On November 18, the International Association of Insurance Supervisors (IAIS) published Phase 2 of its public consultation on the development of metrics for monitoring liquidity risk. The IAIS intends to use liquidity metrics as part of its Global Monitoring Exercise (GME), as a tool to facilitate its monitoring of the global insurance industry’s liquidity risk and liquidity exposure. Following a series of discussions with the Insurance Working Group (IWG), the IIF submitted its response to Phase 2 on January 21, 2022.
In its response, the IIF acknowledged the importance of liquidity risk monitoring for the IAIS as part of the finalization of the Holistic Framework, and the role that aggregate liquidity metrics, including the Exposure Approach (EA) and Insurance Liquidity Ratio (ILR), can serve as high-level macroprudential sector-wide monitoring tools for assessing changes in overall industry liquidity over time. However, the IIF response emphasized that such aggregate liquidity metrics should not be used for microprudential oversight, as they fail to consider many of the relevant facets, such as the time dimension of liquidity risk management, and do not provide a forward-looking view of liquidity. Generally speaking, the IIF and its insurance members believe that a standardized approach is inconsistent with the highly individualized nature of liquidity risk and liquidity risk management across the insurance industry. As such, liquidity risk management and liquidity stress testing is and should remain a bespoke exercise conducted by insurers with supervisory review and oversight.
The IIF suggested the use of other tools for developing a qualitative and macroprudential analysis of sector-wide developments, such as the Global Insurance Market Report (GIMAR) thematic reviews. Further, the IAIS’s Macroprudential Committee and working groups can conduct sectoral deep dive reviews of any liquidity developments that raise concerns among members. This would equip IAIS members to review these issues in the context of individual insurers under their jurisdiction as and to the extent appropriate. The IIF welcomed future opportunities to expand upon its response, and encouraged the IAIS to convene a stakeholder meeting on the important issues raised by this consultation before an approach is finalized.