Dr. Matteo Sottocornola
Dr. Matteo Sottocornola
Dr. Barbara Kaschützke
Dr. Barbara Kaschützke
Riccardo Appolloni
Riccardo Appolloni
Dr. Christian Kubitza
Dr. Christian Kubitza
23 January 2020 | House of Finance, Goethe University Frankfurt

Liquidity Risk in Insurance:
Academic, Industry and Regulatory Perspectives

Riccardo Appolloni, Head of Group Risk Operating Framework, Generali
Dr. Matteo Sottocornola, Senior Expert on Financial Stability, EIOPA
Dr. Christian Kubitza, Researcher/Lecturer, University of Bonn

Dr. Barbara Kaschützke, Researcher/Lecturer
Chair of Investment, Portfolio Management and Pension Finance, Goethe University


Life insurers are important long-term investors on financial markets. Due to their long-term investment horizon they cannot quickly adapt to changes in macroeconomic conditions. Rising interest rates in particular can expose life insurers to liquidity risk as policyholders could terminate insurance policies and invest at relatively high market interest rates. In this context, the 18th ICIR Talk on Insurance and Regulation event addressed the topic of liquidity risk in insurance with insights about identification of liquidity needs and resources, management and optimisation of liquidity position as well as about latest developments from academic, regulatory and industry perspectives followed by a panel discussion.


At the 18th ICIR Talk on Insurance and Regulation, organized by the International Center for Insurance Regulation (ICIR), Riccardo Appolloni (Assicurazioni Generali), Dr. Matteo Sottocornola (EIOPA) and Dr. Christian Kubitza (University of Bonn) discussed the economic impact of liquidity risk for life insurers from an academic, regulatory and industry angle moderated by Dr. Barbara Kaschützke (Goethe University).

Taking an industry perspective, RICCARDO APPOLLONI, Head of Group Risk Operating Framework of Generali, emphasized the importance of liquidity risk management in the insurance business. “A significant shortfall in liquidity could cause the sudden collapse of an insurer, even if it is well capitalized”, Appolloni stated. Therefore, accurate liquidity planning and implementing a liquidity management framework is key to prevent liquidity shortfall in case of unexpected cash outflows. Moreover, insurers need to estimate the right level of liquid resources to be held in their balance sheet, in order to avoid opportunity costs arising from the need to sell assets at discount – especially in a low and negative interest rate environment when investors can earn a liquidity premium from financial markets.

Appolloni roughly outlined that generally a liquidity risk management framework includes – apart from needs and resources – risk metrics and tolerances, time horizons, stress scenarios and a contingency plan. While a single insurance company is limited to its own resources such as, premiums, cash inflows from asset redemption and liquid assets e.g. commercial papers, an insurance group could make use of intra-group loans and cash pooling to provide short- and mid-term liquidity, Appolloni said. Appolloni called for an aligned approach towards the assessment and management of liquidity risks and suggested that the insurance sector should benefit from the bank’s experience.

DR. MATTEO SOTTOCORNOLA, discussed the topic from a regulatory perspective. He agreed with Appollonis assessment that insurers currently tend to shift their asset allocation towards less liquid assets due to the low/negative interest rate environment. However, on the liability side, life insurers showed constantly low lapse rates in previous years. Consequently, despite the decrease in the liquid asset ratio, local supervisors in the EU countries would not take liquidity risk as a major concern.

Nevertheless, EU authorities and standard setting bodies devoted significant effort to liquidity risk in the insurance industry. “There is a common understanding that the vulnerability of insurance undertakings to liquidity risk is limited compared to other exposures, but a change in asset allocations might create concerns”, Sottocornola stated. Liquidity shocks – even if absorbed by insurers – could generate externalities from the insurance sector towards other financial sectors.

According to Sottoconola, this insight had been reflected into the policy monitoring process by the IAIS. Also, the EIOPA considered macroprudential tools and measures such as the introduction of standardized liquidity ratios, liquidity requirements, a temporary freeze of redemption rights and stress testing, Scottonconloa said. Moreover, the EIOPA was striving to enhance its quantitative-based tools, as its current supervisory framework on liquidity is mainly based on qualitative requirements.  Sottoconola enumerated the major challenges that should be addressed in near future by the EIOPA, such as the classification of the liabilities according to liquidity criteria, the definition of a concept and identification of liability cash flow used for liquidity purpose, and the validation of cash flow data from insurers.

In the subsequent presentation DR. CHRISTIAN KUBITZA outlined the results of his research work, which simulates the effects of interest rates on the liquidity of life insurers in Europe. Due to the correlation of surrender rates and interest rates, an interest rate rise would incentivize policyholders to surrender their insurance policies. The subsequent drain of life insurers’ liquidity and fire sale costs could not only lead to significant losses of life insurers’ equity but also affect market prices.

Although the average ratio of lapsed life insurance contracts in Germany is low, Kubitza presented empirical evidence that surrender payments have an economically significant size and vary substantially across EU countries. In some EU countries, up to half of the net premiums of life insurers are needed to absorb contract surrenders. In 2018, the total amount life insurers paid for surrenders was 7 percent of their total assets, Kubitza showed. Interestingly, the size of surrender payments seems to be correlated to product types: Countries with more unit-linked insurance products face more cash outflows for surrenders compared to countries with focus on traditional products.

Moreover, surrender payments would amount to roughly 16 percent of life insurers’ total liquidity buffer.  “An increase in surrender by a factor of 6.5 would deplete the total liquidity buffer of all life insurers in Europe”, Kubitza argued. He concluded that a realistic interest rate shock could erase 10 to 30 percent of life insurers’ equity and reduce market prices by 1 to 2 percent.

In order to avoid such unwanted effects, he suggested to adjust surrender values to current market conditions, which would mitigate surrender incentives and costs.  Alternatively, a delay of surrender payment could prevent life insurers from losses caused by fire sales.