PRA consults on new liquidity reporting requirements for large insurers

The PRA published a consultation paper (CP19/24) on 11 December 2024, proposing new liquidity reporting templates for large insurance firms, with an expected implementation date of 31 December 2025.

The liquidity reporting proposals are prompted by recent market stress events, such as the March 2020 COVID-19 ‘dash for cash’ and the September 2022 liability-driven investment crisis, which put liquidity under strain and highlighted a number of shortcomings in liquidity risk management frameworks.

The current Solvency II reporting framework requires insurers to provide PRA with various reports on derivative exposure, asset positions and cash flows, which are often delayed or infrequent. This proved inadequate during crises, prompting the PRA to rely on ad-hoc and firm specific reporting to ensure effective and timely supervision.

The proposals aim to improve the PRA’s ability to assess and manage liquidity related risks by obtaining timely, consistent and comparable data on the liquidity positions of large insurers.

The PRA also proposes to remove the requirement for life insurers with internal model permissions to submit the annual standing formula (SF.01) reporting template.This proposal aligns with the PRA’s recent Solvency II reforms to simplify reporting obligations. The change is based on the assessment that the SF.01 is less effective in detecting model drift for life insurers compared to non-life insurers. Therefore internal model non-life and composite insurers would still be required to submit the SF.01 report annually.

What does this mean?

The PRA plans to apply its reporting requirements only to UK insurers with significant liquidity risk exposure, introducing thresholds to limit these requirements to large firms making significant use of derivatives or securities financing transactions. The thresholds are:

Solo UK Solvency II firms with assets that have exceeded £20bn on average over the previous three quarterly reporting periods; and
Gross notional value of derivatives contracts exceeding £10bn, as defined by template IR.08.01 (open derivatives exposures as part of Solvency II reporting disclosure) and excluding those held in index or unit-linked contacts; or
Total value of on and off-balance sheet securities involved in lending or repurchase agreements exceeding £1bn, excluding those held for index or unit-linked contracts.

The PRA proposes four new liquidity reporting templates for in-scope firms, with reporting frequencies being monthly, quarterly and annually. It also provides itself with the flexibility to mandate daily reporting during periods of elevated stress. These templates include key liquidity risk data, such as derivatives usage, insurance business and financial transactions cash flows, liquid assets, and committed facilities. The PRA considers the data sought will allow for meaningful analysis and peer comparison in periods of stress and non-stress. Additionally, the data would allow it to evaluate the case for a minimum liquidity requirement in the future.

The reporting templates comprise of approximately 3,000 data fields, of which the PRA identifies around 150 key data points that must be reported daily during periods of stress (reporting template 2 in the table below).

The below table provides further detail on each reporting template.

	Reporting template	Scope	Key attributes	Submission timeline
1.	Cash flow mismatch template (monthly submission)	One submission at solo entity level Separate submissions for Ring Fenced Funds, Matching adjustment Portfolios, Remaining part*	Inflows and outflows from insurance business and financial transactions and unencumbered assets Impact of specified market changes on contingent inflows and outflows	T+10
2.	Cash flow mismatch (short form) template (monthly submission, capability to scale up to daily in stress if required)	One submission at solo entity level Separate submissions for Ring Fenced Funds, Matching adjustment Portfolios, Remaining part*	As above but excluding inflows and outflows from insurance business	T+1
3.	Liquidity market risk sensitivities template (quarterly submission)	One submission at solo entity level	Sensitivity of unencumbered asset values and collateral flows to prescribed changes in interest rates, exchange rates, inflation, government bond spreads and credit spreads	T+30
4.	Committed facilities template (annual submission)	One submission at solo entity and group level	Liquidity facilities where the total committed amount is greater than £10m; this includes total committed and drawn amounts, payment and maturity dates and lender details	T+70

* Remaining part includes cashflows, unencumbered assets etc that sit outside Matching Adjustment Portfolios and Ring Fenced Funds

What do firms need to do?

Assess if entities in their groups fall in scope of the new liquidity reporting requirements based on the PRA’s proposed thresholds.

Perform a red flag evaluation of their current liquidity reporting capabilities, upstream liquidity management processes, controls and data / system architecture to identify critical gaps.

Business case, planning and implementation of their operational readiness plan to ensure ample time for timely dry runs of the proposed reporting templates ahead of the go-live date.

Given the tight implementation timelines, firms expected to meet the proposed thresholds should act now by identifying and addressing gaps in their current reporting capabilities and ensuring compliance readiness.

Red flag evaluation of their current liquidity reporting framework including:

Reviewing their existing reporting capabilities including the availability, quality and timeliness of necessary input data, extent of automation in data analysis, and the controls and governance over the reporting process.

Evaluating the effectiveness and efficiency of upstream processes, such as liquidity risk identification, assessment, and management, to ensure confidence in the accuracy of input data.

Assessing the suitability and scalability of their current technology architecture to support the new reporting requirements effectively.

Once any critical gaps are identified in reporting framework, firms need to focus on remediating them by:

Defining a detailed roadmap to plan and budget for implementing the identified improvements to the reporting processes, controls or the existing systems architecture.

Immediately kick starting their implementation process, including process redesign, documenting controls and technology implementation.

Allowing adequate leeway in the planning and implementation timeline to accommodate any potential changes in the final supervisory statement text and dry runs to address any potential issues before the deadline.

Stakeholder alignment, efficient resource allocation, targeted user training, and rigorous quality assurance are all needed to ensure a successful launch in line with the regulator's deadlines.

The banking sector’s experience with similar regulatory reforms following the financial crisis offers valuable lessons for insurance firms, which are likely to face comparable challenges. Insurance firms should draw on these insights, including the need to start early and get ahead of the technical complexities and requirements for cross functional alignment.

“The PRA's consultation on liquidity reporting represents a significant milestone following collaboration with the industry to enhance resilience of the insurance sector in crisis. It will be imperative for life insurers in scope to digest the proposals and develop the reporting capabilities required. These should focus not only on the reporting output but also on upstream processes and controls across their liquidity risk management framework to allow credible template submissions by the end of 2025.”