The next step in liquidity management

In recent years, insurers have increasingly invested in illiquid assets to enhance returns and diversify portfolios amid a low interest rate environment. However, the sharp rise in interest rates has altered the risk landscape. Longer exit horizons, valuation uncertainty, and greater exposure to private markets are now testing insurers’ ability to manage liquidity effectively. What was once a strategic investment choice has now become a regulatory concern, prompting a shift in supervisory expectations around stress testing, liquidity monitoring and buffers, and group-level oversight.

Until now, liquidity risk was addressed under Pillar 2 of Solvency II through internal governance mechanisms, cash-flow monitoring, and the Own Risk and Solvency Assessment (ORSA). These approaches lacked a standardized framework and did not impose explicit capital requirements. The introduction of the Liquidity Risk Management Plan (LRMP) under the draft Regulatory Technical Standards (RTS) marks a significant evolution. It transforms liquidity risk from a peripheral governance issue into a central regulatory priority.

The LRMP will become a formal, mandatory component of insurers’ risk management systems. Insurers are required to assess their liquidity position periodically under both normal and stressed conditions. This includes projecting incoming and outgoing cash flows across short-, medium-, and long-term horizons, with the latter required upon supervisory request. Stress testing is no longer optional; it must be embedded in the LRMP to evaluate the insurer’s ability to meet obligations under adverse scenarios.

Another major change is the requirement for insurers to define and maintain liquidity risk indicators. These indicators must be tailored to the insurer’s specific risk profile and justified within the LRMP. This places greater emphasis on transparency and defensibility in liquidity risk monitoring.

The scope of the LRMP also expands beyond the entity level to include group-level liquidity assessments. Insurers can no longer rely solely on intragroup cash flows to manage liquidity across affiliated entities. This introduces new constraints on internal capital mobility and requires a more granular understanding of liquidity across the group structure.

A cornerstone of the revised LRMP is the expectation that insurers maintain a liquidity buffer. This buffer should consist of high-quality liquid assets sufficient to cover shortfalls between expected inflows and outflows, particularly under stress. EIOPA expects insurers to monitor the level and quality of these assets, quantify potential losses from forced asset sales – commonly referred to as haircuts – and ensure that the buffer aligns with their business model and risk tolerance. This formalization of liquidity buffers reinforces the shift from passive liquidity management to proactive resilience planning.

Complementing the LRMP, EIOPA’s latest consultation paper Guidelines on supervisory powers to remedy liquidity vulnerabilities, published on 9 October 2025, introduces a structured escalation framework for supervisors to intervene when liquidity vulnerabilities are detected. Under the proposed framework, insurers will be required to submit remedial actions when material liquidity risks emerge; if these prove insufficient, supervisors may impose additional measures such as enhanced governance, targeted stress testing, or strengthened liquidity buffers. The Guidelines also introduce criteria for activating supervisory powers – drawing on forward-looking assessments and stress test outcomes – and set out the conditions under which redemption rights may be temporarily suspended, to be used strictly as a last resort. Together, these measures mark a shift from passive oversight to active intervention, reinforcing policyholder protection and financial stability across the European insurance sector.

With EIOPA now outlining the future shape of liquidity risk management, insurers are encouraged to begin aligning their frameworks with the forthcoming requirements. This includes identifying reliable data sources, designing relevant stress scenarios, and formalizing governance processes. Prompt action will not only ensure compliance but also strengthen liquidity resilience and support strategic asset allocation in an increasingly volatile market environment.

If you would like to assess your current liquidity framework or need support in designing a future-proof LRMP, please reach out.