A Simple Proxy for Liquidity Premium
Document ID: 2009-1719
Published on: 15th December 2009
Author: Jamie Stark
The estimation and uses of the liquidity premium in insurance company valuation and reporting have been much discussed and analysed over the last six months. In October the CFO Forum revised its MCEV principles to allow for the inclusion of the liquidity premium. And while CEIOPS doesn’t exactly open the door for such an inclusion for valuation purposes under Solvency II, recent advice does at least leave it ajar.
Given the material impact of the liquidity premium on the solvency position/reported financials of an insurer, this begs the obvious question - can we make a good estimate of liquidity premium and can we find a proxy that is easy to calculate? In this note, we examine these and other questions.
