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.
The Group is exposed to liquidity risk from its insurance operating activity, depending on the cash flow profile of the expected 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 (e.g. 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.
The Group’s liquidity risk management relies on projecting cash obligations and available cash resources over defined time horizons, to monitor that available liquid resources are at all times sufficient to cover cash obligations that will become due in the same horizons.
A set of liquidity risk metrics (liquidity indicators) 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 assessment of the level of liquidity of the asset portfolio.
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 calculated to take into account unlikely but plausible circumstances that would adversely impact the liquidity of each company.
Liquidity risk limits have been defined in terms of value of the above-mentioned liquidity indicators. 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 described in the stress scenarios.
Generali has defined a set of metrics to measure liquidity risk at Group level, based on the liquidity metrics calculated at company level. The Group manages expected cash inflows and outflows in order to maintain a sufficient available level of liquid resources to meet its medium-term needs. The Group metrics are forward-looking and are calculated under both the base and stress scenarios.
The Group has established clear governance for liquidity risk measurement, management, mitigation and reporting, including specific limit setting and the escalation process in case of limit breaches or other liquidity issues.
The principles for liquidity risk management designed at Group level are fully embedded in strategic and business processes, including investments and product development.
Since Generali explicitly identifies liquidity risk as one of the main risks connected with investments, indicators 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.
The Group has defined in its Life and P&C Underwriting Policies the principles to be applied to mitigate the impact on liquidity from 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 Group among its customers and other stakeholders.
- emerging risks arising from new trends or evolving risks which are difficult to perceive and quantify, although typically systemic. These typically refer to technological changes (big data, blockchains, autonomous machines), environmental trends (climate change), geopolitical developments, regulatory developments, etc. For the assessment of these risks and to raise the awareness on the implications of the emerging trends, Group Risk Management engages with a dedicated network, including specialists from Business Functions (e.g. Insurance, Investment, Actuarial, Sustainability and Social Responsibility, Marketing etc.). The Group also participates to the Emerging Risk Initiative (ERI), a dedicated working group of the CRO Forum. Within ERI 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 results of the sensitivity analysis conducted on the Group main risk drivers (e.g. interest rates, equity shock, credit spreads).
The changes in terms of percentage points in respect to baseline scenario at YE17 (Solvency ratio equal to 208%) are the following:
|Interest rate up 50bps||Interest rate down 50bps||Equity up 25%||Equity down 25%||CS on corporate up 50bps||CS on BTP up 100bps||Ultimate forward rate down 15bps|
|Change in Solvency Ratio||+4p.p.||-7p.p.||+5p.p.||-6p.p.||-3p.p.||-12p.p.||-1p.p.|
(*) Preliminary figures.