PRA consults on extensive liquidity reporting or insurers

December 2024

The PRA is seeking to improve its framework for monitoring and supervising liquidity risk and has proposed new requirements for nine large insurers. Recent market stresses highlighted ‘critical gaps’ in liquidity reporting, hampering supervisors’ ability to assess firms’ liquidity exposures and responses in a stress scenario.

The PRA has identified shortcomings in its current liquidity risk reporting framework, particularly in light of recent market stress events such as the volatility in the UK gilt market in September 2022 and associated challenges. The PRA is enhancing its reporting requirements, building upon the existing liquidity risk management expectations outlined in SS5/19. This will provide it with a more comprehensive understanding of insurers' liquidity positions and enable more effective oversight, with the proposed rules coming into effect on 31 December 2025. 

CP19/24 introduces four new liquidity reporting templates to provide the PRA with more timely, consistent, and accurate information on the liquidity positions of large UK insurers with significant derivative or repo exposures. Of these, two cash flow mismatch templates provide for monthly reporting, although the shorter template – containing 150 key data points – can be required by the PRA on a daily basis.

The PRA also proposes to remove the requirement for all life firms with full or partial internal models to submit annual Solvency Capital Requirement (SCR) information calculated using the Standard Formula (SF). While the formal application date for this change would also be 31 December 2025, the PRA is enabling immediate application of the benefits via a temporary delay in submission deadline for firms’ YE2024 SF SCR. To note, this only applies to life firms – general and composite insurers will need to continue to submit the relevant template (SF.01) for the PRA to monitor model drift.

The current consultation is only one part of a series of regulatory changes that have seen the PRA increase its scrutiny of insurers’ financial and operational resilience. Below KPMG in the UK analyses these changes, the impact on insurers, and how we can help.

The proposed liquidity reporting requirements include two monthly cash flow mismatch templates. The more detailed template covers a range of information on cash flow inflows and outflows from (re)insurance contracts, derivatives and other financial cashflows, as well as information relating to the firm’s asset holdings such as asset class, credit rating, residual maturity and sector.

The PRA seeks to gather a mix of historic and future-looking information, as well as sensitivities to specific market changes. An additional monthly cash flow mismatch template collects a subset of data on the most critical drivers of liquidity strain with a focus on financial transactions. 

In-scope firms will also be required to report annually on committed facilities that might be available to them under stress and quarterly on sensitivity of assets and collateral flows to changes in interest rates, exchange rates, inflation, and gilt and credit spreads.

The new liquidity reporting requirements will apply to firms that have:

• More than £20 billion in assets (excluding assets held for index or unit-linked contracts) on average over the last three quarters

and one or both of:

•  Gross nominal derivatives exposure of more than £10 billion and/or
• Security financing transactions (SFTs) of more than £1 billion

The PRA proposed templates include 3,000 new data cells, compared to equivalent banking templates of 90,000 data cells. Nevertheless, this will be a step change for large insurance firms from current high level quarterly liquidity reporting– particularly if the PRA moves to request daily reporting of the key 150 data points. The requirement for insurers to submit completed templates not just at solo level, but also for each Ring-Fenced Fund (RFF) and Matching Adjustment Portfolio (MAP), will add to the burden. 

The PRA estimates that the proposals will have a one-off implementation cost of £11 million and additional annual costs of £3.6 million across the nine impacted firms. This compares to current internal liquidity reporting spend of £530,000 per firm. 

The existing liquidity management requirements set out in SS5/19 Liquidity Risk Management for Insurers remain relevant and should continue to guide firms’ approach to liquidity management, supplemented with system and data changes to enable firms to meet the new reporting obligations. 

However, impacted firms will face considerable time pressure to implement changes between the point the rules are finalised (likely Q2 2025) and their application on 31 December 2025.

The requirement for monthly reporting will be new to insurers, and the existing QRT processes, designed for quarterly reporting, may not be suitable to meet the new reporting frequency or the reduced remittance times. Even where insurers are able to leverage current processes, they will still need to make considerable changes to gather and submit the relevant data in the new timeframes. The potential for daily reporting also means that the liquidity data collection / reporting process will likely need to be fully automated.

In addition to these implementation challenges, as with all regulatory reporting, firms will need to ensure that the data they submit is sufficiently extensive and robust for regulatory disclosure.

The proposed changes relate to information gathering but it remains to be seen how the overall approach and scope of liquidity supervision will evolve. Banks will be familiar with how the PRA’s approach to supervision of liquidity risk has enhanced over time, and the same could be true for insurers, with this consultation potentially being the first step in an evolutionary journey.

Additionally, the PRA’s overall approach to insurance supervision has already seen major enhancements in recent years. Liquidity risk is just one of many priority areas that the PRA is focusing on. Regulatory attention on subjects such as funded reinsurance and solvent exit planning highlight the PRA’s increased attention to financial resilience. Operational resilience is also high on the agenda, with the PRA requiring insurers to consider impact tolerances for their important business services.

There is considerable overlap between these topics and impacted firms may want to review how these new liquidity reporting requirements can be supported by or support other areas of development.

KPMG professionals can help with: 

• Liquidity framework and operating mode: reviewing and updating liquidity frameworks and operating models to meet the demands of the upcoming PRA obligations, as well as any business model changes such as BPA activity. 
• Modelling and validation: both asset and liability side modelling. Actuarial models can be adapted to provide policyholder liability flows and modelling can be extended to operational cashflows. 
• Liquidity & Collateral management: most of the impacted insurers will have collateral management systems sitting alongside the asset management system. These may need to be reviewed to allow data to be retrieved quickly and at the right level of granularity.
• Systems/process development: the new PRA liquidity template will likely need finance transformation activity to draw together multiple sources of data for fast and accurate reporting. KPMG professionals can help insurers plan for stressed times and provide liquidity information more quickly to address the PRA’s specific concerns.
• Controls environment: fostering a rigorous regulatory reporting control environment. Integration with broader risk and regulatory initiatives: helping firms leverage existing risk and regulatory initiatives such as recovery & resolution, solvent exit planning, enterprise risk management, proactive risk mitigation, improved stress testing, enhanced portfolio management, and tactical asset allocation.