Morningstar DBRS' Takeaways From Its Frontline Perspectives Webinar on Liquidity Resilience of Canadian Life Insurers: A Holistic Approach to Liquidity Risk Assessment

Why It Matters

Understanding liquidity dynamics is critical for regulators and investors because it directly impacts insurers’ creditworthiness and ability to meet policyholder claims during market stress. The webinar’s insights help shape more robust risk‑management practices and rating methodologies across the Canadian insurance sector.

Key Takeaways

• 60% of big four insurers' liquidity needed for on‑demand policy payouts
• Investment contracts represent 25% of liquidity needs, offering predictability
• Stress testing crucial for assessing liquidity under market shocks
• Private credit comprises part of 57% liquid portfolio, adds diversification
• Holistic approach balances assets and liabilities, guiding credit rating decisions

Pulse Analysis

The Canadian life‑insurance market, dominated by Manulife, Great‑West Lifeco, Sun Life and iA Financial, holds a unique liquidity profile. While policy contracts include surrender charges and tax constraints that dampen simultaneous withdrawals, the industry still must be prepared for a worst‑case scenario where all policyholders demand cash at once. Morningstar DBRS estimates that about 60 % of the liquidity required by these four carriers would be needed to satisfy such on‑demand payouts, with an additional 25 % tied to predictable investment‑style contracts. This split underscores the need for nuanced liquidity planning beyond simple cash‑flow forecasts.

DBRS adopts a holistic liquidity‑risk framework that blends traditional maturity analysis with rigorous stress testing. Under normal conditions, maturity buckets provide a snapshot of expected cash outflows, but they often overlook the rapid collateral calls that can arise from derivative positions—typically less than 5 % of the balance sheet yet potentially volatile in a market shock. By simulating adverse scenarios, stress tests reveal how liquidity buffers erode and how quickly insurers can mobilize assets. The methodology also evaluates the quality and accessibility of liquid holdings, informing credit‑rating decisions and regulator‑insurer dialogues.

The growing presence of private‑credit funds in insurers’ portfolios adds another layer of complexity. Although private credit is less liquid than public bonds, it offers low correlation to equity markets, higher risk‑adjusted returns and diversification benefits. DBRS notes that roughly 57 % of the big four’s investment mix is classified as liquid, while the remainder includes private credit, mortgages, real estate and infrastructure. Because many insurance products impose surrender penalties, cash outflows remain relatively predictable, allowing insurers to allocate a measured portion of assets to these alternative classes. Ongoing scrutiny by OSFI and rating agencies ensures that the balance‑sheet approach remains resilient as market conditions evolve.