The Research On Liquidity Risk Management Of Life Insurance Companies Based On Stress Testing

Liquidity risk management is always an important part of the commercial bankrisk management. Similarly, life insurance companies also face liquidity risk as afinancial institution with liability operation. Especially in the condition of the maturityof a lot of participating products and the increasing surrender risk in recent years, lifeinsurance companies are facing huge liquidity needs. When a life insurance companyhas not enough liquidity to pay for insurance benefits and claims expenses or othercash expenses such as surrender value, liquidity risk emerges. Therefore, liquidity riskmanagement of life insurance company is very necessary.There are two of liquidity risk measurement methods which are indicator analysismethod and cash flow method. Indicator analysis method is a static method, reflectingthe level and the status of liquidity of financial institutions on a point. Cash flowmethod is a dynamic method, reflect ing liquidity conditions financial institutions overa period. In addition, the cash flow method takes the customer’s behavior and thefinancial institutions’ ability to obtain liquidity into account, so the cash flow methodis a more appropriate method of liquidity risk than the indicator analysis method.In this thesis, the author applied stress testing to the cash flow method, observedthe life insurance companies’ liquidity conditions under pressure scenarios, and didliquidity risk management based on the result of stress testing. The thesis analyzed thestress testing’s steps of life insurance companies’ liquidity risk management in detail,and conducted a specific research on two life insurance companies’ liquidity riskmanagement. The author selected liquidity gap as the indicator of measuring theliquidity risk of the two life insurance companies, and determined survival benefits,surrender rates and new premiums as factors which affect the two companies’ liquidityrisk. Then, the author did stress testing on the two companies’ liquidity. According tostress testing, the author observed the two companies’ liquidity conditions under stressscenarios and determined the possibility of liquidity risk emergency. The result ofstress testing showed that the two most important factors which affect A company’sliquidity risk are the survival benefits and the surrender rates. In the short term Acompany’s liquidity is enough even under extremely adverse scenario. In the longlasting stress scenarios A company may have liquidity risk. Since participatinginsurance’s maturities could not be avoided, A company must take measures to avoid the crisis of surrender. The result of stress testing showed that the most two importantfactors which affect B company’s liquidity risk are the surrender rates and the newpremiums. In both the short term and long term, B company’s liquidity is enough evenunder extremely adverse scenario. However, B company should take measures to avoidthe crisis of surrender and raise premiums.Finally, this thesis made some suggestions on the application of stress testing onlife insurance companies and life insurance compani es’ liquidity risk management.