Article (87/214)
How insurers can make the most of their liquid assets
How insurers can make the most of their liquid assets

How insurers can make the most of their liquid assets


Christelle Ybanez

Christelle Ybanez

BNP Paribas Securities Services

View profile

Despite expectations that interest rates are turning higher - witness the recent volatility in global stock markets - insurers still operate in a historically low-yield environment. However, it’s not all doom and gloom. Many options are available for insurers to generate extra income without increasing investment risk. They can optimise assets - particularly High Quality Liquid Assets (HQLAs), and - given that cash is considered today’s problem child - they can make it more efficient or even hold less cash. For those looking to manage their collateral as efficiently as possible, they can opt for a tri-party solution and connect to other market players

HQLAs - unlock the value in a portfolio

Without doubt insurers are looking at the potential incremental return from engaging in securities lending. Lending US and specific European government debt (HQLA) is already one of the key, stable generators of revenue in the securities lending universe. Fixed income portfolio managers with an increased appetite to engage in collateral transformation transactions and alternative cash collateral re-investment structures through their securities lending programmes have benefitted from above average returns over the past 18 months.

For insurance companies operating under Solvency II, securities lending does not have a negative impact on their market Solvency Capital Ratio (SCR). This is because the securities that are lent are still included in the insurer’s market SCR calculation and are treated as if they remain on its balance sheet. Although, Counterparty SCR is negatively impacted by securities lending activity an indemnification from a securities lending agent can help mitigate counterparty risk.

Cash Optimisation

Cash has truly been a problematic and high-maintenance asset class owing to low interest rates and the unintended consequences of market regulations.

Central clearing reforms (EMIR and Dodd-Frank) aim to reduce risks and increase transparency. Insurers hedging against interest rates and currency risks need to post daily variation margin (VM) to fully collateralise their mark-to-market exposure at any given time. VM for cleared trades must be posted in cash, while collateral for non-cleared transactions can be in cash or securities (as agreed bilaterally between the two parties).

Solvency II also requires higher collateral. This has put pressure on the balance sheets of insurance companies. Insurers in Europe have therefore been long on cash (cash has a neutral impact on SCRs).

Although cash remains a fact of life for insurers, they do have several solutions available to them to preserve or optimise cash.

Insurers actively managing their cash can forecast end-of-day cash balances on a real time basis and, by using zero-balancing solutions, they can aggregate end-of-day balances across several accounts into a single cash account.  An insurance company is therefore well positioned to re-invest cash balances into the market.

For insurers who prefer to delegate their cash management function, a cash sweep solution executes an automated transfer of all cash balances to pre-agreed money market funds for a yield superior to that of standard cash conditions.

Cash financing

Insurance companies may have a preference for holding less cash despite having daily cash financing requirements. Insurers with a diversified asset portfolio, can access from their custodian committed and/or uncommitted credit facilities to smooth operational flows and thus eliminate the need to maintain a performance-dragging cash buffer.

Tri-party platforms – the enabler for your repo, securities lending and derivatives transactions

When looking for post trade collateral management solutions, it is worth considering the tri-party model, as this can help insurers manage their collateral more effectively

Our tri-party collateral management solution

  • Allows insurers to capitalise on emerging opportunities
  • Alleviates the challenges of inventory management, connecting directly to trading account. No need to manage a long box
  • More efficiently manages basket repos as the cash leg settlement is synchronised with several lines of securities defined by an eligibility matrix (also known as the “basket”)
  • Provides greater velocity to the collateral giver, notably when refinancing small lines of securities
  • Broadens the range of eligible assets - equities or corporate bonds –  thereby obtaining more attractive execution spreads.


Insurance companies can enhance yields using their HQLAs and optimise or preserve their cash. To manage their collateral more efficiently, they can use a tri-party solution. At BNP Paribas Securities Services, we have launched the first new tri-party collateral management solution in 20 years, making the most of the latest technology to enable our clients to monitor their collateral needs in real time and anticipate their future funding requirements.