Since the COVID-19 crisis escalated in early 2020, we have spoken with a number of insurers looking to reduce their regulatory capital requirement as a way to navigate a possible economic recession. For many of these insurers, common sense leads them to considering larger allocations to cash in their portfolios as an obvious way to reduce investment risk and minimise the use of regulatory capital.
However, despite the obvious logic, increasing your allocation to cash does not always deliver the expected outcome. Although cash is a “safe” asset from an investment perspective, it comes with counter-party risk from a regulatory perspective (i.e. risk that the institution holding the cash goes bust). As such, the regulatory capital charges associated with holding cash completely depends on how you are holding that cash and the counterparty risk of the institution where the cash is held.
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