Monitoring of liquidity risk ‘needs to be improved’ - ESRB

Written by Adam Cadle

09/06/2020

The monitoring of liquidity risks in the insurance sector needs to be improved, the European Systemic Risk Board (ESRB) has said, and the Pillar 2 provisions in the Solvency II regulatory regime should be enhanced in the medium term to enable supervisors to require (re)insurers with a vulnerable liquidity profile to hold a liquidity buffer.

Continued efforts by the ESRB  to address the exceptional challenges stemming from the COVID-19 pandemic and its potential impact on the financial system of the EU have led to a second set of actions agreed by its general board. These macroprudential actions, which refer to the five priority areas identified by the ESRB, together with reinforced coordination, both across authorities responsible for different segments of the financial sector and across borders, are aimed at ensuring that the European financial system is able to withstand the shock and thus prevent an even sharper loss of economic capacity and jobs.

The ESRB noted that EIOPA and national insurance supervisors have already been considering developing a liquidity monitoring framework for (re)insurers as a response to the COVID-19 pandemic. In a communication to EIOPA, the general board strongly encouraged EIOPA and its members to finalise and operationalise that framework promptly.

“This would facilitate a more informed and timely assessment of any potential financial stability risks stemming from liquidity risks in the insurance sector (including any liquidity risks stemming from the mismatch between the redemption profile and the asset liquidity of their unit-linked products),” the ESRB stated.

“The COVID-19 crisis highlights the need to better equip (re)insurers to deal with future periods of stress.”

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