Public
Application Paper on Liquidity Risk Management
3.2 Policyholder behaviour
24. This includes an assessment of the possible withdrawals from different product types,
taking into account features such as guarantees, surrender penalties, potential tax
implications, maturity dates, interest rate sensitivity, product purposes, customer type and
borrowing costs (in case of policy loans). Stresses should also assess potential reductions in
regular premium payments, non-renewals and declines in new business and their impact on
net cash flows.
3.3 Contingent or off-balance sheet exposures
25. The insurer should include an assessment of derivative cash flows and collateral
requirements caused by market changes, maturity, exercise of options, margin or collateral
calls, changes in the value of posted collateral and additional costs to rebalancing portfolios.
The insurer should also consider additional collateral needs that could arise from inwards or
accepted reinsurance contracts in-force and any other potentially material liquidity needs
arising from off-balance sheet commitments, contracts or facilities.
3.4 The impact of a deterioration in the insurer’s financial condition or credit
rating
26. The insurer should consider all types of outflows and collateral requirements resulting
from its own credit downgrades of varying magnitude. This should include considerations on
the types, quantity and timing of potential collateral and margin requirements. This analysis
should encompass retail and institutional policyholders as well as capital markets and
reinsurance counterparties.
3.5 The ability to transfer liquidity across entities, countries and portfolios
27. The insurer should assess the transferability of intragroup and intra-entity liquidity.
2
This should include considerations of existing legal, regulatory and operational limitations to
transfers of liquidity and unencumbered assets between entities, business lines and countries.
The insurer should note that during periods of market stress, liquidity might not be freely
transferable between and within group entities, or across national borders and the potential
for affiliates to default on intragroup obligations. A prudent assumption may be that, under
stress, a part or the entire liquidity may become non-transferrable, so it is expected that the
insurer will demonstrate that its approach to transferability is realistic.
28. As part of its stress testing, where material, the insurer should appropriately address
legally or operationally ring-fenced assets. Such assets could include legally insulated
separate accounts, closed blocks
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, with-profits funds or matching adjustment portfolios. These
blocks of assets, therefore, should only be included as cash flow sources to back cash flow
needs arising from these same accounts. The insurer should also detail how assets in these
blocks may affect the insurer’s balance sheet through guarantees, hedging programmes or
other regulatory requirements to replace or maintain assets.
2
Assets may not be fungible within legal entities due to reasons such as those discussed in paragraph 46 and
regulations regarding branch assets. See IAIS, Issues Paper on Supervision of Cross-Border Operations Through
Branches (2013) at Section 2.2.
3
Within the context of this Application Paper, closed blocks refer to discrete pools of assets that are set aside to
support the dividend expectations of participating policyholders from the periods prior to demutualisation, as well
as anticipated policy benefits. Typically, changes of their values would be largely offset by future changes in the
dividend rates on these participating policies.