Prudential Regulation Authority Rulebook

1.1

This supervisory statement (SS) sets out the Prudential Regulation Authority’s (PRA’s) expectations concerning the liquidity risk management framework an insurer must have in place pursuant either to Conditions Governing Business 3.1(2)(c)(iv) and Group Supervision 17.1(1)(b) in the PRA Rulebook for Solvency II firms or to Insurance Company – Overall Resources and Valuation 2.5(3) in the PRA Rulebook for non-Directive firms, as applicable.

1.2

It is addressed to all UK Solvency II firms, including in respect of the Solvency II groups provisions, to the Society of Lloyd’s (‘the Society’) and its managing agents, and to non-Directive insurers (collectively referred to as ‘insurers’).

1.3

The areas addressed in this SS include:

• the development and maintenance of proper policies, systems, controls and processes (Chapter 2);
• the identification of material liquidity risk drivers (Chapter 3);
• the design and undertaking of forward-looking scenario analysis and stress testing programmes (Chapter 4);
• considerations for the inclusion of highly liquid assets in the liquidity buffer (Chapter 5);
• the use of quantitative metrics and tools for measuring and monitoring liquidity risk drivers (Chapter 6); and
• effective contingency planning (Chapter 7).

1.4

This SS draws on the PRA’s regulatory experience to identify some key issues for an insurer to consider when managing liquidity risk. It is not intended to be an exhaustive guide to liquidity management. The PRA recognises that the mix of sources of liquidity risk is unique to each individual insurer and group, and that liquidity risk management practices will vary. An insurer, therefore, is expected to understand the drivers of the liquidity risk it faces and to apply the guidance contained in this SS in light of the scale, nature and complexity of its activities.

1.5

This SS should be read in conjunction with:

• the Conditions Governing Business, Group Supervision, and Investments Parts of the PRA Rulebook for Solvency II firms;^[1]
• the Friendly Society – Financial Prudence, Insurance Company – Overall Resources and Valuation and Non-Solvency II Firms – Governance Parts of the PRA Rulebook for non-Directive firms;^[2]
• Commission Delegated Regulation (EU) 2015/35 (‘the Delegated Act’), including Articles 258 – 267 (System of Governance);^[3]
• European Insurance and Occupational Pensions Authority (EIOPA) Guidelines on system of governance;^[4]
• ‘The PRA’s approach to insurance supervision’;^[5]
• SS14/15 ‘With-profits’;^[6]
• SS41/15 ‘Solvency II: applying EIOPA Set 2, System of Governance and ORSA Guidelines’;^[7]
• SS5/16 ‘Corporate Governance: Board responsibilities’;^[8]
• SS19/16 ‘Solvency II: ORSA’;^[9]
• SS5/17 ‘Dealing with a market turning event in the general insurance sector’;^[10]
• SS4/18 ‘Financial management and planning by insurers’;^[11]
• SS7/18 ‘Solvency II: Matching adjustment’;^[12]
• SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’^[13]; and
• the joint Bank and PRA Statement of Policy (SoP) ‘Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU’.^[14]