Insurance Solutions

The Fluidity of Liquidity

April 2023 – 4 min read

To meet policyholder demands and terms of their financing arrangements, life insurers must maintain adequate levels of liquidity. Here are some reasons why today’s environment makes liquidity management so critical.

As seen by the recent events in the banking industry, rising interest rates can also pose a challenge for life insurance companies, potentially threatening their financial health. Along with inadequately priced products, poor expense management, investment defaults and fraud, rising rates can be a factor contributing to insurer insolvency by impairing liquidity, or the ability to raise sufficient cash, when needed, to meet payment demands. In the past, insurer liquidity crises largely were the result of poor product management (for example, writing policies that allowed for large-scale, immediate policyholder cash-outs), inadequate liquidity in investment portfolios to fund redemptions, or poor anticipation of disintermediation risk due to changing economic conditions. In hindsight, proper planning and stress testing could have saved most, if not all, insurers facing insolvency in the past. Given today’s environment, attention to liquidity needs is more important than ever.

Reasons for an Increased Focus on Liquidity

IMR WOES

The turbulent economic environment of 2022 was characterized by high and unanticipated inflation, a sharp spike in interest rates, and steep declines in the prices of equity and fixed income securities. These extreme events caused a significant decline in asset values for all insurers, leading to grievous unrealized losses in their investment portfolios.

Figure 1: Life Industry Unrealized Gain/Loss and IMR

the-fluidity-liquidity-chart1.jpgSource: S&P. As of December 31, 2022


Thanks to the statutory book-value accounting used by insurance companies, large declines in a portfolio’s market value are rendered harmless until they are realized. But since accounting for realized gains and losses runs through the Interest Maintenance Reserve (IMR), which due to a legacy ruling must be positive to act as a buffer, large amounts of realized losses will eventually begin to degrade surplus positions, regardless of how well assets are managed against liability needs. The unnatural effect of this makes insurers reluctant to trade their portfolio, either for repositioning to improve credit risk management or to accommodate policyholders demanding cash for their policies. These forces create additional liquidity strains for insurers, where a record 26% of life insurers were in a negative IMR position as of year-end 2022.1

1. Source: S&P. As of December 31, 2022.

Want to read the full article?

View PDF

Ken Griffin, CFA, ASA, MAAA

Head of Insurance Solutions

Alex Perez

Associate Director, Insurance Solutions

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

Related Viewpoints