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  • RM-3.1 RM-3.1 Liquidity Risk

    • RM-3.1.1

      Section RM-3.1 applies only to insurance firms and insurance brokers.

    • RM-3.1.2

      Insurance licensees must identify and manage their liquidity risk across all their operations, and document their policies and procedures for achieving this in a liquidity risk policy. This policy must be regularly reviewed.

      Amended: January 2007

    • RM-3.1.3

      Liquidity risk is the risk of not being able to meet liabilities when they fall due, even though a firm may still be solvent. Liquidity risk can result from claims falling due earlier than anticipated, higher than expected policy surrender or changes in mortality rates.

    • RM-3.1.4

      Liquidity risk in insurance licensees relates to the management of their cash flow and the risk to their meeting short-term liabilities due to liquidity problems. The risks of matching of assets and liabilities, currency risk etc. are considered as part of insurance risk and are the subject of specific limits in Section CA-6.1.

    • RM-3.1.5

      Insurance licensees must also carry out stress testing to assess the resilience of their financial resources to any identified areas of material liquidity risk. This stress testing may take into account the general characteristics, and licensee's experience, of the classes of business that it writes, any discounting of its claims provisions, and any mitigating factors that it considers relevant such as the ability to sell assets quickly and the options available to re-schedule the payments to policyholders and other counterparties.

    • RM-3.1.6

      Where the insurance licensee considers that the nature of its assets or liabilities and the matching of its liabilities result in no significant liquidity risk exposure, it will not be expected to carry out stress testing. The CBB will expect it to document the reasons for its decision and be prepared to discuss these during an on-site visit.

      Amended: January 2007

    • RM-3.1.7

      When assessing liquidity risk, the insurance licensee should consider the extent of mismatch between assets and liabilities and the amount of assets held in highly liquid, marketable forms should unexpected cash flows lead to a liquidity problem. The price concession of liquidating assets is a prime concern when assessing such liquidity risk and should be built into any assessment of capital adequacy.

      Amended: January 2007

    • RM-3.1.8

      Captive insurance firms are exempted from the specific requirement to undertake stress and scenario testing aimed at testing the resilience of their financial resources to specific areas of significant risk.

      Amended: January 2007