PRA publishes SS5/19 on liquidity risk management for insurers

The Prudential Regulation Authority (PRA) published Supervisory Statement SS5/19, ‘Liquidity risk management for insurers’, in September 2019, setting out detailed expectations for firms’ liquidity frameworks. The statement applies across the UK insurance sector, including Solvency II firms, Lloyd’s entities and non-Directive insurers, and links those expectations directly to existing Rulebook provisions.

Scope and rulebook application

SS5/19 is addressed to all UK Solvency II firms, including in respect of the Solvency II groups provisions, aligning liquidity expectations at both solo and group level. It is also addressed to the Society of Lloyd’s and its managing agents, bringing the Lloyd’s market explicitly within the same supervisory framework.

The statement further applies to non-Directive insurers, which the PRA collectively refers to as ‘insurers’, extending the expectations beyond the Solvency II perimeter. For Solvency II firms, SS5/19 applies pursuant to Conditions Governing Business 3.1(2)(c)(iv) and Group Supervision 17.1(1)(b) in the PRA Rulebook, tying liquidity risk management to governance and group supervision requirements. For non-Directive firms, it applies to Insurance Company – Overall Resources and Valuation 2.5(3) in the PRA Rulebook, as applicable.

Governance, policies and the liquidity risk framework

The PRA states that SS5/19 sets out its expectations concerning the liquidity risk management framework an insurer must have in place. The areas addressed include the development and maintenance of proper policies, systems, controls and processes, which are covered in Chapter 2 of the statement.

The PRA expects a clearly defined liquidity risk appetite that is owned and approved by the board, anchoring liquidity risk management in board-level decision-making. It also expects a liquidity risk management strategy and documented liquidity risk policy(ies) and processes, providing a formal structure for how firms identify, measure, manage and monitor liquidity risk.

An insurer must maintain sufficient liquid assets, both as to amount and quality, to enable it to meet its liabilities as they fall due, setting a binding requirement on the outcome of the liquidity framework. In designing this framework, the PRA expects an insurer to consider its liquidity risk exposure in normal market conditions and in severe but plausible stressed situations, linking governance and policy design directly to stress-aware risk assessment.

Identification of liquidity risk drivers

Chapter 3 of SS5/19 covers the identification of material liquidity risk drivers. The PRA’s expectations in this area focus on ensuring that firms understand the specific factors that could affect their ability to generate or retain liquidity across their business models.

The statement notes that these material drivers should be captured within the broader liquidity risk management framework described in Chapter 2, so that governance, policies and controls are informed by a clear view of where liquidity strain could emerge.

Scenario analysis, stress testing and metrics

Chapter 4 of SS5/19 covers the design and undertaking of forward-looking scenario analysis and stress testing programmes. The PRA expects these programmes to be structured to test firms’ liquidity positions under a range of conditions, including the severe but plausible stressed situations referenced in its expectations for the overall framework design.

Chapter 6 addresses the use of quantitative metrics and tools for measuring and monitoring liquidity risk drivers. The PRA’s expectations here focus on firms having appropriate quantitative measures in place to track the material liquidity risk drivers identified under Chapter 3 and to support the forward-looking analysis described in Chapter 4.

Liquidity buffers and highly liquid assets

Chapter 5 of SS5/19 sets out considerations for the inclusion of highly liquid assets in the liquidity buffer. The PRA links these considerations to the requirement that an insurer must maintain sufficient liquid assets, both as to amount and quality, to meet liabilities as they fall due.

The statement therefore connects the composition of the liquidity buffer with the broader framework of policies, risk appetite and quantitative tools, so that the buffer is calibrated and managed in line with identified risk drivers and stress outcomes.

Contingency planning

Chapter 7 of SS5/19 covers effective contingency planning. The PRA’s expectations in this chapter relate to how firms prepare for, and would respond to, liquidity stress events identified through their scenario analysis and stress testing programmes.

These contingency planning expectations sit alongside the requirement to maintain sufficient liquid assets and the expectation to consider both normal and stressed conditions, completing the framework from identification and measurement through to response.

The PRA has not specified in SS5/19 a further decision point or review date for these expectations, which apply under the Rulebook provisions referenced for Solvency II and non-Directive firms.

--- Sources: https://www.bankofengland.co.uk/prudential-regulation/publication/2019/liquidity-risk-management-for-insurers-ss https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2019/ss519.pdf