Prudential Standard FSI 6 (Liquidity Risk Assessment)

Question 1

Liquidity Shortfall

Answer 1

An indicator of the potential magnitude of liquidity risk an insurer may be exposed to under severe stress.

The indicator has no impact on any Pillar 1 capital requirement, but provides the Prudential Authority with an indicator to the degree to which an insurer’s Pillar 2 assessment must contain additional details regarding the management of liquidity risk.

Question 2

The principle underlying the calculation of the Liquidity Shortfall indicator

Answer 2

To provide an estimate of the expected shortfall of liquid assets to meet cash-flows at a 99.5% confidence interval over a one-year time horizon.

This calculation is performed by comparing an insurer’s available liquid assets against its cash-flow requirements after the application of prescribed stresses to both the cash-flow requirements and liquid assets.

Question 3

Assets considered to be “liquid” by the Standard (2)

Answer 3

• All cash (or cash equivalent) assets; and

- All listed assets other than those classified as “Other Equity” under FSI 4.1