Liquidity risk management for insurers

Policy Statement 18/19 | Consultation Paper 4/19

Published on 24 September 2019

Liquidity risk management for insurers PS18/19

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 4/19 ‘Liquidity risk management for insurers’ (see page 2 of 2). It also contains the PRA’s Supervisory Statement (SS) 18/19 ‘Liquidity risk management for insurers’ (Appendix).

This PS is relevant to all UK Solvency II firms, including in respect of the Solvency II groups provisions, the Society of Lloyd’s (‘the Society’) and its managing agents, and non-directive insurers (collectively referred to as ‘insurers’).

Summary of responses

The PRA received thirteen responses to the CP. Respondents generally welcomed the PRA’s proposals, and made a number of observations and requests for clarification. The PRA’s feedback to these responses is set out in Chapter 2. 

Changes to draft policy

After considering the responses, the PRA has made some changes to the draft policy. The most significant amendments involve clarifying the PRA’s expectations on the definition of risk limits within an insurer’s liquidity risk appetite framework, the role of the board, and any risk committee of the board, in managing liquidity risk and the definition of the liquidity buffer. In addition, the function and characteristics of the liquidity buffer have been clarified. Details of the changes are included in Chapter 2. 

A number of editorial amendments were made to improve the clarity of the SS and are not explicitly addressed in this PS.

The PRA does not consider that these changes and editorial amendments alter the substance of its expectations. Accordingly the impact of the changes for firms is not considered to be significant or to differ in respect of mutuals.

Implementation

The expectations set out in SS5/19 and the withdrawal of Legacy Supervisory Statement (LSS) 2/13 ‘Collateral upgrade transactions and asset encumbrance: expectations in relation to firms' risk management practices’ have immediate effect. 

The final SS attached to this PS should be read in conjunction with SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’, ‘The PRA’s approach after the UK’s withdrawal from the EU’ and the joint Bank and PRA Statement of Policy (SoP) ‘Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU’.

PDFPS18/19 Liquidity risk management for insurers


Published on 5 March 2019

CP4/19 - Liquidity risk management for insurers

Overview

In this consultation paper (CP) the Prudential Regulation Authority (PRA) seeks views on a draft supervisory statement (SS) ‘Liquidity risk management for insurers’ and the consequential supersession of a legacy supervisory statement on collateral upgrade transactions.

The proposals are relevant to all UK Solvency II firms, including in respect of the Solvency II groups provisions, the Society of Lloyd’s (‘the Society’) and its managing agents, and non-Directive insurers (collectively, ‘insurers’).

Summary of Proposals

The draft SS in the Appendix to this CP sets out the PRA’s expectations for liquidity risk management by insurers. These include the key elements of an insurer’s liquidity risk management framework, the consideration of material sources of liquidity risk an insurer may be exposed to, expectations of the design and conduct of a stress testing programme, considerations for assessing asset liquidity, quantitative metrics and tools for measuring and monitoring liquidity risk, and effective liquidity contingency planning.

Legacy SS2/13 ‘Collateral upgrade transactions and asset encumbrance: expectations in relation to firms’ risk management practices’ sets out the PRA’s expectations of banks and insurers engaging in collateral upgrade transactions and described a number of considerations in their management of the associated risk. Upon publication, it is proposed that the new SS would supersede the legacy SS, including the expectation therein to notify the PRA in advance of significant transactions.

Responses and next steps

This consultation closed on 5 June 2019. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP4_19@bankofengland.co.uk

PDFCP4/19 Liquidity risk management for insurers