Final 2022 LST Framework

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NAIC2022LIQUIDITYSTRESSTESTFRAMEWORK

ForLifeInsurersMeetingtheScopeCriteria

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December13,2022

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TableofContents

INTRODUCTION...................... ... ............. ............. ... ............. ............. .. ............. ............. ... ............. ............... ..4

MacroprudentialImplicationsofaLiquidityStress....................... ... ............. ............. .. ............. ............. ... ....4

BACKGROUND...................... .. ............. ............. ... ............. ............. ... ............. ............. .. ............. ................ .. ..5

NAICMacroprudentialInitiative..................... ............. ............. .. ............. ............. ... ............. ............. .. ..........5

LiquidityAssessmentSubgroup...................... .. ............. ............. ... ............. ............. ... ............. ............ ... .......6

Mandate..........................................................................................................................................6

DataGaps........................................................................................................................................6

DiscussionswithInsurers................................................................................................................7

RegulatoryGoalsoftheLiquidityStressTest.................................................................................9

[Beginningof]2022Liquidity

StressTestingFramework–tobeincluded/referencedintheNAICFinancial 

AnalysisHandbook................................. ... ............. .. ............. ............. ... ............. ............. .. ............. ...............9

Section1.ScopeCriteriaforDeterminingGroupsSubjectto2022LST......... ... ............. ............. .. ............. ..9

Section2.LiquidityStressTest........... ............. ... ............. ............. ... ............. .. ............. ............. ... ............. ..11

2.1Summary..................................................................................................................................11

2.2TimeHorizons..........................................................................................................................11

2.3Insurer’sInternalLiquidityStress

TestingSystem.................................................................13

Section3.LegalEntitiesRequiredtoPerformtheLSTforInsurersMeetingtheScopeCriteria... ... ..........13

Section4.CashFlowApproach–LiquiditySourcesandUses........... ... ............. ............. .. ............. ... ..........16

4.1BaselineAssumptionsforCashflows.....................................................................................17

Section5.StressScenariosandtheirAssumptions...................... ............. ... ............. ............. .. ............. .....17

5.1

AdverseLiquidityStressScenarioforInsurers.......................................................................19

5.1.1Narrative...............................................................................................................................19

5.1.2Regulator‐PrescribedAssumptions.....................................................................................20

5.1.3MarketCapacityAssumption..............................................................................................21

5.1.4EconomicVariablesforAdverseScenario...........................................................................23

5.1.5SWAPSpreads......................................................................................................................24

5.1.6SwaptionVolatility...............................................................................................................24

5.1.7Moody’sTransitionMatrix/MigrationRates......................................................................25

5.1.8

Moody’sDefaultTable.........................................................................................................25

5.1.9Moody’sRecoveryRateTable.............................................................................................25

5.1.10“WhatIf”Modification......................................................................................................26

5.1.11Company‐SpecificAssumptions.........................................................................................26

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5.2InterestRateSpikeScenario...................................................................................................26

5.2.1Narrative...............................................................................................................................26

5.2.2Regulator‐PrescribedAssumptions.....................................................................................27

5.2.3Company‐SpecificAssumptions...........................................................................................27

5.3InsurerSpecificInformationRequest‐Worst‐CaseScenario................................................28

5.3.1Narrative...............................................................................................................................28

Section6.AvailableandExpectedAssetSales........ ... ............. ............. .. ............. ............. ... ............. ..........28

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Section7.Reporting....... .. ... ............. ............. .. ............. ............. ... ............. ............. ... ............. ............. .. .....29

Section8.Templates............ ............. .. ............. ............. ... ............. ............. ... ............. ............. .. ............. .....32

8.1LiquiditySourcesTemplate.....................................................................................................32

8.2LiquidityUsesTemplate..........................................................................................................33

8.3AssetsTemplate......................................................................................................................34

Narrative/ExplanatoryDisclosuresnotedinthe2022LST.................... ............. .. ............. ............. ... ..........36

[Endof2022LiquidityStressTestingFramework–tobeincludedasan

appendixintheNAICFinancial

AnalysisHandbook]......... .. ............. ............. ... ............. .. ............. ............. ... ............. ............. .. ............. ........37

DataAggregation.. ............. ... ............. .. ............. ............. ... ............. ............. ... ............. ............. .. ..................37

RegulatoryAuthority....... ............. ............. .. ............. ............. ... ............. .. ............. ............. ... ............. ..........37

Confidentiality........................... ... ............. ............. .. ............. ... ............. ............. .. ............. ..........................38

Timeline... ... ............. ... ............ ............. ... ............. ............. ... ............. ............. .. ............. ................ .. .............38

Annex1:OriginalScopeCriteriawithAnnualStatementReferences.......................... ............. ... ............. ..39

Annex2:RegulatoryPrescribedAssumptions.......... ... ............. .. ............. ............. ... ............. ............. ... .......41

Annex2i.EconomicandMarketVariables...................................................................................

41

Annex2ii.MarketCapacityAssumption......................................................................................44

Annex2iii,A.Year‐endStructuredSpreadBaselineValues........................................................45

Annex2iv.SWAPSpreadTable.....................................................................................................46

Annex2v.ImpliedVolatilityofIRSwaptions...............................................................................47

Annex2vi.CreditAssumptions:Moody’sTransitionMatrix/MigrationRates...........................47

Annex2vii.CreditAssumptions:Moody’sDefault

Table............................................................48

Annex2viii.CreditAssumptions:Moody’sRecoveryRateTable................................................48

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INTRODUCTION

MacroprudentialImplicationsofaLiquidityStress

Beginningmid‐year2017,the NAICembarkedona  project todevelopa liquidity stresstesting

framework.WhiletheNAIChasexistingtoolsandprocessesforassessingliquidityriskatalegal

entitylevel (i.e.,‘inward’impacts totheinsurer),therewasrecognition thatthe NAICtoolbox

couldbefurtherenhanced

withtheadditionofmoregranulardataintheannualstatementand

a tool that would enable an assessment of macroprudential impacts on the  broader financial

markets (i.e., ‘outward’ impacts) of a liquidity stress impacting a large number of insurers

simultaneously.

Post‐financialcrisis,therewereseveralattemptstoassess

potentialmarketimpactsemanating

fromaliquiditystressintheinsurancesector.Manyoftheseanalysesreliedheavilyonanecdotal

assumptions and observations from behaviors of other financial sectors. To provide more

evidence‐basedanalyses,theNAICdecidedtodevelopaLiquidity StressTest (LST)Framework

forlargelife insurers that

wouldaim to capture the outwardimpacts on the broaderfinancial

marketsofaggregateassetsalesunderaliquiditystress.

Thestresstestwillberunannuallyandthefindings,onanaggregatebasis,reportedannuallyas

part of the NAIC’s continuous macroprudential monitoring efforts. The NAIC’s pursuit of the

liquidity stresstestshould not suggestanypre‐judgementofthe outcomes. TheNAICbelieves

there is value to the exercise whether it points to vulnerabilities of certain asset classes or

marketsor, alternatively, suggests that even a severe liquidity stress impacting the insurance

sectorisunlikelytohavematerialimpacts

onfinancialmarkets.TheNAICliquiditystresstesting

framework is intended to supplement, not replace, a firm‐specific liquidity risk management

framework.TheNAIChasnotyetdiscussedstepsthatmightbetakentoaddressanyidentified

vulnerabilities but acknowledges that any recommendations may require collaboration with

otherfinancialregulators.

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The NAIC’s revised proposed liquidity stress testing framework is contained in the pagesthat

follow. The NAIC recognizes that, at least in the early years, the stress testing process and

analyseswillbeiterative.Weexpectrefinementsastheframeworkisdeveloped,especiallyafter

thefirstyear’simplementation.

BACKGROUND

NAICMacroprudentialInitiative

TheNAIC’sMacroprudentialInitiative(MPI)commencedin2017.Itrecognizedthepost‐financial

crisisreformsthatbecamepartofourSolvencyModernizationInitiative(SMI)thatcontinueto

serve us well today. However, in the ensuingyears since those reforms,insurers have had to

contendwithsustainedlow interestrates,changingdemographics

andrapidadvancementsin

communication and technology. They have responded by offering new products, adjusting

investmentstrategies,makingstructuralchanges,andexpandingintonewglobalmarkets.There

are new market players, new distribution channels, and a complex web of interconnections

betweenfinancialmarketplayers.

Whathasnotchangedsincethe

financialcrisisisthescrutinyontheinsurancesectorintermsof

understanding how insurers react to financial stress, and how that reaction can impact, via

various transmission channels, policyholders, otherinsurers,financialmarketparticipants, and

thebroaderpublic.

Theproposedworkonmacroprudentialmeasuresisreflectiveofthestateinsurance

regulators’

commitment to ensure that the companies they regulate remain financially strong for the

protectionofpolicyholders,whileservingasastabilizingforcetocontributetofinancialstability,

includinginstressedfinancialmarkets.Tothatend,theNAIC’sthree‐yearstrategicplan(2018‐

2020), “State Ahead”, reflects the objective of

“Evaluating Gaps and regulatory opportunities

arisingfrommacroprudentialsurveillance,anddevelopappropriateregulatoryresponses.”

TheNAIC’sworkonmacroprudentialsurveillanceisoverseenbytheFinancialStabilityTaskForce

oftheNAICExecutiveCommittee.InApril2017,theTaskForcewasaskedtoconsidernewand

improved tools to better monitor and

 respond to both the impact of external financial and

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economicrisks on supervised firms, as well asthe risksemanating from oramplified by these

firmsthatmightbetransmittedexternally.TheTaskForce,inturn,focuseditseffortsonpotential

enhancementstoidentify and monitorliquidityrisk, amongotherareas.More specifically, the

TaskForcewasrequestedtofurther

developtheU.S.regulatoryframeworkonliquidityriskwith

a focus on life insurers due to the long‐term cash‐buildup involved in many life insurance

contractsandthepotentialforlargescaleliquidationofassets.

LiquidityAssessmentSubgroup

To carry out its work on assessing liquidity considerations, the Task Force established the

LiquidityAssessmentSubgroup(“Subgroup”)mid‐year2017.

Mandate

ThechargesandworkplanoftheSubgroupreflectthefollowingassignments:

 Reviewexistingpublicandregulator‐onlydatarelatedtoliquidityrisk,identifyanygapsbased

onregulatory

needsanddeterminethescopeofapplication,andproposerecommendations

toenhancedisclosures.

 Develop a liquidity stress testing framework proposal for consideration by the Financial

Condition (E) Committee, including the proposed universe of companies to which the

frameworkwillapply(e.g.,largelifeinsurers).

 Oncethestresstesting

frameworkiscompleted,considerpotentialfurtherenhancementsor

additionaldisclosures.

Inaddition,asmallinformalstudygroupcomprisedofregulators,industryparticipantsandNAIC

staffwas formed to consider thespecificdata needsandtechnical aspectsoftheproject.The

studygroupisNOTanofficialNAICworkinggroup.Allrecommendations

fromthestudygroup

must be vetted and considered by the Liquidity Assessment Subgroup and/or the Financial

Stability(EX)TaskForceaccordingtoNAICprocedures.

DataGaps

PriortoundertakingworkontheLiquidityStressTest,theSubgroupconstructedaninventorylist

ofexistinglifeinsurerdisclosuresasof2018

thatcontributetoanunderstandingofliquidityrisk.

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Whenassessingthecurrentstate,theSubgrouprecogni zedtheavailabilityofsignificantdetailed

investment‐related disclosures but contrasted it to the relati vely sparse liability‐related

disclosures.Toremedythisimbalance,ablanksproposalwasconstructedtosignificantlyincrease

thedisclosuresforlifeinsuranceproducts.

Specifically,theAnalysisofOperationsbyLine

ofBusinessschedulewasexpandedfromasingle

exhibittofiveexhibits,oneeachforIndividualLife,GroupLife, IndividualAnnuity,GroupAnnuity,

andAccidentandHealth.TheAnalysisofIncreaseinReservesschedulewassimilarlyexpanded.

Withineachofthefivenewexhibits,columnswereaddedformoredetailed

productreporting.

Forexample,columnswereaddedtotheIndividualandGroupLifeexhibitstocaptureuniversal

lifeinsuranceanduniversallifeinsurancewithsecondaryguarantees,andcolumnswereadded

totheIndividualandGroupAnnuityexhibitstocapturevariableannuitiesandvariableannuities

withguaranteedbenefits.Inaddition,twonew

lineswereaddedtothenowfiveexhibitsofthe

AnalysisofIncreaseinReservesschedule:onecapturingthecashsurrendervalueoftheproducts

outstandingandanothercapturingtheamount of policyloans available(lessamounts already

loaned).A new addition wasalsoproposed to the Life Notesto

FinancialStatement.Thenew

Note33consideredthetypeofliquidityconcernsdisclosedinNote32forannuitiesanddeposit‐

typecontractsandaddeddisclosuresforlifeinsuranceproductsnotcoveredinNote32.

TheseproposalswereexposedandcommenteduponseveraltimesattheLiquidityAssessment

Subgroup,theFinancialStability

(EX)TaskForce,andattheBlanks(E)WorkingGroup.Ultimatel y,

theywereadoptedbyNAICPlenaryforinclusioninthe2019LifeAnnualStatementBlank.Asan

interimstep,TheFinancialStabilityTaskForceperformedadatacallrequestingafewkeylines

of information from the newly adopted

2019 format of the Analysis of Operations by Line of

BusinessscheduleandtheAnalysisofIncreaseinReservesschedule,aswellasthenewNote33,

butpopulatedwith2018year‐enddata.ThisdatacallwascompletedinJuly2019.

DiscussionswithInsurers

Duringthelatterpartof2017

andfirstquarterof2018,theSubgroupconductedcallswithseveral

large life insurers who agreed to share their internal liquidity risk assessment processes. The

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

dialogueprovidedextremelyhelpfulinputand informedtheestablishmentoftheinitialdirection

oftheLiquidityStressTestingFramework.Feedbackfromthesediscussionsinclude:

• Scopecriteriashouldberisk‐focused,notsolelybasedonsize.

• Stress test framework should align with internal management reporting and leverage the

ORSA.

•

Stress test should be principle‐based and complement a company’s internal stress testing

methodology.

• Regulatory guidance should be provided to help define liquidity sources and uses,

products/activities with liquidity risk, time horizons, level of aggregation, reporting

frequency,andestablishingstressscenarios.

• Public disclosureofresults shouldbecarefully

consideredto avoidexacerbating aliquidity

crisis.

Regarding the specifics of liquidity assessments/stress test approaches, significant diversity in

practicesexist.Keyobservationsinthisregardincluded:

• Liquiditytestsare performedatthematerialentitylevelandattheholdingcompanylevel.

Definitionsofmaterialentitiesdiffer.

• Mostfirmsdetermine

somesortof coverageratio(LiquiditySources)/(LiquidityUses),for

BaseandStressscenariosandmonitorresultstoensuretheyalignwiththefirm’s(internal)

riskappetite.Categoriesofliquiditysourcesandusesdifferacrossfirmsandassumptionsvary

dependingontimehorizon.Someinsurersdeterminecoverageratiosutilizing

balancesheet

values, applying different haircuts by asset class, time horizon and type of stress. Other

insurersdetermineliquiditycoveragegaps(LiquidityInflows–LiquidityOutflows)utilizinga 

cashflowapproach.

• Stress scenarios vary by company, reflecting a combination of market‐driven, as well as

idiosyncraticandinsurer‐specificscenarios.



• Timehorizonstestedalsovary,typicallyrangingfrom7daysto1year.

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

RegulatoryGoalsoftheLiquidityStressTest

• Theprimarygoalofthisliquiditystresstesting,andthespecificstressscenariosutilized,isfor

macroprudentialuses – to allow the FSTF regulators to identify amounts of asset sales by

insurers that could impact the markets under stressed environments. Thus, the selected



stressscenariosare consciously focusedonindustry‐wide stresses – thosethatcan impact

manyinsurerswithinasimilartimeframe.Thesemaynotbethemoststressfulscenariosfor

specific legal entity insurers, or even their groups. Regulators have indicated the liquidity

stresstestingisalsomeanttoassistregulators

intheirmicroprudentialsupervision,inthe

context of being helpful for domiciliary and lead state regulators to better understand

liquidity stress testing programs at those legal entities and groups. There is no intent to

requirethesestressscenariostobeusedbyindividualinsurersforsomesortofassessment

regulatoryinterventionmechanism.Similarly,therehasnotbeenanyconsiderationgiven

torequiringtheminthemanagementofanyentitiesinreceivership.

• Regulatoryconcerns regardingliquidityriskfor legalentityinsurersand/or groups ismore

aboutthestressscenariosofmostconcerntothoseentities(notthoseidentifiedfor

macro

prudentialpurposes).Similarly,whenconsideringliquidityriskatalegalentityand/orgroup,

regulatorsneedtounderstandtheinsurer’sentireriskmanagementframework.Muchofthis

understandingmaycomefromtheORSAfilings.Thus,theLSTisnotmeanttobealegalentity

insurer requirement, or used as a

 ranking too l, etc. However, it is recognized that simply

reviewingtheseLSTresultsmayhelpregulatorsbetterunderstandtheroleofliquiditystress

testing within the entities – which may result inmore questionsand information requests

regarding the entities’ own liquidity risk management framework and dynamics of their

internal

liquiditystresstests.



[Beginningof]2022LiquidityStressTestingFramework–tobe

included/referencedintheNAICFinancialAnalysisHandbook

Section1.ScopeCriteriaforDeterminingGroupsSubjectto2022LST



HISTORY–ScopeCriteriafortheInitial2020LST:

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

Indeterminingthecompaniessubjecttotheliquiditystresstest(LST),considerationwasgiven

to activities assumed to be correlated with liquidity risk. Another consideration was the

desirabilityoftyingdatausedinthecriteriabacktothestatutoryfinancialstatements.Ultimately

six activities were identified. Those activities are Fixed and

 Indexed Annuities, Funding

Agreements, Derivatives, Securities Lending, Repurchase Agreements and Borrowed Money.

Minimumthresholdswereestablishedforeachofthesesixactivities.Alifeinsurancelegalentity

orlifeinsurancegroupexceedingthethresholdfor anyofthesixactivitiesissubjecttothestress

test(seeAnnex1for

moredetails).

While the scope criteria only utilize statutory annual statement data, the stress test is not

similarlylimited.Thus,thestresstestwillconsidermanymoreliquidityrisk elementsthanthe

scopecriteria,andinternalcompanydatawillbethesourceformanyofthoseelements.

Just as the liquidity

 stress test structure and methodology may change over time, the scope

criteriamayalso bemodified,for example,inresponsetonewdatapointsintheNAICAnnual

StatementBlank.Thescopecriteriawillbereviewedannually.

Usingtheagreedcriteria,NAICstaffobtainedtheamountsforalllifeinsurance

legalentitiesfrom

the 2018 annual statutory financial statements (filed by March 1, 2019). If two or more life

insurerswerepartofaninsurancegroupwithanNAICgroupcode,thenthenumbersforeachof

those legal entity life insurers was summed together to represent an insurance group result.



Thus,alegalentitylifeinsurernotinaninsurancegroupcanmeetthethresholdonitsown,or

thesumoflegalentitylifeinsurersinagroupcouldmeetthethreshold.Twenty‐threeinsurance

groupsmettheinitialscopecriteria.

Inestablishingwhetheraninsurerorgroupmet

orexceededthethresholdcriteria,theSubgroup

memberssupportedusingthemostcurrentsingleyearactivityratherthanamulti‐yearaverage.



Thisresultedincoverageamountsrangingfrom60%to80%oftheindustrytotalforeachactivity

based on 2018 data.

 It was recognized that using single year activity could result in more

instancesofaninsurancegroupbeinginscopeoneyearandoutofscopethenext,butregulators

vieweditmoreimportanttohavethemostrecentfinancialdatautilizedfordeterminingscope.

Toaddressconcernsaboutinsurersmoving

inandoutofscope,regulatoryjudgmentwillbeused

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

toaddressaninsurer’sexitfromorentrytothescopeofinsurerssubjecttotheliquiditystress

test.PerrevisionstothemodelHoldingCompanyAct,theleadstateregulatorwillconsultwith

the Task Force in determining when it is appropriate to remove an insurer from the LST

requirement

ifitnolongermeetsthescopecriteria.Similarly,leadstateregulatorsshouldhave

theability to consultwiththeTaskForceandrequire the LST fromaninsurernotmeetingthe

scopecriteria(e.g.,aninsurerclosetotriggeringthescopecriteriaformorethanoneyear).

CURRENT–

ScopeCriteriaforthe2022LST:

Regulatorsagreedtoretainthesame6criteriaandthresholdsfromthe2020and2021LSTScope

Criteriaforuseasthe2022LSTScopeCriteria.The2022LSTScopeCriteriahavebeenappliedto

the2021annualstatementdata(dataasofDec.31,

2021,filedbyMarch1,2022).

Section2.LiquidityStressTest

2.1Summary



Thestresstestingframeworkemploysacompany cashflowprojectionapproachincorporating

liquidity sources and uses over various time horizons under a baseline assumption and some

number of stress scenarios (for 2022 there are 2 stress scenarios and also an insurer‐specific

request for information). The available assets are then recorded

 by asset category. The

frameworkthencallsforidentificationofexpectedassetsalesbycategory,orotherfundingas

allowedinthestresstest,tocureanycashflowdeficits(liquidityusesexceedliquiditysources)

under the stress scenarios. The stress tests are to be performed at the legal entity

level; the

aggregatedgroupdoesnotperformtheLST.

2.2TimeHorizons



The time horizons chosen by regulators are 30 days, 90 days, and 1 year, because, overall,

insuranceproductsaredesignedtobeforthebenefitofcustomersasriskprotectionoverthe

longtermandnotdesignedtoprovideshorttermliquiditylikeotherfinancialproducts.Historical

experienceintimesof

stressdemonstrateslowpolicyholderreactioninshortperiodsoftime,as

opposedtoaneventthatoccursovermonthsoryears.Featuresdesignedtoprotectthelong‐

termnatureoftheproductforthepolicyholdersultimatelyreducethelikelihoodofpolicyholder



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

reaction to short‐term volatility in markets. Therefore, evaluating shorter than 30‐day time

horizons has been deemed not warranted for the overarching macroprudential purpose of

gaugingliquidityriskintheLifeinsuranceindustry.

Policyholdersdonot“run”fromaninsurerintimesofeconomicstresstotheextentdepositors

fromabank,becauseinsuranceispurchasedtoobtaintheprotectioninsuranceprovides,not

asasourceofliquidityordiscretionaryfunds.IntheUnitedStates,lifeinsuranceandannuities

are purchased primarily for long‐term financial protections upon death or  retirement.

Surrendering a life insurance contract to harvest its

cash surrender value would leave the

policyholderwithoutdeathbenefitprotectionthatwouldbeexpensiveorimpossibletoreplace

ata future date. Surrenderingavariable annuity contractwouldlock in potentially temporary

decreasesinaccountvalueandcouldresultinthelossoflivingbenefitprotectionthatbecomes

more valuable

 when market conditions depress account values below trigger points. Further,

mitigating contract features such as surrender charges and the insurer’s right to delay the

processingofwithdrawalsandsurrendersforupto30daysarecommon.

There are also non‐contractual mitigating factors at play, such as potential negative tax

consequences,thatfurtherreducetheshort‐termnatureofliquidityriskforlifeinsurers.

Simplyput,policyholdersarehighlydisincentivizedtogiveupthelikelyirreplaceableprotection

forwhichtheyhavealreadypaid.Therun‐likemasssurrenderofinsurancepolicieswouldrequire

largenumbersofpolicyholderstoactagainsttheir

self‐interest.

Fromaholisticriskperspective,liquiditystressistraditionallyexperiencedontheassetside.One

short‐term consequence of market turmoil could be a requirement to post collateral in

connection with existing derivative contracts. However, even in this scenario, collateral is

typicallypostedintheformofsecurities,

soademandforcashisnotgenerated.

Wedoacknowledgeliquidityriskdoesexistwithrespecttoshortertimehorizonsandthatmany

insurersdoconsidershortertimehorizons(7‐daysforexample)aspartoftheirinternalliquidity

stresstestingframework.Thisisviewedasacashmanagement/Treasuryfunction

impactingthe

dailyoperationsofindividualinsurers,however,thatwouldnotaffecttheindustryasawhole.

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Hence, these considerations are typically reviewed as part of individual/microprudential

surveillanceeffortsintheU.S.

2.3Insurer’sInternalLiquidityStressTestingSystem



Insurersaretousetheirown internalliquiditystresstestingsystem to perform theregulatory

LST, adjusting for regulatory assumptions, metrics, etc., as specified in this document. For

example, assessing materiality of stressed cash flows for inclusion in the liquidity uses and

sources templates is per theinsurer’sowninternal methodology,

butdeterminingwhich legal

entities are to perform the LST and report on those templates is specified in this document.

Insurersshouldprovideanarrativedescriptionoftheirinternalliquiditystresstestingsystemand

processes, including for example their materiality thresholds for stressed cash flows and

methodologyforconvertingforeign

currenciestoUSdollars(seeSection7.Reporting).Thestress

scenariosmayvaryfromyear‐to‐yearandcontainvariationsreferredtoas“What‐if”scenarios.

The following sections provide a further description of each of the key components of the

framework.

Section3.LegalEntitiesRequiredtoPerformtheLSTforInsure rsMeetingthe

ScopeCriteria

The scope of entities included within an insurance group for the purposes of liquidity stress

testingtoassessthepotentialforlargescaleliquidationofassets(i.e.,thelegalentitieswithin

thegroupwhichshouldperformtheLST),shouldinclude:

 U.S.Life insurancelegal entities,includingreinsurers,regardless of corporate

structure,so

includingcaptive(regulatorsspecificallywantallU.S.lifeinsurance/reinsurancelegalentities

to perform the 2022 LST for informational purposes – future LST iterations may see a

materialityconsiderationadded);

 Non‐guaranteed/market value separate accounts are not included in the 2022

LST. However, regulators may want to perform

a separate account  study in the

future. The current thinking is that even though non‐guaranteed/market

valueseparate accountsmay experience asset sales during stressed

environments,thosesalesareatthepolicyholder’sdiscretionanddonotgenerate

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liquidity stress for the insurer/group. As such they are deemed other market

activityratherthaninsuranceentityactivity.Thus,forannuitiesthatprovideboth

non‐guaranteed and guaranteed benefits,insurers should onlyinclude the cash

flow impact of the guaranteed benefits. Though not required for the 2022 LST, 

insurersshouldconsider

includingnon‐insulatedseparateaccountamountsasif

theyweregeneralaccountamounts.

 Non‐U.S.lifeinsurance/reinsurancelegalentitiesshouldperformthe2022LSTif

theyposematerialliquidity risksto the U.S. group(seebelow on non‐U.S. legal

entities).

 Whereapplicable,holdingcompaniesthatcouldbe

asource ordrawofliquiditytothelife

insurancelegalentities;and

 Non‐life insuranceentitiesand non‐insurance entities with materialsourcesof liquidity, or

thatcarr youtmaterialliquidityrisk‐bearingactivitiesandcould,directlyorindirectly,pose

materialliquidityrisktotheU.S.group.Thismateriality

considerationshouldoccurwithinthe

context of the specific stress scenario (and “what if” modification if applicable). The

materialitycriteriaand initial list of legalentities in scopeshould be reviewed by the lead

stateregulatorandmodifiedbytheinsurerasneededbasedonregulatordirection.

 Non‐U.S.

legalentities(includingnon‐U.S.holdingcompanies)aresubjecttothis

materialityconsiderationandshouldbesubjecttoperformingtheLSTiftheypose

materialliquidityrisktotheU.S.group.

 U.S.non‐life insurers andreinsurers arenotautomaticallyexempted.IftheU.S.

non‐life insurerposes materialliquidity

risk, per the stress scenario,to the U.S.

group,thenthatlegalentityinsurershouldperformtheLST.

 Legal entity asset managers and mutual funds(both U.S. and non‐U.S.) are excluded from

performingthe2022LST. 

 However, those legal entities performing the LST (e.g., holding comp anies that

couldbeasourceoruseofliquidityforthelifeinsurers)mustreflectanymaterial

stressed cash flowsfrom/tothelegalentityassetmanager/mutualfund intheir

2022LST results(e.g.,theliquidity sources

andliquidityusestemplates,asthey

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dowithanyothertypeoflegalentitythathasmaterialstressedcashflowsfrom/to

thelegalentitiesperformingtheLST).

 Ifsuchmaterialstressedcashflowsfrom/tothelegalentityassetmanager/mutual

fundexist,theregulatorswantspecificdisclosuresonthoseintheresults(either

by adjusting the  templates

 to include a line for these and/or in the

narrative/explanatorydisclosuressubmittedalongwiththetemplates).

 Examples of when such legal entity asset manager/mutual fund considerations

anddisclosureswouldneedtobemadeforaspecificstressscenarioinclude:

o Iftheholdingcompanyor anotherlegalentity(ies)in

thegroupisexpected

tofundamaterialliquidityshortfallofamutualfund/assetmanager(i.e.,

redemptionsexceedtheabili tytosellassets),thentheexpectedcashflows

must be reflected (especially where there are established inter‐affiliate

supportagreements);

o Iftheholdingcompanyor anotherlegalentity(ies)inthe

groupisexpected

to provide capital to the mutual fund/asset manager or is expecting

dividendsfromthem,thematerialexpectedcashflowsmustbereflected;

and

o Iftheassetmanagermanagesfinancialinstrumentsunderwhichitretains

somerisk,suchasnewEuropeanCLOs, orhas contractual riskretention

agreementsforUSCLOs,therequiredriskretentionlimit(5%forEurope)

must bereflectedif sourced from the holding companyor another legal

entity(ies)inthegroupandconsideredmaterial.

 Legalentitybanks(bothU.S.andnon‐U.S.)areexcludedfromperformingthe2022LST.

 However, those legal entities performing the LST (e.g., holding companies that

couldbeasourceoruseofliquidityforthelifeinsurers)mustreflectanymaterial

stressed cashflows from/to the legal entity bank in their2022 LST results (e.g.,

theliquiditysourcesandliquidityusestemplates,asthey

dowithanyothertype

of legal entity that has material stressed cash flows from/to the legal entities

performingtheLST).

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Page16of48

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 If such material stressed cash flows from/to the legal entity bank exist, the

regulatorswantspecificdisclosuresonthoseintheresults(eitherbyadjustingthe

templates to include a line for these and/or in the explanatory disclosures

submittedalongwiththetemplates).

 Examples of when such legal entity

 bank considerations and disclosures would

needtobemadeforaspecificstressscenarioinclude:

o Iftheholdingcompanyor anotherlegalentity(ies)inthegroupisexpected

tofundamaterialliquidityshortfallofabank,thentheexpectedcashflows

must be reflected (especially where there are

established inter‐affiliate

supportagreements);and

o Iftheholdingcompanyor anotherlegalentity(ies)inthegroupisexpected

to provide capital to the bank or is expecting dividends from them, the

materialexpectedcashflowsmustbereflected.

For2022,thelegalentitiesidentifiedinthebulletsabove,per

aCompany’sORSAand/orother

materiality criteria applied to the specific stress scenario, must be considered as material or

identifiedascarryingoutmaterialliquidity riskbearingactivities and hencesubjecttointernal

liquiditystresstestingrequirements.Althoughalegalentityinthegroupmaynotberequiredto

perform

thestresstestduetomaterialityconsiderationsorexemptions,thoseentities'material

cashimpactson entities performing the stress test must be captured in the sources and uses

templates of the entities performing the LST. Theinsurer will need to disclose the materiality

criteria(agreeduponbytheLeadStateregulator)

usedindeterminingthelegalentitiessubject

tothe2022LSTinthesubmissionofitsresults.Basedontheresultsofthe2020initialLSTexercise

andthoseofthe2021and2022LSTfilings,theSubgroupwilldetermineifadditionalmateriality

criteriashouldbedevelopedtoensurebetter

comparabilityamongstinsurers.

Section4.CashFlowApproach–LiquiditySourcesandUses

TheLiquidityStressTestingFrameworkisanchoredbyacashflowapproach,utilizingcompanies’

actual cash flo w projections of sources and uses of liquidityovervarious time horizons based

uponexperienceandexpectations.ThiscontrastswithaBalanceSheetApproach,whichemploys

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Page17of48

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static balance sheet amounts and generic assumptions about asset liquidity. While a Balance

SheetApproachiseasiertoapplyandprovidescalculationconsistency(andthustheperception

ofincreasedcomparability),its‘one‐sizefitsall’approachcouldresultinamisleadingassessment

of liquidity risk and fail to capture certain asset

 activities or product features under different

stressscenariosandtimehorizons.Thecashflowapproachisdeemedmoredynamicandhence

tocaptureliquidityriskimpactsmoreprecisely.

Theinsurershouldproducecashflowprojectionsforsourcesofliquidityandusesofliquiditythat

cover:operatingitems,investments and derivatives,

capitalitems,andfunding arrangements.

(See Liquidity Sources and Uses templates in Section 7). To clarify an issue regarding funding

arrangements, the projected cash flows for liquidity sources and uses should include already

existingfundingarrangementssuchasFHLBdrawsoutstandinginthecurrenttimeperiod.Also,

specifictotheholding

company,theseprojectedcashflowsforliquiditysourcesandusesshould

includematerialnon‐U.S.impactsaswell.

The insurer will produce these liquidity sources and uses cash flow projections in a baseline,

normalcourseofbusiness scenario, foreachtime horizon.The insurerwillalsoproducethese

cashflows

foreachtimehorizonforaspecificnumberofrequiredstressscenarios(for2022there

are2stressscenariosandalsoaninsurer‐specificworst‐casescenario).

4.1BaselineAssumptionsforCashflows



Baseline (pre‐stress) cash flows are the insurer‐specific cash flows from normal expected

operations.Insurersshouldpreparecashflowprojectionsundernormaloperatingconditionsand

reportthenetcashflows(projectedliquiditysourceslessuses)foreachtimehorizon.Thesecash

flowprojectionsshould be consistentwith those used for

 internal baseline liquidity forecasts,

suchasthoseusedforfinancialplanningandanalysis(FP&A),riskmanagement,etc.Apositive

netcashflowispresumedinthebaselinecashflowssincecompaniesareusuallynotexpected

tobeoperatinginanetcashflowdeficiencystate.

Section5.StressScenariosandtheirAssumptions

Foryear‐end2022therearetworegulatoryliquiditystressscenarios:anadverseliquiditystress

scenario for insurers, and an interest rate spike scenario. There is also an insurer‐specific

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

informationrequestforeachgroup’sownmostadverseliquiditystressscenario(s).Theadverse

liquidity stress scenario contains a regulator provided narrative, regulator‐prescribed

assumptions,andcompany‐specificassumptions.Theinterestratespikescenarioallowsall other

narrativedescriptioncomponentsandkeymetrics(includinghowmuchinterestratesspike)to

be provided

 by each company. The insurer‐specific information request contains a company

providednarrativeandadescriptionofkeycompanymetrics.Theregulatorprovidednarrative

willbeaqualitative descriptionofthe specifiedstressscenarioto highlighttheparticular risks

andsensitivitiesassociatedwiththatstressscenario.Theregulatorprescribedassumptions

are

specificparametersinsurersshouldincorporateintotheirprocessforaparticularstressscenario.

Company‐specific assumptions should be consistent with the information provided in the

regulatorprovidednarrativeandregulatorprescribedassumptions,andrepresentthedetailed

assumptionsneededforaspecificcompany’sliquiditystresstestingprocess.Examplesofwhere

companies

 should provide their assumptions include: debt issuance, lapse sensitivity, new

business sensitivityand mortality sensitivity. Regulators expect insurers to utilize policyholder

behavior assumptions (e.g., surrenders and policy loan withdrawals, existence of new sales

activity) as well as the insurer’s response (e.g., assuming delays in payment of policyholder

benefits),consistentwith

theseverity ofthe stress,andto provide very thoro ughexplanatory

information. All key business activities and product‐ type impacts to liquidity should be

consideredbythecompanies.

If the insurer’s internal model does not utilize a specific economic and/or company‐specific

assumption included in this document, the internal model does

 not need to be modified to

incorporateit.However,iftheinsurer’sinternalmodeldoesutilizeaspecificeconomicand/or

company‐specific assumption included in this document, the insurer should use the approach

outlined below to calculate the value for that assumption. (This emphasizes the macro

surveillancebenefitofthe

2022LST,allowingforalevelofconsistencyofassumptionsacrossthe 

industry.Asdiscussedpreviously,thisisnotmeanttospecifyassumptionsusedbytheinsurers

intheirowninternalliquiditystresstestingwork.)Ifthereisnospecificvalueincludedinthe2022

LST Framework and instead there is

 an illustrative value or suggested guidance, the company

should use a value consistent with the illustrative value or suggested guidance. For example,

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

guidance is given below on using Moody’s values for migration, default, and recoveries.

However,insurersmayuseS&Pdataorotherappropriatedatasources.

5.1AdverseLiquidityStressScenarioforInsurers

5.1.1Narrative

Insurers are required to apply an adverse liquidity stress scenario as one of the two stress

scenarios. The following is a summary of market conditions in the adverse scenario extracted

fromtheFederalReserveBoard’s2017SupervisoryScenariosforAnnualStressTestsRequired

undertheDodd‐FrankActStress

TestingRulesandtheCapitalPlanRule.

The adverse scenario is characterized by weakening economic activity across all economies

includedinthescenario.Thiseconomicdownturnisaccompaniedbyaglobalaversiontolong‐

termfixed‐incomeassetsthat,despitelowershort‐termrates,bringsaboutanear‐termrise

in

long‐termratesandsteepeningyieldcurvesintheUnitedStatesandthefourcountries/country

blocksinthescenario.

Theeconomic indicatorlevelsdescribedbelowprovidethebackdropfortheeconomicclimate

insurers should assume in the adverse scenario. The actual levels insurers should use in the

adversescenarioare

providedinAnnex2.

 Macroeconomic

o RealGDPfallsslightlymorethan2percentfromthepre‐recessionpeakinthe

fourthquarterof2016totherecessiontroughinthefirstquarterof2018.



o Unemploymentrateincreases.

o HeadlineCPIfallsandthenrisesoverthescenario

period.



 InterestRatesandCreditSpreads

o Short‐termTreasuryratesfallandremainnearzerothroughoutthestress.

o 10‐yearTreasuryyieldsrise.

o InvestmentGrade(IG)corporatecreditspreadswiden.

 AssetValuations

o Equitypricesdeclinebyroughly40%.

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o TheVolatilityIndex(VIX)peaksatapproximately35.

o Housingpricesandcommercialrealestatepricesdeclinethrough8quarters.

 DescriptionofInternationalMarketConditions

o Recessions and slowdowns in growth are experienced in the Euro area, United

Kingdom,Japan,anddevelopingAsiaeconomies.

o Allforeigneconomiesexperience

adeclineinconsumerprices.

o U.S. Dollar appreciates against the Euro, British Pound, and developing Asia

currencies.

o U.S.Dollardepreciatesmodestly againsttheJapaneseYen,drivenbyflight‐to‐safety

capitalflow.

5.1.2Regulator‐PrescribedAssumptions

InsurersshouldutilizethevaluesfortheeconomicindicatorsfromtheFederal

ReserveBoard’s

annualSupervisoryScenariosforAnnualStressTestsRequiredundertheDodd‐FrankActStress

TestingRulesandtheCapitalPlanRuleasthebasisforscenarioassumptions,TableA.1Historical

dataandTableA.5(Annex2i,A)Supervisoryadversescenario.Insurersshouldusetheversion

publishedinFebruary2017

(refertothetablesinAnnex2i).Specifically,insurersshouldrunthe

adverseliquiditystressscenariousingthedeltasfortheTreasurycurve,Corporatespreads,GDP,

Unemployment, U.S. Inflation (CPI), Housing Price Index (HPI), S&P 500 index (SPX SPOT),

CommercialRealEstateIndex(CREI)andVIXindex.Theseseconomicvariables

shouldbeused

totheextentthesevariablesareincludedinaninsurer’sinternal liquiditystresstestprocessor

models.

Insurers should apply the same change in economic variables experienced between Q4 2016

TableA.1andthestressscenariosinTableA.5tocurrenteconomicvariablelevels(Annex2i,D).

Insurers

shouldusethetablesinAnnex2iforanillustrativeexampleofhowthedeltasfromthe

2017Fed’sCCARareappliedtothecurrentreferencequarter(Q42020)forthe2020LST(Annex

2i,B).Forexample,insurersshoulduse2022(ormostrecentyear‐end)10Yr.Treasury

ratesand

applythesamepercentageorabsoluteb.p.changeshownfromQ42016tothe2017TableA.5

amountsintheir2022LSTstressscenarios.TableC(Annex2i,C)showsthe2017deltasapplied

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

to2021year‐endlevelsonanabsoluteandpercentagebasisfor3monthand1‐yearhorizonsfor

easeofuse.Thedeltasto applyareprovidedforthe30‐day,90‐dayand1‐yearhorizons.Note,

the tables also include structured spread assumptions described below in section 5.1.4.

 The

tablesareincludedinAnnex2iofthisdocument.



Inaddition,othermarketindicatorsarenecessaryforinsurerstoapplytostressedcashflowsand

toassess the impactonexpectedassetsales.These areasfollows(withdetailstobefoundin

Annex2):

 MarketCapacityAssumption



 EconomicVariablesforAdverseScenario

 SWAPSpreads

 SwaptionVolatility

 CreditAssumptions:Moody’sTransitionMatrix/MigrationRates

 CreditAssumptions:Moody’sDefaultTable

 CreditAssumptions:Moody’sRecoveryRateTable

Necessaryeditsfor2022year‐endvalueswillbepostedasLeadStat eGuidancetotheAnnexes

in

early2023.



5.1.3MarketCapacityAssumption

Thefollowingissuggestedguidancetodeterminemarketconstraintsonassetcategoriestobe

soldinti mesofstress.Itrepresentsstandardsfollowedbymanyinsurerstoestimateassetssales

by stress scenario, asset category and time hor izon that can be sold without meaningfully

impactingtheentiremarketbywideningbid‐offerspreads.Werecognizeeachcompanyhasits

ownindividualmethodologyfordeterminingpotential

assetsalesunderstress,andwe request

awrittennarrativebeprovidedastohowtheymaketheirdetermination.



Onceanassetclasshasbeenidentifiedasavailabletobesoldtosatisfyacashdeficiencyfrom

cashflow stress testing, theinsurershouldcalculateitspercentageofthetotal

amountissued

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

andoutstanding.Nexttheinsurershouldobtainaveragedailytradingvolumes(ADTV)andmake

anassumptionforthehaircutamounttoapplytothatvolumetoreflectstressedconditions(the

“haircut ADTV”). Next, the insurer would apply its calculated percentage of total outstanding

ownedtothehaircutADTV,andtheresult

wouldbedividedbythenumberofdaysinthestress

testingtimehorizon to arriveatadailyamountthatcanbesold.Thisdailyamountabletobe

soldwouldbemultipliedbythenumberofdaysinthe prescribedtimehorizon:30daysforthe

30‐day

horizon,60daysforthe90‐dayhorizon(31‐90days)and274daysforthe1‐yearhorizon

(91‐365days).Anillustrativeexamplebestexplainstheabove‐describedprocess.



Illustrativeexample(alsoincludedinAppendix2ii):

Step1:EstimateUnconstrainedSalesPerDay

InsurerAhasa$100billionportfolioofinvestment‐gradecorporatebonds,pricedatpar.

InsurerAestimatesthatitholdsapproximately5%ofoutstandingcorporatebonds.Inthe

adverseliquiditystressscenario,InsurerA’sunconstrainedliquiditystresstestingmodel

assumesthatitcansell:



TimeHorizon %Ableto

Be

Sold

SalePrice TotalSale Sales/Day

First30Days 10% 97 $9.7B $440M

31‐90Days 20% 94 $18.8B $430M

91‐365Days 50% 90 $45.0B $230M



Step2:AddMarketCapacityConstraint

Assumetheaveragedailytradingvolumeinthesecondarymarketforinvestmentgradecorporate

bondshasbeen$13.0Billionoverthepastyear.InsurerAestimatesthattradingvolumeswould

declineby40%intheadverseliquiditystressscenarioto$8.0Bperday.

SinceInsurerAis5%ofthe

market,InsurerAcanonlytrade$400Mperday($8Bx5%)withoutpayingasignificantilliquiditypremium

andimpactingtheoverallmarket.

InsurerAthenrepeatsthisprocessforeveryassetclassinitsinvestmentportfolio.



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Page23of48



TimeHorizon UnconstrainedSales/

Day

MarketCapacity

Assumption

Impact

First30Days $440M $400M ($40M)

31‐90Days $430M $400M ($30M)

91‐365Days $230M $400M $0



5.1.4EconomicVariablesforAdverseScenario

Insurers should use Annex 2i and 2iii to assist in determining cashflows, asset values and the

quantityof assetstobesoldinstressedmarkets.Forbaselinevalues,theindustryshallsubmit

year‐endspreadstotheregulatorsshortlyafteryear‐end.Theregulators

willreviewandapprove

thevaluesforuseinthetableforliquiditystresstestingpurposes.Structuredspreaddatawas

derivedfromtheJPMorganABSWeeklyAssetSpreadDatasheet.Thespreadswerescaledtoa

stressed economic environment consistent with an adverse scenario as describedby the Fed,

described above

and adopted for this stress testing. For the 2020 LST, economic conditions

experienced in March of 2020 were deemed consistent with an adverse scenario. Therefore,

structuredspreadsfromMarch2020wereusedasthebasisforthestressedspreadsassumptions

for insurers to use in their stress testing scenario for the

 30‐day, 90‐day and 1‐year horizons.

Note, to calculate structured spreads for CLO/CDO 5.5‐7 year and ABS Auto3 year, it was

necessarytoconstructaTreasuryyieldcurvewith3‐yearand7‐yearpoints.Thesepointswere

calculatedusingastraight‐linelinearinterpolationmethod.For

the2022LST,thesameMarch

2020structuredspreadsweredeemedappropriateforuse.

Regulators ask industry members to agree on one set of structured spread values amongst

themselves to submit for approval, not each insurer submitting values that each need to be

approved. Regulators and/or the NAIC need to do a reasonableness check of current

baseline/market levels of spreads insurers use before applying the stressed amounts in the

JPMorgan spreadsheet. For example, if current spreads are already greater than the JPMorgan

stressed spread amounts, regulators may have to consider alternatives or additional stressed levels.

One agreed upon set of values will help provide uniformity, consistency, and comparability of

stress testing results across insurers.



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

When utilizing these spreads, insurers should assume the percentage increase in spreads

experienced in March 2020 from the JPMorgan ABSWeeklyAssetSpreadDatasheet; and apply

the absolute increase to the agreed upon December 31 baseline spreads. These tables are provided

in Annex 2i, B.

Since the reasonableness check is merely a check of current market rates, it is not anticipated that

it will be burdensome for insurers to provide an agreed upon set of December 31 baseline values

to regulators by January 31 of each year or for the regulators to be able to respond by February 28

of every year to allow insurers sufficient time to incorporate into their stress testing framework.

Baseline amounts are included in Annex 2i, B.

For the 2022 LST – NAIC values are to be established as Lead State guidance in early 2023 after

the 2022 LST Framework has been adopted. These NAIC values will be established using the

industry developed process.



5.1.5SWAPSpreads

Stressedspreadlevelsmayimpactassetspricesforexpectedsalescalculationsnecessaryforthe

stress scenarios. Insurers should complete the SWAP Spread table in Annex 2iv to document

assumptionsusedindeterminingassetvaluesandthe

quantityofassetstobesoldinstressed

markets.SWAPspreadsourcedataisnolongerprovidedintheFederalReserve’sH.15FREDdata. 

UseofBloombergSwapSpreadsispreferred–ifoptionsexistwithinBloomberg, identifywhich

option was used. If a different source from Bloomberg is used,

then identify the source and

option.

5.1.6SwaptionVolatility

InsurersshouldusethetableinAnnex2vtoassistindeterminingassetvaluesandthequantity

ofassetstobesoldinstressedmarkets.Insurersshouldobtaintheinformationtopopulatethe

tableusingBloomberg’sSwaptionVolatilityforvarioustimehorizonsandexpiry.Forconsistency,

insurersshouldusethetablefoundonBloombergatNSV[Go].

Commented [ST1]: TobeupdatedasLeadStateGuidance

inearly2023.



Page25of48



5.1.7Moody’sTransitionMatrix/MigrationRates

InsurersshouldusethetableinAnnex2vitoassistindeterminingcorporatecreditmigrations,

assetvaluesandthequantityofassetstobesoldinstressedmarkets.Thetableisimportedfrom

Moody’s Corporate‐Global: Annual default study, Exhibit 36‐Average one‐year alphanumeric

ratingmigrationrates,1983‐2021.Ifavailable,insurersshouldusetheequivalentMoody’stables

forU.S.PublicFinanceformunicipalbondsand the appropriateMoody’stablesfor structured

/asset‐backedsecurities.Alternativesourcesmaybeusedbutshouldbedisclosedaswellasthe

rationalefortheiruse.

5.1.8Moody’sDefaultTable

InsurersshouldusethetableinAnnex2viitoassistindeterminingasset

valuesandthequantity

ofassetstobesoldinstressedmarkets.ThetableisimportedfromMoody’sCorporate‐Global:

Annual default study, Exhibit 41‐Averagecumulativeissuer‐weighted global default rates by

letter rating, 1983‐2021. Insurers should use the equivalent Moody’s tables for U.S. Public

Financefor municipal bonds andthe appropriateMoody’stablesfor structured /asset‐backed

securities.Alternativesourcesmaybeusedbutshoulddisclosedaswellastherationalefortheir

use.

5.1.9Moody’sRecoveryRateTable

InsurersshouldusethetableinAnnex2viiitoassistindeterminingassetvaluesandthe

quantity

ofassetstobesoldinstressedmarkets.ThetableisimportedfromMoody’sCorporate‐Global:

Annualdefault study,Exhibit8‐Averagecorporatedebtrecoveryratesmeasuredby ultimate

recoveries,1987‐2021.InsurersshouldusetheequivalentMoody’stablesforU.S.PublicFinance

formunicipalbondsandtheappropriateMoody’stablesforstructured/asset‐backedsecurities.

Alternativesourcesmaybeusedbutshoulddisclosedaswellastherationalefortheiruse.

If relevant for a given insurer, the adverse liquidity stress scenario for insurers can be run

consideringsourcesotherthanexpectedasset

sales(e.g.,FHLBcreditlinedraws,banklinesof

credit and holding company contributions). Should that be the case, the insurer must clearly

identifythesourcesotherthanassetsalesutilizedtomeetexpectedliquiditydeficiencies.

Commented [ST2]: TobeupdatedasLeadStateGuidance

inearly2023.

Commented [ST3]: TobeupdatedasLeadStateGuidance

inearly2023.

Commented [ST4]: TobeupdatedasLeadStateGuidance

inearly2023.



Page26of48



5.1.10“WhatIf”Modification

The“Whatif”modificationtotheadverseliquiditystressscenarioremovestheabilityforinsurers

touseextraordinaryinternalandexternalfundingsourcestosatisfyanyliquiditydeficiencyunder

stress,i.e.,noactionstakeninresponsetothestress(asopposedtoongoingoperationalfunding

agreementsincluded

intheinsurer’sbaselinetemplates)orinresponsetoaliquiditydeficiency.

Intragroup “keep well” agreements would be considered extraordinary transactions. Thus,

expectedassetsaleswillbetheprimarysourceofmeetinganyliquiditydeficiencyforthe“What

if”scenario.Anyexistingfundingsuchascommercialpaperwillnotbe

assumedtoroll,norwill

FHLBfacilitiesabilitytorolluponmaturity.

5.1.11Company‐SpecificAssumptions

Insurers must construct the assumptions needed for their internal models to run the above

adverseliquiditystressscenarioforinsurers.Companyspecificassumptionsshouldbeconsistent

withtheabovescenarioasnarrativeandregulatorprescribed

assumptions.Examplesincludethe

inability to roll or issue new debt, potential increases in lapse rates, new business sensitivity,

mortalityexperienceandpolicyholderbehavior(e.g.,surrendersandpolicyloans).

5.2InterestRateSpikeScenario

5.2.1Narrative

Insurers should run an interest rate spike stress test that resembles the late 70’s/early 80’s

inflationaryperiodasitmostcloselymirrorstheregulatorydesiredinterestratespikescenario.

Historicaldatafromthelate70’s/early80’sshowthefollowingeconomicconditions:

 Inflationary forces caused interest rates to rise quickly.

 Investors rotated out of fixed income and into equities, real estate, and commodities.

 Central bank responded by tightening monetary policy in tandem, eventually causing the

yield curve to invert.

Insurers

should provide a detailed narrative outlining their scenario and assumptions around

generaleconomicconditionsbulletedaboveandspecificassumptionsforeconomicvariablesfor

each time horizon. The economic variables in the table below and the amount of expected



Page27of48



movementineachvariableshouldbefullydescribedinthenarrativetotheextentareusedina

company’sinternalmodel.Thetableoutlinesthedirectionalmovementof therelevanteconomic

indicators.Insurersshouldspecifytheamountofmovementforeachvariabletheyconsiderto

be part of the scenario for

 a severe interest rate spike. For example, insurers may indicate a

parallelshiftinTreasuryratesup100bpsinthefirst30days,up200bpsin90daysand300bps

over12months.Thetableisaguideandnottobeinterpretedasastricttemplateandmaybe

supplemented or customized by the insurer.Narrative/Explanatory disclosures should explain

theseassumptions.

5.2.2Regulator‐PrescribedAssumptions

Regulatorsdidnotadoptanyregulator‐prescribedassumptionvaluesforthisstressscenario.

Instead,theyprovidedthebelowregulatorguidanceforinsurerstousewhenestablishingtheir

owncompanyspecificassumptionsforthisstressscenario.



EconomicVariable ExpectedMovement Comments

Treasuryrates Increaserapidly Criticalfactorsformodelingimpactsto

assetprices,collateralflows,and

productcashflows

Equityprices Increaserapidly

Creditspreads Increasemoderately

Inflationrates Increaserapidly Thesefactorshelpdefinethe

macroeconomicconditionsofthe

scenario

RealGDPgrowth Flat

hesefactorshelpdefinethe

macroeconomicconditionsofthe

cenario



Unemploymentrate Flat

Realestateprices Increase

Swapspreads Increase Impactderivativecollateral

requirements

FXrates Unclear

Impliedvolatility Increase

Creditassumptions

(transition,default,recovery

rates)

Unclear Maynotbeanimportantassumptionto

defineforthescenario



5.2.3Company‐SpecificAssumptions

Insurersmustconstructtheassumptionsneededfortheirinternalmodelstoruntheabovestress

scenario. Companiesareencouragedto provide more information beyond these guidelinesas

they feel is appropriate to help regulators understand their assumptions for the scenario.



Page28of48



Company specific assumptions should be consistent with the stress scenario’s narrative and

regulator prescribed assumptions. Based on the 2022 significant increases to inflation and

interest rates, insurers should consider increasing the 2021 values for use in the 2022 LST to

ensurea“severeinterestratespike.”



5.3InsurerSpecificInformation

Request‐Worst‐CaseScenario

5.3.1Narrative

Thisinformationrequestrequiresinsurerstoprovide adetailednarrativeof their most severe

liquidity stress scenario(s) to obtain greater insight to the drivers of liquidity risk for specific

insurers.Themostseverescenarioshouldbeonethatresultsinthelargestliquiditydeficiency

(liquidity sources less uses) from

 their existing internal liquidity stress testing process. The

scenarioshouldbefocusedontheinsurer’sinternalmodelscenariowiththeworst‐caseoutcome

forthegroup.Regulatorsmayusethisinformationtoinformfutureprescribedstressscenarios.

Insurers should provide a comprehensive narrative describing the stress scenario(s) and the

economic

environment(s).Thisstressscenario(s)could beacombination of multiplestressor s.

Insurersshouldreviewthesescenariostoensuretheyareworstcasefortheirbusinessmodel,

products,etc.,particularlyifnoliquiditydeficienciesareidentified.



Section6.AvailableandExpecte dAssetSales

Oncethe stressedsourcesand uses of liquidityhave beenestablished,andthe net cash flows

calculated, insurers then project the assets available at the end of the time horizon by asset

category(pleaserefertotheassetcategoriesintheAssetsTemplateinSection7).Thevaluation

of available assets

 for the baseline scenario utilizes current and projected asset values for a

normal operating environment. The valuation of available assets for a stress scenario will be

baseduponfairvaluehaircutsperthespecificstressscenarionarrative,itsregulatoryprescribed

assumptions,and/orthecompanyassumptionsbasedonthenarrativeand

regulatoryprescribed

assumptions (e.g., fair market value haircuts and capacity indicators). Note: Any securities

pledged as part of institutional funding agreements (e.g., FHLB) should be excluded and



Page29of48



consideredencumbered.However,anypre‐pledgedassetsthatarenotsecuringcreditthathas

beenextendedandremainsoutstanding(i.e.,excess)shouldbeconsideredunencumbered.

Totheextentthatstressedcashinflowsareinsufficienttomeettheanticipatedcashoutflows,

the insurer must provide for cash flows to meet the deficiency.

 Unless a stress scenario (or

“What‐if”modificationofastressscenario)indicatesotherwise,theinsurercanutilizeinternal

andexternal fundingsources(e.g.,FHLB newdraws)aswellasassetsalestosatisfyaliquidity

deficiency. Any expected asset sales must be reported in the appropriate column(s) of the

template.Insurersdecidewhichcategoriesofavailableassetstosell,aswellasthequantityto

sell.(PleaserefertotheAssetsTemplateinSection7.)

Asset sales will appear in two different places‐1) within the liquidity sources template for

expected/plannedactivityduringthetimehorizon(pre‐liquiditydeficiencycalculation),

and2)in

theassetstemplateforanyamountofassetsalesusedtomeetaliquiditydeficiency(Liquidity

SourceslessLiquidityUses).Ifaninsurerhasnoliquiditydeficiency,thentherearenoassetsales

neededintheAssetsTemplate(thoughavailableassetsstillapply).Similarly,ifcashon

handwas

sufficienttomeettheliquiditydeficiencyandtheinsurerchosetoutilizethatcash,thennoasset

saleswouldbereportedintheAssetstemplate.

Theexpectedassetsalesamountscalculatedbasedontheinsurer’sownmodelsshouldalsobe

subjected toportfoliomanagerand/or ChiefInvestment Officer (CIO)

feedback.This feedback

maytaketheformof“topside”adjustmentstotheexpectedassetsales.Regulatorsexpectrobust

disclosuresaround thechief investmentofficer’s(orequivalent title or designee)assumptions

and decisions on expected asset sales. The intent is for these asset sales to most accurately

represent what actions the

insurer could reasonably take in the given scenario, market

conditions,andthecompany’santicipatedinvestmentpolicyand/orstrategy.



Section7.Reporting

Insurers should submit datain the reporti ng  template for liquidity sources, liquidity uses, and

assets(availableassetsandexpectedassetsales)inUSdollars.Thesetemplatesutilizecategories

for 30‐day, 90‐day and 1‐year time horizons. The assets template further illustrates available



Page30of48



assets and final expected asset sales by asset sub‐category to cover any liquidity deficiency

(negativeamountsofnetliquiditysourceslessliquidityusesover theprescribedtimehorizons).

Useoftheseconsistentsub‐categoriesofassetsiscriticalforallowingtheTaskForcetoaggregate

theassetsalesresults.







Page31of48



LiquiditySourcesandLiquidityUsesTemplates:

Aliquiditysources reportandaliquidityusesreportshould be generated for each legal entity

withinthegroupthatwassubjectedtoliquiditystresstesting,usingtheNAICtemplates.These

legalentityamountsshouldalsobeaggregatedintoagroupliquiditysourcesreportand

agroup

liquidity uses report for submission (the LST is not performed at the group level; rather it is

performed at the legal entity level and those results are aggregated to present a group level

report).

 FortheBaseline,theAdverseLiquiditystressscenario,andtheInterestRateSpike

stress

scenario,LiquiditySourcesandLiquidityUsestemplatesatboththeindividualentitylevel

andtheaggregatedgrouplevelaretobesubmitted.

 Forthe“WhatIf”VariationoftheAdverseLiquiditystressscenario,agrouplevelLiquidity

Sourcestemplateand/oragrouplevelLiquidityUsestemplateisonlyrequired

ifthereis

a material difference from the Adverse Liquidity stress scenario’s group level Liquidity

SourcesandLiquidityUsestemplates.



AssetsTemplate:

AswiththeLiquidityUsesandLiquiditySourcestemplates,theAssetstemplateistobegenerated

for each legal entity performing the LST. For the 2022 LST, the

 insurer may submit the assets

templateatthegrouplevelonly,withoutsubmissionofthelegalentityassetsalestemplates.

 A group level assets template is required for the Baseline and all stress scenarios,

includingthe“WhatIf”variationoftheAdverseLiquiditystressscenario.



ModificationofTemplates:

Insurers

areallowedtoaddlinestothetemplatestoprovidemoredetailedbreakdownofexisting

categories(e.g.,forcashflowsto/fromlegalentityassetmanager/mutualfundsaswellasbanks),

butdeletionsofexistinglines/categoriesarehighlydiscouraged.

SubmissionDeadline:

Thereportingtemplatesandmanyothernarrativedisclosuresreferencedin

thisdocumentare

tobesubmittedtotheLeadStatebyJune30,2023.



Page32of48



Section8.Templates



8.1LiquiditySourcesTemplate



Note 1: Certain flows could be settled in securities (e.g., margins on  derivatives, capital contributions/dividends,

etc.).SeethemorespecificSecurityCollateralguidancewithintheExceltemplates.

Note2: AssetSales(pendingsettlement)shouldincludetradesexecutedpriortothereportingdatewithaknown

settlementdateafterthereporting

date(forexample12/30tradedateand01/03settledate).

Note3: AssetCommitmentsshouldincludeanticipatedcashflowsrelatedtosettlementofafutureobligationto

acounterpartytotheextent,andintheamount,appropriateforthespecificstressscenarioandeconomic

assumptions.Examplescouldinclude capitalcallsfor

 alternativeinvestments,mortgageloan fundings,

etc.,andshouldincludeeachcompany’sbestestimateastowhattheywouldexpecttofundundereach

scenario.Ifthesecommitmentshavebeenexplicitlyprefunded/collateralizedbyhighlyliquidassets,asset

commitments should be reported on a net basis, including proceeds from the sale of

the highly liquid

assetsinanamountconsistentwiththespecificstressscenarioandeconomicassumptions.Thislineitem

may includesomepercentage amountofcommitments to fund privateplacement revolvers consistent

withthespecificstressscenarioandeconomicassumptions,butrevolversandlinesofcreditthemselves

shouldbecapturedin

thecreditfacilitieslineintheSourcesFundingsection.



CashFlow CFType CFCategory 1Month 3Month 1 2 Month 1Month 3Month 12Month

PremiumsandDeposits(Renewal/NewBusiness) ‐ ‐ ‐ ‐ ‐ ‐

CashCharges/Fees ‐ ‐ ‐ ‐ ‐ ‐

ReinsuranceRecoverables ‐ ‐ ‐ ‐ ‐ ‐

Expenses–IntercompanySettlements ‐ ‐ ‐ ‐ ‐ ‐

TaxPayments(Inflows) ‐ ‐ ‐ ‐ ‐ ‐

OtherFlows ‐ ‐ ‐ ‐ ‐ ‐

‐ ‐

 ‐ ‐ ‐ ‐

PrincipalandInterest ‐ ‐ ‐ ‐ ‐ ‐

Dividends/Distributions ‐ ‐ ‐ ‐ ‐ ‐

InitialandVariationMargi nReceived ‐ ‐ ‐ ‐ ‐ ‐

OtherCollateralReceived ‐ ‐ ‐ ‐ ‐ ‐

AssetSales(PendingSettlement) ‐ ‐ ‐ ‐ ‐ ‐

‐ ‐ ‐ ‐ ‐ ‐

CapitalContributions ‐ ‐ ‐ ‐ ‐ ‐

Commitments ‐ ‐

DividendsfromSubsidiaries ‐ ‐ ‐ ‐ ‐ ‐

DebtIssuance/Refinancing ‐ ‐ ‐ ‐ ‐ ‐

GICs ‐ ‐ ‐ ‐ ‐ ‐

FHLB ‐ ‐ ‐ ‐ ‐ ‐

Repo/SecuritiesLending ‐ ‐ ‐ ‐ ‐ ‐

CreditFacilities(Incl.ContingencyFundingFacilities) ‐ ‐ ‐ ‐ ‐ ‐

IntercompanyLoans ‐ ‐

CommercialPaper ‐ ‐ ‐ ‐ ‐ ‐

GroupSummary

Sources Operating

InvestmentandDerivatives

Capital

Funding

TotalSources(beforeAssetSales)

LegalEntity1

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Page33of48

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8.2LiquidityUsesTemplate

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Note1: Certainflowscouldbesettledinsecurities(e.g.,marginsonderivatives,capitalcontributions/dividends,

etc.).SeethemorespecificSecurityCollateralguidancewithintheExceltemplates.

Note2: AssetPurchases(pendingsettlement)shouldincludetrades executedprior tothereportingdatewitha

knownsettlementdateafterthereportingdate

(forexample12/30tradedateand01/03settledate).

Note3: AssetCommitmentsshouldincludeanticipatedcashflowsrelatedtosettlementofafutureobligationto

acounterpartytotheextent,andintheamount,appropriateforthespecificstressscenarioandeconomic

assumptions.Examplescouldinclude capitalcallsfor

alternativeinvestments, mortgageloan fundings,

etc.,andshouldincludeeachcompany’sbestestimateastowhattheywouldexpecttofundundereach

scenario.Ifthesecommitmentshavebeenexplicitlyprefunded/collateralizedbyhighlyliquidassets,asset

commitments should be reported on a net basis, including proceeds from the sale of the

 highly liquid

assetsinanamountconsistentwiththespecificstressscenarioandeconomicassumptions.Thislineitem

may includesomepercentage amountofcommitments to fund privateplacement revolvers consistent

withthespecificstressscenarioandeconomicassumptions,butrevolversandlinesofcreditthemselves

shouldbecapturedin

thecreditfacilitieslineintheSourcesFundingsection.

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CashFlow CFType CFCategory 1Month 3Month 1 2 Month 1Month 3Month 12Month

Non‐ElectiveBenefits/Claims ‐ ‐ ‐ ‐ ‐ ‐

ElectiveBenefits/Claims ‐ ‐ ‐ ‐ ‐ ‐

Commissions ‐ ‐ ‐ ‐ ‐ ‐

ReinsurancePayables ‐ ‐ ‐ ‐ ‐ ‐

Expenses‐Other ‐ ‐ ‐ ‐ ‐ ‐

Expenses‐IntercompanySettlements ‐ ‐ ‐ ‐ ‐ ‐

InsuranceProductCommitments ‐ ‐ ‐ ‐ ‐ ‐

TaxPayments(Outflows) ‐ ‐ ‐ ‐ ‐ ‐

AssetCommitments ‐ ‐ ‐ ‐ ‐ ‐

InitialandVariationMargi nPaid ‐ ‐ ‐ ‐ ‐ ‐

OtherCollateralPledge d ‐ ‐ ‐ ‐ ‐ ‐

AssetPurchases(Pendi ngSettlement) ‐ ‐ ‐ ‐ ‐ ‐

Shareholder/PolicyholderDividends

CapitalContributionstoSubsidiaries ‐ ‐ ‐ ‐ ‐ ‐

DividendstoParent ‐ ‐ ‐ ‐ ‐ ‐

DebtMaturities/DebtServicing ‐ ‐ ‐ ‐ ‐ ‐

GICs Benefits/Maturities ‐ ‐ ‐ ‐ ‐ ‐

Repo/SecuritiesLending ‐ ‐ ‐ ‐ ‐ ‐



IntercompanyLoans ‐ ‐ ‐ ‐ ‐ ‐

GroupSummary

Use s Operating

InvestmentandDerivatives

Capital

Funding

LegalEntity1

TotalUses

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8.3AssetsTemplate

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AssetCate gory AssetSub‐Category 1Month 3Month 12 Month

Cash Cash&CashEquivalents ‐ ‐ ‐

TreasuryBonds ‐ ‐ ‐

AgencyBonds ‐ ‐ ‐

OtherIGSove reigns&RegionalGovernment‐ ‐ ‐

BelowIGSovereigns&RegionalGovernment ‐ ‐ ‐

AgencyCM O ‐ ‐ ‐

AgencyMBS ‐ ‐ ‐

AgencyCM B S ‐ ‐ ‐

AgencyABS ‐ ‐ ‐

IGPublic

CorporateBonds ‐ ‐ ‐

IGMuni cipalBonds ‐ ‐ ‐

BelowIGPublicCorporateBonds ‐ ‐ ‐

BelowIGMunicipalBonds ‐ ‐ ‐

IGPrivatePlacementBonds ‐ ‐ ‐

IG144As ‐ ‐ ‐

BelowIGPrivatePlace mentBonds ‐ ‐ ‐

BelowIG144As ‐ ‐ ‐

IGCMO ‐ ‐ ‐

IGMBS ‐ ‐ ‐

IGCMBS ‐ ‐ ‐

IGABS ‐ ‐ ‐

IGCLO ‐ ‐ ‐

BelowIGCMO ‐ ‐ ‐

BelowIGMBS ‐ ‐ ‐

BelowIGCMBS ‐ ‐ ‐

BelowIGABS ‐ ‐ ‐

BelowIGCLO ‐ ‐ ‐

CommonStock ‐ ‐ ‐

PreferredStock ‐ ‐ ‐

OtherEquityandAlternativeInvestments ‐ ‐ ‐

Commercial,Residential,Agricultural,BankandOtherLoans ‐ ‐

 ‐

Other ‐ ‐ ‐

‐

‐ ‐

PublicBonds

PrivateBonds

Non‐AgencyStructuredDebt

Equity

Other

TotalInvestedAssetsAvailableforSale

GroupSummary

GovernmentSecurities

CashandInvestedAssetsAvailableforSale

Scenario Summary

AsofDate

1Month 3Month 12Month 1Month 3Month 12Month

TotalSources(beforeAssetSales) ‐ ‐ ‐ ‐ ‐ ‐

TotalUses ‐ ‐ ‐ ‐ ‐ ‐

NetSources&Uses(DeficitbeforeAssetSales) ‐ ‐ ‐ ‐ ‐ ‐

TotalInvestedAsse t sAvailableforSale ‐ ‐ ‐ ‐ ‐ ‐

Cashappliedtodeficit ‐ ‐ ‐ ‐ ‐ ‐

Deficit

Sub‐total ‐ ‐ ‐  ‐ ‐ ‐

TotalAssetsSold‐ ‐ ‐ ‐ ‐ ‐

Deficitsatisfiedifzeroorgreater ‐ ‐ ‐ ‐ ‐ ‐

Confidential‐‐ForDiscussionPurposesOnly,DoNotDistribute

GroupSummary LegalEntity1

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Page35of48

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Note1:Insurerswillenter“Illiquid”inadatafieldforanyassetcategorydeemedsuchwithinaspecifictimehorizon.

(Regulatorscanthenfollowupwithquestionslaterifthereareconcerns,etc.)

Note 2: Any securities pledged as part of institutional funding agreements (e.g., FHLB) should be excluded

and

consideredencumbered.However,anypre‐pledgedassetsthatarenotsecuringcreditthathasbeenextendedand

remainsoutstanding(i.e.,excess)shouldbeconsideredunencumbered.

Note3:Reminderthatregulatorswantrobustdisclosuresregardingthechiefinvestmentofficer’s(orequivalenttitle

ordesignee)assumptionsanddecisionsonexpectedassetsales.

Mightneedtosupplementthetemplatecomments

withadditionalnarrativedisclosures.

Note4:Excludingthe“WhatIf”variation,insurersaretoprovidedisclosuresindicatingwhenaffiliatedamountsare

providedtoassistalegalentityinaddressingaliquiditydeficiency.

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AssetCate gory AssetSub‐Category 1Month 3Month 12 Month

Cash Cash&CashEquival ents ‐ ‐ ‐