Tech, transparency and the liquidity challenge in insurance

For today's insurance industry, rigorous monitoring and management of funding liquidity risk – or the ability to obtain sufficient funding to meet financial obligations – is a topic of increased focus amid a constantly changing global risk and regulatory landscape. Growing illiquidity in insurer portfolios as a result of increased allocation to private markets incentivized by regulatory changes, and volatile geopolitical conditions have converged to make this a central risk management issue, particularly for life and long-term insurers. However, there are many ways the industry can adjust to manage this risk, from working across global jurisdictions to ensuring they are incorporating digital transformation in their approach. 

Market changes affecting funding liquidity

There are two major trends that have drawn both prudential and regulatory concerns. The first is that private equity interest in long-term insurers has surged, attracted by the sector's float dynamics and reasonably smooth, long-term cash flows. The second is updated capital rules. These rules incentivize insurers to create liability-matching portfolios that allow them to invest their surplus in riskier assets. Oftentimes, this portion of the insurer's asset stack has flowed into illiquid, hard-to-value private assets. 

In theory, insurers should maintain enough liquidity buffers to avoid forced asset sales, which could trigger tax losses and ripple effects on market stability. However, the increase in capital tied up in illiquid private assets has become a focus for regulators. 

Addressing funding liquidity risk with a global lens

While funding liquidity is a topic of conversation across the industry, jurisdictions are tackling this discussion with a broad range of approaches. To see how different these approaches are, let's explore regulators' current processes in three different regions:

1. Bermuda is setting the global standard among regulators in this space and is consistently ahead of the curve. Bermuda's new liquidity risk management program (LRM) was introduced in 2024 and highlights the growing regulatory concerns around liquidity within life and long-term insurer balance sheets. Specifically, it focuses on balance-sheet transparency within its liquidity framework. This transparency speaks to how the Bermuda Monetary Authority (BMA) is particularly focused on the risks that could arise in a combined liquidity and credit stress scenario, especially given the wholesale business nature of Bermudian insurers. The heightened scrutiny also reflects a broader concern for the resilience of the Bermudian re/insurance market and may serve as a model for other jurisdictions seeking to strengthen liquidity oversight.

2. In the U.S., the National Association of Insurance Commissioners (NAIC) is prioritizing more oversight and iterative stress testing that incorporates liquidity as part of a wider framework. NAIC regulated entities are generally domestic and retail-focused, with access to deep and highly liquid domestic rates and credit markets. In such a situation, NAIC is more focused on a holistic view of insurers, where liquidity is a part of the puzzle. Nonetheless, with its Liquidity Stress Testing (LST) working group, NAIC is looking to evolve and increase the emphasis on liquidity as part of its oversight process. There are likely to be significant changes to NAIC's approach in the next 12-24 months.

3. The EIOPA in the EU, has taken a less rigorous approach, which is at least partially an artifact of the belief that European insurers continue to maintain healthy liquidity buffers. Crucially, EIOPA's focus has been on updating its liability discounting curve methodology, known as Ultimate Forward Rate (UFR), to more closely align with observed market rates behavior. Changes to the UFR rates have the potential to significantly impact insurer capital, and liquidity concerns are likely to take a backseat to ensuring a rigorous testing and comments process for this change.

 
Despite these regional differences, a consistent theme is developing: liquidity oversight is becoming more robust, frequent, and transparent. Given the material societal role of insurers in managing risks, regulators are laser-focused on ensuring that insurers meet their policyholder obligations. The primary risks in these markets emerge from credit and liquidity shocks, and as such, regulators can be expected to continue to focus on liquidity and require better balance-sheet transparency. Here, we expect them to draw inspiration from Bermuda's rigorous approach to liquidity as part of the overall insurance supervision framework. 

Technology's role in strengthening risk management frameworks

As the landscape becomes more complicated as a result of regulatory differences and market forces, technology has become a vital enabler of more dynamic, integrated risk management. Insurers can no longer rely solely on backward-looking models or manual risk aggregation, particularly as balance sheets become more complex and market conditions more fluid. Importantly, the window to address an oncoming liquidity challenge has dramatically shrunk, requiring insurers to be able to identify and action any challenge before it becomes a crisis.

Digital transformation in practice can present itself in various ways, but the following tools and frameworks will allow insurers to comply with evolving regulations and better align investment decisions with risk appetite:

1. Fast data aggregation, risk analytic calculation, and funding/asset-liability analytics across the entire balance sheet.

2. Integrated stress testing for multiple risk factors, including credit, climate, interest rates, and liquidity.
   
3. Balance-sheet-wide modeling and scenario planning that informs both regulatory reporting and investment decision-making.Importantly, insurers aren't just investing in software but in the confidence that their risk infrastructure can withstand the next market shock. The future of balance-sheet and liquidity management will depend on how effectively firms can embed these digital capabilities across the enterprise.
   

So what's next?

Looking ahead, insurers must prepare for a regulatory and market environment where funding liquidity risk is scrutinized more closely and managed more dynamically. As regulatory frameworks evolve—led by Bermuda's transparency-driven approach and mirrored by growing NAIC oversight and eventual EU alignment—insurers should expect increased requirements around liquidity buffers, asset transparency, and stress testing. The convergence of increased private asset exposure and macroeconomic volatility underscores the urgency. 

To stay ahead, insurers will need to adopt robust digital risk infrastructure capable of real-time analytics, integrated stress testing across a series of risk factors, and balance-sheet-wide views. Successfully embedding these tools will be critical to ensuring resilience in the face of liquidity shocks and maintaining trust in the long-term promises insurers make to policyholders.