Page 64 - Risk Management in current scenario

2. Surrender Coverage Ratio (SCR) defined as = Surrender Value of All
Policies/Market Value of assets

3. Monthly cash inflow (Premium plus liquid assets) minus cash out flow
(expected out flow) should be positive over next 12 months. Any
month’s negative surplus should be funded from accumulation of
previous months of surplus.

LCR measures the ratio of cash inflow to the company to the cash out
flow from the company over the next 12 months period. For the
Company to keep meeting the liquidity arising over next 12 months, this
ratio should be greater than “1”. In a more practical world to stay prudent,
the LCR could be targeted to “1.5” by companies.

The Surrender Coverage ratio indicates the extreme end of liquidity
position of the Company if all the policyholder surrenders at once. This
is a very extreme out flow scenario that tests the liquidity strength of
the company. The important point to note here is that if the surrender
coverage ratio is greater than “1” does not guarantee liquidity because
on arriving such news of mass surrender the company may get lower
asset value.

The third method is a matching of monthly cash flow position ensuring
no negative surplus through raising extra liquid assets if otherwise.

Issues with Liquidity Risk Measure calculation
While calculating the above ratios, it is important to recognize how these
ratios are calculated. In these ratios calculations, liability is easy to
understand as being expected cash out flow from the company; however,
correct judgment is required to consider the assets cash flows. If a
company assumes that the aggregate available cash over the calculation
period is simply a sum of cash provided by each asset classes, there are
two issues in this approach. One is, other risks should be considered such
as the assets and liability management risk or concentration risk while

62 | Risk Management in Current Scenario