Liquidity Premiums and contingent liabilities
Last updated 15th July 2010 - This note explores how market-consistent liability valuation methodology can be adjusted to allow for liquidity premiums, and the implications this has for the behavious of the valuation of different types of liabilities.
Liquidity premium has recently emerged from relative obscurity to become a major issue in financial reporting (MCEV) and regulatory assessment(Solvency II) in European insurance. This note explores the three-stage process of incorporating an allowance for liquidity premiums into the market-consistent valuation of insurance liabilities.