Liquidity risk is defined as the uncertainty, emanating from business operations, investment or financing activities, over the ability of the Group and Group companies to meet payment obligations in a full and timely manner, in a current or stressed environment. This could include meeting commitments only through accessing credit markets at unfavorable conditions or through the sale of financial assets, incurring in additional costs due to the illiquidity of (or difficulties in liquidating) the assets.
The Group is exposed to liquidity risk from its insurance operating activity, depending on the cash flow profile of the expected new business, due to the potential mismatches between the cash inflows and the cash outflows deriving from the business.
Liquidity risk can also stem from investing activity, due to potential liquidity gaps deriving from the management of the asset portfolio as well as from a potentially insufficient level of liquidity in case of disposals (i.e. capacity to sell adequate amounts at a fair price and within a reasonable timeframe). Finally, the Group can be exposed to liquidity outflows related to issued guarantees, commitments, derivative contract margin calls, or regulatory constraints regarding the Insurance Provisions Coverage Ratio and capital position.
The Group’s liquidity risk management relies on projecting cash obligations and available cash resources into the future, in order to monitor that available liquid resources are at all times sufficient to cover the cash obligations that will become due in the same period.
A set of liquidity risk metrics has been defined to monitor the liquidity situation of each Group insurance company on a regular basis. All such metrics are forward-looking, i.e. they are calculated at a future date based on projections of cash flows, assets and liabilities and an estimation of the level of liquidity of the asset portfolio. The ratios measure the ability of each company to ensure the fulfilment of its regulatory capital requirements as well as its cash obligations towards customers and other stakeholders.
The metrics are calculated under both the so-called “base scenario”, in which the values of cash flows, assets and liabilities correspond to those projected according to each company’s Strategic Plan scenario, and a set of so-called “stress scenarios”, in which the projected cash inflows and outflows, the market price of assets and the amount of technical provisions are recalculated to take into account unlikely but plausible circumstances that would adversely impact the liquidity of each company.
Liquidity risk limits have been defined by Group Head Office in terms of value of the above-mentioned metrics that each Group company cannot exceed. The limit framework is designed to ensure that each Group company holds a “buffer” of liquidity in excess of the amount required to withstand the adverse circumstances depicted in the stress scenarios.
Generali has defined a set of metrics to measure liquidity risk at Group level, based on the liquidity indicators calculated at company level. The Group manages expected cash inflows and outflows so as to maintain a sufficient available cash level to meet the short and medium term needs and by investing in instruments that can be quickly and easily converted into cash with minimum capital losses. The Group considers the prospective liquidity situation in plausible market conditions as well as under stressed scenarios.
The Group has established clear governance for liquidity risk measurement, management, mitigation and reporting consistent with Group regulations, including the setting of specific limits and the escalation process in case of limit breaches or other liquidity issues.
The principles for liquidity risk management designed in the Group RAF are fully embedded in the Strategic Planning as well as in business processes including investments and product development.
As far as the investment process is concerned, Generali has explicitly identified liquidity risk as one of the main risks connected with investments. As a result, indicators such as cash flow duration mismatch are embedded in the Strategic Asset Allocation process. Investment limits are set to ensure that the share of illiquid assets remains within a level that does not impair the Group’s asset liquidity. As far as product development is concerned, the Group has defined in its Life and P&C Underwriting Policies the principles to be applied to mitigate the impact on liquidity from lapses and surrenders in life business and claims in non-life business.
Reputational, Contagion and Emerging Risk
Although not included in the calculation of SCR, the following risks are also taken into account:
- Reputational risk referring to potential losses arising from deterioration or a negative perception of the company or among its customers, counterparties and Supervisory Authority. Reputational risk management is mostly embedded into following processes: Communication and media monitoring activities, Corporate and Social Responsibility (CSR), Compliance, Marketing and Distribution management.
- Emerging risks arising from new trends or risks difficult to perceive and quantify, although typically systemic. These usually include changes to the internal or external environment, social trends, regulatory developments, technological achievements, etc. For the assessment of these risks, Group Risk Management engages with a dedicated network, including specialists from Business Functions (e.g. Insurance, Investment, Actuarial, Corporate Social Responsibility, etc.) and results of local emerging risk identification processes. To strengthen its understanding and awareness of emerging risks, the Group is also part of the Emerging Risk Initiative. Within this working group emerging risks common to the insurance industry are discussed and specific studies are conducted.
Contagion risk is inherent in the Group structure. It refers to potential negative implications that events occurring within one Group company may negatively affect other Group companies (or the Group itself).
To test the Group’s Solvency Position resilience to adverse market conditions or shocks, sensitivity analysis taking into account unexpected, potentially severe, but plausible events is undertaken. The purpose of such analysis is to create awareness and prepare to take appropriate management actions should such events materialize.
The following template provides the resilience of the Solvency Position to the main risk drivers (e.g. interest rates, equity shock, credit spreads)
|Economic Solvency Ratio|
|Yield curve +50bps||200.5%|
|Yield curve -50bps||184.9%|
|Corporate spread +100 bps||191.3%|
|Italian BTP spread +100 bps||181.9%|
|Ultimate Forward rates -50 bps||188.8%|