Many South African insurers have long-only, generally liquid investment portfolios, with margin-call exposure, no repo, and good reinsurance coverage, including appropriate liquidity provisions. With low liquidity risk, risk and board time for these firms is likely better spent elsewhere.
In contrast, other South African insurers use derivatives and hedge guarantees, lend securities or hold complex or private asset structures, have product mix and growth that trades cash-on-hand for negative liabilities, or have on- or off-balance-sheet commitments to group entities. These insurers have significant liquidity risk, and in generally manage this fairly well.
The danger group consists of those insurers who are transitioning from one liquidity risk profile to another, in search of yield and returns and growth, but where the liquidity risk management has not yet matured to match the risk profile. On the liability side, the largest potential outflows in life insurance usually come from investment products where large withdrawals are possible: single-premium investment policies, institutional business, and guaranteed products with surrender values close to fund value. For non-life insurers, the exposure is mainly a large catastrophe or a cluster of large claims that must be paid before reinsurance recoveries arrive, together with any lag in premiums collected through intermediaries. In this paper, we discuss topics such as insurance liquidity, differentiation of liquidity risk exposures, and internal assessments—in addition to the time that boards and the chief risk officer should ideally spend on liquidity risk.
Key takeaways include the following:
- Liquidity risk focus should follow actual liquidity risk exposure, which follows complexity more than insurer size.
- Contract terms drive much of the exposure: rating triggers, reinsurance settlement and cash call clauses, surrender penalties, and deferral rights.
- Insurer failures driven truly by liquidity are exceedingly rare, and the evidence points to liquidity risk concentrated in specific activities, not spread across all insurers.
- Having high-quality liquid assets is necessary but not sufficient.
- A useful internal assessment uses horizons shorter than a year, classifies assets by realistic time to cash, uses coherent scenarios chosen by the board, and is updated more often than annually.