include an assessment of the arrangements the G-SII has in place to manage, mitigate
or reduce liquidity risks.
The G-SII Policy Measures document focuses on a liquidity gap analysis 6, which
cumulatively determines both liquidity sources and liquidity needs at specific points intime under current and stressed conditions. The plan should consider stress scenariosthat are forward looking and not based entirely on historical data. In particular, G-SII’s
should construct idiosyncratic, market-wide and combined stress scenarios relevant totheir business, noting that stress testing work for capital purposes may not be relevant or
adequate for liquidity purposes.
Liquidity analysis
A liquidity gap analysis is an effective tool to identify, measure and manage liquidity risk
in insurance. By providing this guidance and focussing on the liquidity gap analysis as acommon deliverable for all G-SIIs, the IAIS aims to facilitate the interaction of the G-SII
and its GWS as well as among supervisors involved in Crisis Management Groups(CMGs) and/or Colleges. This does not preclude the use of other risk factors, risk
metrics or policy tools that could supplement the gap analysis. The analysis should
include consideration of the location of material liquidity gaps within the G-SII (e.g.
individual entities or sub-group of entities).
Liquidity sources and liquidity needs as maintained in the inventory serve as a basis forthe gap analysis (cf. section 4).
The gap analysis should include, at a minimum, the following:
o

o

o

6

A projection over time of liquidity sources under current conditions and future
stress scenarios (based on the insurer’s liquidity sources).
o All encumbered cash and other assets should be excluded from liquidity
sources.
o All ring-fenced cash and other assets (e.g. those belonging to Unit Linked
funds, With Profit Funds) should be excluded as liquidity sources.
However, the share belonging to the insurer can be considered.
o The haircut on collateral posted in secured borrowings should beconsistent with those levels at which the insurers' counterparties arewilling to lend at, in adverse market conditions.
o The availability of new unsecured market borrowings and rollovers should
be assumed as zero under idiosyncratic and combined stress scenarios
for the full time horizon.
o Regarding existing borrowing agreements, their degree of liquidity should
consider whether there are contingencies.
A projection over time of liquidity needs under current conditions and future
stress scenarios should consider such situations as high rates of surrenders,
cancellations or lapses, at the legal entity level and – where applicable acceleration of liquidity needs at the group level (e.g. holding company obligation
to repay its loans due to a credit rating trigger).
Projections of both liquidity availability and needs must be based on consistentassumptions.

Please refer to the Annex for a stylised example of a gap analysis
Page 6 of 9oo

G-SII’s should be required to substantiate that the contingency funding plans arereasonable and have a likelihood of success under stressed conditions.
Time intervals and overall time horizon needs to be appropriate for the businessmodel. G-SII’s should be encouraged to use a number of time horizons;particularly short term (which addresses the potential problems in collateral
margin, money market funds freeze risk, etc.) and long term (which could be one
year or longer).

Liquidity sources and liquidity needs should be presented separately under different time
horizons and scenarios. The difference between liquidity sources and needs constitutes
the respective excess liquidity (or shortfall thereof) of the insurer, in the time intervals.
The ratio of the liquidity sources and liquidity needs on the other hand constitutes thecoverage ratio7 in the time intervals. Both excess liquidity and coverage ratio should be
calculated for each scenario and time horizon. ‘Early warning indicators’, which could be
expressed as coverage ratios or other quantitative criteria, should be part of regularmonitoring.
Additional, insurer specific considerations to be taken into account:ooooTarget liquidity maintenance levels, i.e. minimum standard, that an insurer sets
for its liquidity management and planning
Capital planning: capital repatriation, dividends, etc.
Haircuts applied to securities under current and stressed conditions for use infunding and sale
Other liquidity risk metrics that are of specific interest to internal management or
supervisors

If any mitigating conditions, measures or management actions impact the liquidity risk of
the insurer, these should be included and their role explained. In particular, any
assumptions relating to “monetisation” of future cash flows need to be justified.
Furthermore, the plan should provide results before and after application of risk
mitigating measures, and the resilience of these measures under stressed conditions.

5.

Reporting to group-wide supervisor
The G-SII should report at least annually on its liquidity management and planning or
more frequently in the event of any major changes 8 to its policy or liquidity risk profile.
The frequency of reporting should reflect the distinctive nature, scale, and complexity of
the group. The G-SII should be able to respond to ad-hoc requests from the group-wide
supervisor (GWS) on its current liquidity condition at any time.
The GWS should share the information within supervisory colleges and with the Crisis
Management Group.

7

Depending on the nature of the activities and the manner in which they are funded, it may be appropriate todetermine a number of liquidity coverage ratios.
8
The GWS in consultation with the G-SII may define major changes if deemed appropriate.
Page 7 of 9

Annex 1 Illustrative example of a gap analysis 9
Time horizon

Liquidity
sources (1)End of periodbalancesheet(e.g.
quarter)Current

3 months

6 months

12
months2 yearsn years

Cash
Lines of credit……

Liquidity
needs (2)Contingent
claimsAssetpurchases
Operatingexpenses…….

ExcessLiquidity
CoverageRatio(1) – (2)(1) – (2)(1) – (2)(1) – (2)(1) – (2)(1) – (2)(1) – (2)(1)/(2)(1)/(2)(1)/(2)(1)/(2)(1)/(2)(1)/(2)(1)/(2)

Assessments should be done for different scenarios, with respective implications on liquidity
sources and needs and the corresponding liquidity measures. This assessment could be
supported by charts. Complex structures may also justify an additional assessment at entity
level to fully reflect the level of liquidity resources or the constraints thereof.

9This is a generic illustration only and does not take into account any firm specificities or other aspects a G-SII
may want to consider.
Page 8 of 9

Liquidity under scenario X
2.5

100000
90000
80000

2.17

70000

2.0

1.84

1.83

1.71

1.61

60000

1.54

1.5

50000
1.0

40000
30000
20000

0.5

10000
0

0.0
current

3mo

6mo

liquidity sources

12moliquidity needs

2yrs

n yrs

coverage ratio

Liquidity under Scenario Y
1.6

90000
80000

1.43

1.4
1.27

70000

1.10

60000
50000

1.2
1.04

1.01

1.01

1.0
0.8

40000

0.6

30000
20000

0.4

10000

0.2

0

0.0
current

3mo
liquidity sources

6mo

12mo
liquidity needs

2yrs

n yrs

coverage ratio

Figure 1: Illustration of liquidity position under different scenarios

Page 9 of 9