PRA Policy Statement PS 18/19, ‘Liquidity risk management for insurers’

On 24 September 2019, the Prudential Regulation Authority (PRA) released Policy Statement (PS) 18/19, ‘Liquidity risk management for insurers.’ In this paper the PRA publishes the responses it received to Consultation Paper (CP) 4/19 and outlines the subsequent changes it has made to its draft policy on liquidity risk management for insurers. The final Supervisory Statement (SS) 5/19 ‘Liquidity risk management for insurers’ is contained within the appendix.

This paper is relevant to all UK Solvency II firms.

  • Liquidity risk management framework: Clarity was requested on the establishment of risk tolerance limits for liquidity risk, and on the way in which groups should implement the provisions of the SS.
  • Sources of liquidity risk: Responses requested additional guidance on intraday risk, suggesting that it is typically not material for insurers.
  • Stress testing: Clarity was requested on the stress horizons listed, while additional guidance on the treatment of individual funds within a life insurer’s portfolio was also requested.
  • Liquidity buffers: Responses requested clarification on the purpose of the liquidity buffer and the PRA’s classification of assets of primary and secondary liquidity.
  • Risk monitoring and reporting: Some responses raised concerns over the required level of board involvement with liquidity risk management.
  • Liquidity contingency planning: Responses highlighted that contingency planning requirements have been set across different jurisdictions.
  • General comments.

The most significant changes to the policy are as follows:

  • Definition of risk limits: There were concerns that establishing risk tolerance limits would be needlessly complex as they would interact with existing risk limits and would be unlikely to materialise from a single source. The PRA now expects an insurer’s senior management to decide what liquidity risk limits need to be set, in accordance with the nature, scale and complexity of the firm’s activities, rather than for each material risk to which the insurer may be exposed.
  • Documentation: There were concerns over the duplication of existing documentation in order to comply with the PRA’s expectations. The PRA has confirmed that existing documentation does not need to be duplicated, and only needs to be accessible from one location.
  • Liquidity buffer: The PRA has clarified the characteristics of the liquidity buffer, stating that the purpose is to cover any mismatch between cash outflows and cash inflows. Where liquidating assets could conflict with business or risk management strategies, including such assets in the liquidity buffer goes against the objectives of the SS. They also clarified the definitions of assets of primary and secondary liquidity, but retained the list of example assets for each, while noting that they were not necessarily definitive classifications. The PRA also added additional requirements to consider the suitability of pooled money market funds for inclusion in the liquidity buffer, including a fund’s ability to limit or stop withdrawals.
  • Role of the board: The PRA has clarified that oversight of liquidity management may be conducted by any risk committee of the board. However, if the insurer approaches or breaches its liquidity risk appetite then the issue must be escalated to the board and the PRA should be informed.

The PRA states that it does not believe that these amendments alter the substance of its expectations.

The expectations set out in SS 5/19 have immediate effect. To discuss this topic further, contact Milliman consultants Russell Ward, Paul Fulcher, or Claire Booth.

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