This supervisory statement (SS) sets out the Prudential Regulation Authority’s (PRA’s) expectations concerning the liquidity risk management framework an insurer must have in place pursuant to Conditions Governing Business 3.1(2)(c)(iv) and Group Supervision 17.1(1)(b) in the PRA Rulebook for Solvency II firms or to Insurance Company – Overall Resources and Valuation 2.5(3) in the PRA Rulebook for non-Directive firms, as applicable.
It is addressed to all UK Solvency II firms, including in respect of the Solvency II groups provisions, to the Society of Lloyd’s (‘the Society’) and its managing agents, and to non-Directive insurers (collectively referred to as ‘insurers’).
The areas addressed in this SS include:
- the development and maintenance of proper policies, systems, controls and processes (Chapter 2);
- the identification of material liquidity risk drivers (Chapter 3);
- the design and undertaking of forward-looking scenario analysis and stress testing programmes (Chapter 4);
- considerations for the inclusion of highly liquid assets in the liquidity buffer (Chapter 5);
- the use of quantitative metrics and tools for measuring and monitoring liquidity risk drivers (Chapter 6); and
- effective contingency planning (Chapter 7).
This SS draws on the PRA’s regulatory experience to identify some key issues for an insurer to consider when managing liquidity risk. It is not intended to be an exhaustive guide to liquidity management. The PRA recognises that the mix of sources of liquidity risk is unique to each individual insurer and group, and that liquidity risk management practices will vary. An insurer, therefore, is expected to understand the drivers of the liquidity risk it faces and to apply the guidance contained in this SS in light of the scale, nature and complexity of its activities.