Liquidity risk considerations for life insurers

Life insurers focus much of their attention on managing the risks they are exposed to that might impact their available capital. This makes sense because maintaining adequate capital is important for insurers to instil confidence with all stakeholders that they have sufficient funds to continue doing business and meet policyholder obligations. However, the fact that a firm holds adequate capital does not guarantee a position of adequate liquidity.

Managing liquidity requires a different approach from managing capital and must often be considered over a different, typically much shorter, time period. This paper by Milliman consultants provides some context for a discussion of insurer liquidity risk. It explores sources of liquidity risk and provides some examples of where insurers have been challenged in the past.

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