Liquidity Risk Under Scrutiny as Insurers Embrace Private Credit

Morningstar DBRS published a commentary discussing the increasing use of illiquid assets by insurers in North America and Europe.

Key highlights:

-- Liquidity risk in the insurance sector is getting more attention because of the growing use of private assets.

-- There isn't a widely available, consistent metric to measure liquidity risk exposure for insurers globally.

-- In the short term, focus is on better monitoring the investment portfolios of insurers as well as complex reinsurance structures with asset transfers.

“Liquidity risk regulatory frameworks in the insurance sector are often less developed than those that apply to banking institutions because of the historically lower concern over liquidity issues with the insurance business model,” said Patrick Douville, Vice President, North American Insurance Credit Ratings. “In fact, insurers are exposed to various sources of liquidity risk, including a growing exposure to illiquid assets as private credit rises in popularity. In our view, a consistent, widely accepted approach for quantitatively measuring liquidity risk and liquidity resources is needed.”