Companies that start to develop a
more robust liquidity management
process now will be better positioned to
withstand the impact of ongoing changes
to the regulatory, ratings, and financial
reporting environments.
of the projection. The starting pool can be adjusted to take
into account any non-cash drains on liquidity and any opportunities for raising additional liquidity during the scenario
under analysis. Drawing down an LOC may be an option if
your company is downgraded, but if the stress scenario includes the failure of several large banks, LOCs may not be a
liquidity source.
5. identify the cost of raising additional liquidity. There may
be alternatives for raising additional liquidity in a stress scenario. Liquidity-raising techniques should be prioritized for
each stress scenario, with special consideration given to the
capacity of each source under the given scenario.
Companies can consider Steps 4 and 5 as separate analyses
designed to answer the following questions:
■ ■ How long can our company survive the stress without any
additional liquidity?
■ ■ How much do we think it will cost us to extend the amount
of time we can survive?
Senior management can use the results of this analysis to analyze the trade-offs between sacrificing yield today by keeping
liquid instruments on the books now and risking high expenses
(and perhaps insolvency) by relying on the ability to find additional liquidity during a future crisis.
Cushioning Change
The importance of appropriate capital and liquidity cushions
became clear during the crisis. Regulators, accounting oversight groups, and rating agencies have begun to react to lessons
learned from the crisis by changing their views on how insurers
should conduct business. Although the full extent of changes
to the way these groups view insurance will not be known for
years, some themes are starting to emerge. Companies that
start to develop a more robust liquidity management process
now will be better positioned to withstand the impact of ongoing changes to the regulatory, ratings, and financial reporting
environments.
GEORGE CHRISTOPHER, a fellow of the Society of Actuaries
and a member of the Academy, is an executive in the Insurance
and Actuarial Advisory Services practice at Ernst & Young. he
can be reached at george.christopher@ey.com.
