Actuarial Notes

Liquidity Risk

By Liquidity Work Group of the ERM/ORSA Committee, American Academy of Actuaries · American Academy of Actuaries · 2024

Study guide: Exam CP-351

A public policy practice note, dated February 2024, developed by the Liquidity Work Group of the American Academy of Actuaries' ERM/ORSA Committee. It updates the Academy's 2000 practice note on liquidity risk management and extends it from life insurers to health and property/casualty insurers through practice-area appendices. It discusses liquidity demands and sources, liquidity risk analysis and liquidity risk management, with a primary focus on events that cause significant unexpected liquidity stress. It is not an actuarial standard of practice.

On the syllabus

  • Exam CP-351 — the whole note except Appendix I; outcome 2b.

Executive Summary

Liquidity Risk and Its Causes

  • What Is Liquidity Risk?
  • Types of Liquidity Risk
  • Discussion of Invested Asset-Driven Liquidity Risk
  • Discussion of Insurance Product-Driven Liquidity Risk
  • Discussion of ALM-Driven Liquidity Risk
  • Discussion of Corporate Activities-Driven Liquidity Risk

Sources of Liquidity

Liquidity Risk Analysis

  • Stress Scenarios

Liquidity Management Framework

  • Risk Tolerance Statement
  • Policies and Limits
  • Roles and Responsibilities

Liquidity Management in Normal Environments

Liquidity Risk Management for Stress Events

Conclusion

APPENDIX I: Recent Publications

APPENDIX II: Liquidity Risk for Property/Casualty (P&C) Insurers

  • Sources of Liquidity Risk for P&C Insurers
  • Managing Liquidity Risk for P&C Insurers—Catastrophes
  • Managing Liquidity Risk for P&C Insurers—Fronting
  • Liquidity Risk for P&C Insurers—Summary

APPENDIX III: Liquidity Risk for Health Insurers

Sources