Life Liquidity Risk Working Group - NAIC

  • 2000-1, NAIC Proceedings
    • March 12
    • March 25
  • 2000-3, NAIC Proceedings
  • 2001 - SOA - Life Liquidity Risk, by Jon E. Niehus, Society of Actuaries - 2p
    • The Life Liquidity Risk Working Group arose from an interest in liquidity matters in 1999 by the Life and Health Actuarial Task Force relative to guaranteed investment contracts with bail-out provisions with increased interest subsequent to the General American insolvency.
  • Life Liquidity Work Group of the American Academy of Actuaries
    • 2000 09 - AAA Report - Report of the Life Liquidity Work Group of the American Academy of Actuaries to the Life Liquidity Risk Working Group of the NAIC - 24p
      • Donna R. Claire, Chair
    • 2000 1202 - AAA Report - Report of the Life Liquidity Work Group of the American Academy of Actuaries to the NAIC’s Life Liquidity Working Group - 26p
      • Donna R. Claire, Chair
  • 2000-3, NAIC Proceedings
    • p146 - Report of the Life Liquidity Work Group of the American Academy of Actuaries to the Life Liquidity Risk Working Group of the NAIC - September 2000
    • Historically, the provisions in life insurance policies allowing for the deferral of surrender payments enabled life insurance companies to invest in illiquid assets such as real estate, commercial mortgages and non-144A private placement bonds.
      • More recently insurance companies have availed themselves of further investment opportunities providing enhanced income that impose additional liquidity contingencies.
    • These new investments include:
      • commercial investment pools that, depending on the tranche, may provide high credit rating and higher yields at the expense of liquidity,
      • swaps and other derivatives with downgrade or put provisions that are tailored to the specific needs of the insurance company at the expense of liquidity,
      • agreements to provide letters of credit that may require cash payments on short notice.
    • The assets mentioned above may increase stress liquidity risk.

1. Introductory Comments from Mr. Vance

Mr. Vance noted that the charge for this group had previously been assigned to the Life and Health Actuarial Task Force, but had subsequently been assigned to this newly created group to address the broad range of liquidity issues.

  • He also stated that, for purposes of beginning the discussion on liquidity risk, the following definition will be used:

"The inability of a company to meet a financial commitment when it comes due either through cash flow or liquidation of assets at fair market value."

Next, Mr. Gorski described what he considers to be the appropriate components of a regulatory framework in monitoring liquidity risks:

  • Existence of adequate company-wide risk management system.
  • The keys are "adequate" and "company-wide."
  • Discussions to date have focused on product-level risk management. Evaluation of "adequacy" is an issue.

3. Status Report from the American Academy of Actuaries

  • Donna Claire (Claire Thinking)....... In summary, Ms. Claire stated that the AAA intends to assist in identifying "what are the risks, what are the tools, and just give you the feeling for what are the possibilities regarding where the actuary can help" identify liquidity risks.

5. Discuss Future Work Plans

  • Mr. Vance responded that the working group is interested in the broader problem, i.e., the liquidity position of the entire company.

2000-1, NAIC Proceedings (March 12)

6. Report of Life Liquidity Risk Working Group

Mr. DeAngelo said the working group held an organizational meeting and will consider and make recommendations related to products issued by life insurers that have significant liquidity risk, for example guaranteed investment contracts (GICs) with bailout provisions.

  • The working group will consider appropriate limits on the level of activity by insurers, required or prohibited contractual language, reserving methods, reporting requirements, and risk management systems for insurers engaged in this activity.

Mr. DeAngelo moved and Mr. Burch seconded a motion to adopt the Life Liquidity Risk Working Group report (Attachment Eight).

Commissioner Koken said she was pleased with the states that are participating in this new working group and opined that the issues it is addressing are important.

The motion to adopt the Life Liquidity Risk Working Group report passed.

2000-1, NAIC Proceedings (March 25)