Liquidity Management in Life Insurance Company- Nepal

Submitted By:

Raushan Babu Kushwaha

P.U. Regd. No: 2021-2-03-2510

P.U. Roll No: 21031934

Excel Business College

Submitted To:

Faculty of Management

Pokhara University

A project Work Report Submitted to Pokhara University in partial fulfillment of the

requirements for the degree of

Bachelor of Business Administration (BBA)

Kathmandu, Nepal

July, 2024
 DECLARATION

This Project Report entitled “Liquidity Management in Life Insurance Company

in Nepal” submitted by me, is in partial fulfillment of the requirement for the award
of BBA degree of Pokhara University. This report is the result of my original work
and it has not been previously submitted to any other university or any other
examination(s).

Signature ……………………….

Name: Raushan Babu Kushwaha

BBA (Batch): 2021

P.U. Regd. No: 2021-2-03-2510

PU Exam Roll Number: 21031934

Excel Business College

ii
 BONAFIDE CERTIFICATE

This is to certify that this report entitled “Liquidity Management in Life Insurance
Company in Nepal” is the Bonafide work of Raushan Babu Kushwaha who carried
out the Project Report under my supervision. This report is forwarded for
examination.

………………………………….

Supervisor

Name: Saroj Khanal

Excel Business College

………………………………….

Program Director

Name: Khagendra Singh Samant

Excel Business College

………………………………..

Name:

External Examiner

iii
 ACKNOWLEDGEMENT

It gives me tremendous pleasure in acknowledging the valuable assistance extended

towards me by various personalities in the successful completion of this research.

First of all, I would like to express my gratitude to Saroj Khanal (Supervisor) for
entrusting me to conduct the project work. I would like to express my gratitude
towards him for providing me with his valuable guidelines, comments, and
suggestions which have given me great help while preparing this report.

I am grateful to Pokhara University and my college Excel Business College for

providing me the opportunity to experience this type of practical and necessary work
which will be very beneficial in my future career.

I would also like to take this opportunity to thank all those who have directly or
indirectly helped me in the preparation of this research report.

Sincerely

Raushan Babu Kushwaha

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 EXECUTIVE SUMMARY

Liquidity is the ability to meet expected and unexpected demands for cash.
Specifically, it is a company’s ability to meet the cash demands of its policy and
contract holders without suffering any loss. The liquidity profile of a company is a
function of both its assets and liabilities. Liquidity risk is inherent in the financial
services industry and one must measure, monitor and manage this risk.

There are different levels of liquidity management. There is day-to-day cash

management, which is commonly a treasury function within a company. There is
ongoing cash flow management, which typically monitors cash needs for the next six
to twenty-four months. The third category of liquidity management addresses the
stress liquidity risk, which is focused on the catastrophic risk.

According to the Board, insurance coverage has reached about 38.26 percent in the
fiscal year 2078/79. Including the foreign employment term life insurance policies,
the access to insurance has reached 41.20 percent.

Low insurance penetration is one of the greatest issues facing Nepal's insurance
sector. In Nepal, Insurance penetration was only 1.69% in 2020, compared to a global
average of 7.23%, according to a report by the Insurance board.

The purpose of this paper is to examine the liquidity management in life insurance
Company in Nepal. In this paper, the reasons for differences in the insurance practices
of the related companies, the problems in the insurance sector of Nepal have been
studied and mentioned. The possible actions and solutions that can be taken to
develop the insurance sector have also been mentioned in this paper.

Liquidity is the ability to meet expected and unexpected demands for cash.
Specifically,it is a company’s ability to meet the cash demands of its policy and
contract holders without suffering any (or a very minimal) loss. The liquidity profile
of a company is a function of both its assets and liabilities. Liquidity risk is inherent
in the financial services industry and one must understand, measure, monitor and
manage this risk. There are different levels of liquidity management. There is day-to-
day cash management, which is commonly a treasury function within a company.
There is ongoing cash flow management, which typically monitors cash needs for the
next six to twenty-four months. The third category of liquidity management addresses

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the stress liquidity risk, which is focused on the catastrophic risk. It is important to
recognize that stress liquidity risk management is district from asset/liability
management and capital management issues. It is therefore not generally covered by
actuarial opinions and is not included in risk based capital; rather, it is a separate and
fundamental area of financial risk management. This report briefly covers all three
types of liquidity management, but focuses primarily on stress liquidity risk. It
identifies some embedded liquidity options and sources of liquidity, and it offers
some suggestions regarding management and measurement of liquidity risk. It is
meant to serve as an educational tool for actuaries and regulators considering liquidity
risk and not an Actuarial Standard of Practice

vi
 TABLE OF CONTENTS
DECLARATION......................................................................................................................ii

BONAFIDE CERTIFICATE.................................................................................................iii

ACKNOWLEDGEMENT......................................................................................................iv

EXECUTIVE SUMMARY......................................................................................................v

LIST OF TABLE.....................................................................................................................ix

LIST OF FIGURES..................................................................................................................x

LIST OF ABBREVIATIONS.................................................................................................xi

CHAPTER-1.............................................................................................................................1

INTRODUCTION....................................................................................................................1

1.1 Background of the Study..................................................................................................1

1.1.1 Liquidity Management...................................................................................................2

1.1.2 Demands on Liquid Resources......................................................................................2

1.1.3 Sources of Liquidity......................................................................................................5

1.2 Literature Review...........................................................................................................11

1.3 Objectives of the Project Work.......................................................................................12

1.4 Limitation of the Study...................................................................................................13

1.5 Conceptual Framework...................................................................................................13

1.6 Research Methods...........................................................................................................15

1.6.1 Data Collection Techniques.........................................................................................16

1.6.2 Techniques of Data Analysis.......................................................................................16

CHAPTER-2...........................................................................................................................18

DATA ANALYSIS AND MAJOR FINDING......................................................................18

2.1 Data Presentation and Analysis......................................................................................18

2.2.1 Trend and Structure.....................................................................................................18

2.2.2 Descriptive Statistics...................................................................................................18

2.2.3 Correlation analysis.....................................................................................................19

2.2.4 Regression analysis......................................................................................................19

2.3 Major Findings and Discussion......................................................................................19

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 2.4 Return on Equity (ROE).................................................................................................21

2.5 Current Ratio (CR).........................................................................................................22

2.6 Leverage Ratio (LR).......................................................................................................23

2.7 Ratio of Premium to Total Loans...................................................................................24

2.8 Ratio of Premium to Total Assets...................................................................................26

CHAPTER-3...........................................................................................................................27

SUMMARY AND CONCLUSION.......................................................................................27

3.1 SUMMARY....................................................................................................................27

3.2 CONCLUSION...............................................................................................................29

REFERENCES

APPENDICES

viii
 LIST OF TABLE

Table 2.1 Analysis of ROE…………………………………………………….21

Table 2.2 Analysis of CR………………………………………………………22
Table 2.3 Analysis of LR…………………………………...………………….24
Table 2.4 Analysis of ratio of premium to Total Loan…………………………25
Table 2.5 Analysis of ratio of Premium to Total Assets………..………..…….26

ix
 LIST OF FIGURES

Figure 1.1: Conceptual framework……………………………………………….13

Figure 2.1: Analysis of ROE……………………………………………………..22
Figure 2.2: Analysis of Current Ratio (CR)……………………...………………23
Figure 2.3: Analysis of Leverage Ratio (LR)…………………………………….24
Figure 2.4: Analysis of Ratio of Premium to Total Loans……………………….25
Figure 2.5: Analysis of Ration Premium to Total Assets………………………...26

x
 LIST OF ABBREVIATIONS

BBA Bachelor of Business Administration

PU Pokhara University

EBC Excel Business College

ROA Return on Assets

ROE Return on Equity

CA Current Assets

CR Current Liabilities

LR Liquidity Ratio

LR Leverage Ratio

BU Business Unit

CLIL Citizen Life Insurance Limited

PLICL Prabhu Life Insurance Company Limited

SLICL Sun Life Insurance Company Limited

ILICL IME Life Insurance Company Limited

FY Fiscal Year

ALM Asset-liability management

Pvt. Private

Ltd. Limited

& And

TA Total Assets

TE Total Equity

IB Insurance Board

CBS Central Bureau of Statistics

MoF Ministry of Finance

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 CHAPTER-1

INTRODUCTION

1.1 Background of the Study

Liquidity management within the life insurance industry has long since flown under
the radar of executive management and regulators alike. This is primarily due to the
large quantity of liquid assets traditionally held on life insurers' balance sheets,
combined with the long-dated nature of underlying liabilities. In the last 10 years,
however, several factors have led to an increase in the liquidity risk profile of
insurers. Based on the recommendations in the draft guidance note, life insurers will
need to develop and enhance their liquidity risk management capabilities. In doing so,
a decision may be taken to implement measures to meet minimum regulatory
requirements or, alternatively, to build a "best in practice" capability, depending on
the insurer's longer-term objectives. Successful implementation of such a capability
will increase resilience to withstand a crisis event. It will also unlock a value
generating opportunity for the benefit of both policyholders and shareholders, through
the monetization of excess liquidity on the balance sheet.

The process of industrialization in Nepal started after establishment of Udyog

Parishad in 1935 and promulgation of Company Act, 1936. Subsequently, the Gharelu
Ilam Prachar Adda (Office for the Promotion of Cottage Skills) was also established
in the same period. As a result more than one dozen industries were established
during the 1940s with joint efforts of Nepalese and Indian industrialists. During this
period, demand of insurance was fulfilled by Indian life and non-life insurance
companies. Modern history of insurance in Nepal started from 1947 after the
establishment of Nepal Transportation and Insurance Company by 100 percent
domestic capital (Insurance Board, 2012). The history of the Nepalese insurance
industry is almost seven decades old. During the period, only two insurance Acts were
implemented. On the basis of insurance related Act, the history of insurance in Nepal
has been divided in three phases:

i) Pre regulation period which covers to period till 1967,

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ii) Insurance Committee period which starts from 1968 and ends by 1991, and
iii) Insurance Board period which starts from 1992.

1.1.1 Liquidity Management

An insurer's overall approach to managing liquidity is to be set out in a liquidity
management strategy. This is expected to cover the insurer's day-to-day and longer-
term management of liquidity risk. A crucial component of the strategy is the
definition of a Liquidity Contingency Plan, outlining the decision-making process and
range of actions that could be taken in response to a liquidity stress event. Clear
escalation and prioritization procedures must be set out, detailing when and how each
of the actions can and should be activated, with roles and responsibilities assigned to
key decision-makers.

First line management activity is to be overseen by independent second- and third-line

risk functions, responsible for defining liquidity policies, risk appetite and risk
policies covering identification, measurement, management, monitoring and reporting
across the full value chain.

1.1.2 Demands on Liquid Resources

Liquidity Risk may be defined as the risk that a firm, though solvent, either does not
have sufficient financial resources available to enable it to meet its obligations as they
fall due, or can secure them only at excessive cost. The financial commitments of life
insurers are typically long term, and generally assets held to back these would be
long-term and may not be liquid. If liquid resources are not already available to meet
a financial commitment as it falls due, liquid funds will need to be borrowed and/or
illiquid assets sold in order to meet the commitment. Losses would arise from the
interest on borrowings and from any discount that would need to be offered to realize
assets. In the worst case scenario, a life insurer may not be able to meet its
commitments.

● Liquidity risk from other policy related outflow

Maturities, deaths, disability and annuity claim outgo can be reasonably
estimated and liquidity can be arranged to meet this expected outgo (though
death and disability can still be a source of residual liquidity risk). Similarly
many with-profits bonds and linked policies have the option to take regular
withdrawals, and while these are discretionary, they can be readily estimated.

2
 As well as claims there are expenses and commission which can also be
modeled relatively easily. Commission will vary with new business volumes,
but new business plans can give a good indication of likely levels, and in any
case, such payments are typically linked to the payment of premium which
will offset the outflow, with amounts clawed back when these cease within a
specified period.
Other sources of policy related outflow include refunds of premiums within
cooling off periods; policy loans advanced and redress payments, though
redress is often by enhancement of policy value. It is worth noting that past
practice in the US was for policies to offer loans at pre-determined rates of
interest. This led to some severe liquidity problems when interest rates fell and
the option to take out a loan on the policy became valuable. Such options are
usually not offered any more, but this highlights the importance of ensuring
that policy conditions do not exposure the insurer to undue liquidity risk.
Offsetting such outflows are policy related inflows, principally premiums but
also interest/repayments under policy loans advanced. Note however that the
policyholder has the option to cease payment and either surrender the policy or
make it paid-up, reducing premium income at the same time as discretionary
outflow increases. Reinsurance premiums are an outflow but these will be
offset by reinsurance commission and recoveries. There is a residual liquidity
risk arising from delays in payment, and reinsurer default though a credit risk
event could also have implications for liquidity.
● Investment related liquidity risks
Normal trading will give rise to outflows to pay for purchases and inflows
from sales, but property purchases will often involve a large outflow in a
single transaction and may cause temporary liquidity problems unless
sufficient liquidity is put in place beforehand. Another problematic transaction
could arise in rebalancing portfolios using futures. For example, a life
company could go short in equity futures but long in gilts. The latter, being
carried out in the cash market will result in a drain which will not be
immediately offset by the sale of underlying assets.
When dealing in derivatives, margin calls will be a source of outflow. Three
particular problems should be noted. Firstly, such calls may arise at times of
market stress, at a time when asset liquidity may be tightening, and will

3
 exacerbate market risk problems. Secondly, the timing of cash flows on a
derivative hedging an asset may be markedly different to the asset being held,
even if they are similar in all other respects.
Finally, large calls may be triggered by a credit downgrading which could
have other effects, not least on surrender volumes. For these reasons alone,
potentially significant calls should be fed into liquidity analysis which should
be integrated with market risk assessment.
Note that margin calls will not be a problem where a position is covered by
liquid assets (though such assets may not be available to meet other demands
on liquidity and care should be taken so they are not double-counted). Also it
may be possible to meet margin calls by depositing securities rather than cash,
which may mitigate this source of risk. Therefore, the collateral terms of any
derivative contract should be closely examined. Offsetting trading and margin
outflows is income received from investments including dividends, rent, bond
coupons etc. Dividend and rental income is variable and may fall in the same
circumstances in which the insurer is faced with high surrender claim outgo.
● Other outflows
Examining other possible outflows, dividend payments and loan interest are a
significant outflow arising only a few times a year, and (once a dividend has
been decided upon) sufficient liquidity should be put in place before these are
payable. Tax is paid on set dates and again, once the bill has been calculated,
liquid resources should be put in place before the dates. Other corporate
outflows may stem from the purchase of businesses or strategic stakes. These
are necessarily ad hoc outflows, but the decision to proceed should be
accompanied with the realization of liquid resources to meet any payments
due. As for derivatives, companies need to be aware of any clauses in
contracts (e.g. joint venture agreements) requiring collateral to be posted in
events such as credit downgrades, which can be a hidden source of liquidity
strain.

4
1.1.3 Sources of Liquidity
To meet any outflows, insurers will typically hold cash in the form of bank deposits,
Treasury Bills, commercial paper and other money market instruments. In addition,
the following sources of liquidity may be available:

● Asset sales
Listed bonds and equities can usually be sold quickly to raise cash, but the
price attained will depend on the type of security and the amount sold, both in
absolute terms and as a proportion of the total issue of that particular security.
Listed asset prices are usually quoted on the basis of a certain minimum and
maximum amount traded or deal size, with a market makers spread between
the bid and offer price of the asset. When selling more than the maximum deal
size, the spread will widen and a lower price will apply.
● Repo Sales
As an alternative to selling gilts, cash can be realized almost immediately on
these (and some other approved securities) through Repo operations on the
money market.
● Lines of Credit
Another source of liquidity is lines of credit from banks and similar
institutions. Banks may offer such facilities at minimal cost as part of a
broader pitch for business. However, the facility will usually be limited by
term, and it may not be possible to renew a facility in a stress situation. Often
a bank will have the right to refuse the line. Even if it doesn’t, there is a
counter party risk that a bank may refuse to honour the agreement. A line of
credit may be in place from an insurer's parent, but in examining liquidity
stress scenarios, it should be noted that the liquidity crisis may be brought
about because of problems at the parent, who may then be unable to honour
the line.
● Selling additional business:
If a company is in a severe stress situation, selling additional business is
probably not a viable option. However, if the company needs cash in less
stressful circumstances but does not want to sell assets or to borrow, an
additional sales push may be considered.

5
● Levels of Liquidity Management
Given that financial institutions are willing to accept some amount of liquidity
risk, that risk must be managed appropriately. Liquidity risk management can
be broken into three levels:
● Day-to-day cash management
This type of liquidity management involves controlling day-to-day cash flow
variability by balancing cash positions and lines of credit. It is important to
monitor short-term liquidity needs so that unforeseen events do not require
actions that may be detrimental to ongoing cash management and adequate
cash or borrowing capability is available in the event of a large, unpredicted
cash demand.
● Ongoing/intermediate term cash flow management
This type of liquidity management involves ongoing cash needs over the next
six to twenty-four months. It involves analysis of cash inflows and outflows. If
the analysis indicates a high risk of future cash needs exceeding future
available cash, this type of management would include a plan to restore
liquidity. Ongoing liquidity management tools can include restructuring or
fine-tuning the portfolio (e.g., renegotiating the terms of large liabilities or
assets), selling more or fewer of selected products, diversifying where
possible, and changing the investment strategy if needed (e.g., increasing high
quality public securities and reducing commercial mortgage acquisitions).
● Stress liquidity risk management
This type of liquidity management involves the ability of the company to meet
the demands of many policy/contract holders for cash over a short period.
Although such an event may never occur, it is essential that the cash demand
be met if it does. Good liquidity management requires a strategic management
plan, possible action plans, and ongoing analysis and monitoring at all three
levels. While the focus of this report is stress liquidity risk management, all
three levels are important and interrelated. The three levels of liquidity
management should be designed to provide required cash at the appropriate
time, while, at the same time, allowing for investment policies that maximize
returns on investments. In order to achieve the proper balance between cash
availability and maximum return, it is necessary to examine a broad range of

6
economic scenarios and stress events. Day-to-day and ongoing intermediate
term cash management plans can provide for lower levels of adversity than
stress liquidity cash management. Both day-to-day cash management and
ongoing/intermediate term cash flow management, generally involve cash
management and cash lines. While stress liquidity risk management, will
almost certainly involve liquidation. Since the stress liquidity risk is always
present, however, the cash requirements dictated by this risk will dominate
asset portfolio management policies unless contingency plans are in place..
Including payment deferral or market value adjustment provisions in policies
can also mitigate the stress liquidity risk. The appraisal of the amount of cash
required, once the triggering event has occurred, is based on the exposure to
demand. Institutional contract holders are more likely to obtain immediate
knowledge of adverse events than retail contract holders. The number of
contract holders affected by the event also affects the risk. The liquidity
profile of a company is determined by obtaining a total enterprise perspective.
The rating and financial strength (mainly the capital position) of a company
are not the only indicators of a company’s ability to meet the stress liquidity
risk, although the strength of the company may provide more time to react to
demands for liquidity caused by changes in the economic environment. A
company could have highly liquid liabilities, but if its assets are totally
invested in Treasury bonds with similar market/book characteristics to those of
the liabilities, then liquidity is not an issue. Similarly, having a portfolio of
very illiquid assets is not material if asset and liability maturities are well
matched and there are few or no instances in which clients can demand cash
before the assets mature. Liquidity risk should therefore be managed by
evaluating cash needs under possible scenarios. The goal is to ensure that cash
will be available when needed to pay benefits under any reasonably
foreseeable set of circumstances. Some companies may require less
sophisticated analysis of liquidity risk. For example, for a company with 100%
traditional whole life insurance business sold by captive agents, backed by
highly rated, publicly traded corporate bonds with laddered maturities, the
liquidity risk may be small. Other companies may need to look at a variety of
stress scenarios and company specific situations and determine what assets
could be liquidated in a timely, and cost effective, manner.

7
The Stress Liquidity Risk Management Process:

The keys to managing the stress liquidity risk are product design, portfolio strategy,
systematic monitoring, and preparedness to act. Communication and coordination
through a strong corporate oversight function are vital in a multi-line environment. It
is essential to monitor the asset/liability liquidity risk continuously and to have the
mechanisms for action (e.g., deferral rights) aligned closely with the liquidity needs
time frames. To minimize the likelihood of exercising deferral rights or selling less
liquid assets, a company should match its asset portfolio management strategy with its
product features. First, this means identifying and understanding the embedded
liquidity options in its portfolio. Second, steps must be taken to acquire appropriate
investments, set appropriate limits on the risk that the company is willing to take and
develop the means to manage the risk whenever possible. The next sections of this
report describe various embedded options and some possible risk reduction
techniques. For multi-line companies with segregated asset portfolios, there are merits
to examining the liquidity risk of each business unit (BU) before analyzing the results
for the total company. While it is the profile and strength of the total company that
matters, difficulties can occur when a particular BU is overly aggressive in managing
its assets without appropriate attention to liquidity risk or to the additional embedded
liquidity options that it may be selling. By evaluating each BU on a “stand alone”
basis, it is easier to isolate potential problems before they occur. If one BU is issuing
very liquid liabilities, the corporation may require that BU to invest in more liquid
assets than is traditional. Alternatively, once the company is aware of the liquidity
needs for each BU, it can identify synergies between product lines. Complementary
businesses can be managed together to increase yields while still managing liquidity
risk. For the BU that is issuing very liquid liabilities, it may be able to invest in less
liquid assets if another BU with less liquid liabilities invests in more liquid assets to
ensure that the combined asset portfolio supporting the combined liabilities reflects
liquidity needs of the enterprise. The company’s understanding of the liquidity risk in
all its business lines enables it to manage the whole corporation effectively within
agreed upon risk levels. Liquidity risk management at both the BU and corporate
levels requires regular monitoring of current and projected positions. Several different
analytical tools exist which can assist the company in locating potential problems
before they become real ones. These tools are described later in this document and are

8
not intended to be an exhaustive list, since some companies may issue special
products or have an investment style that merits development of a monitoring tool that
is unique to that institution. Monitoring liquidity risk without an appropriate action
plan is incomplete risk management. When the liquidity risk level is too great,
corporate management must be aware of the tools that it has available with which to
lessen the risk, and it must be willing to use them when necessary. For example, many
policies and contracts have deferral provisions (either in the documents themselves or
under statutory provisions) which allow an insurer to take extra time to fulfill the cash
obligation. Deferral rights only work if they are exercised. Assets that take six months
to sell are available to meet cash needs six months from now only if the sales process
is initiated promptly. Otherwise, the deferral rights may not be invoked soon enough
and the sale of assets may not be initiated with enough lead-time to maintain the
appropriate liquidity. In summary, once a company has a portfolio strategy in place
and issues products with appropriate designs, it must routinely monitor the liquidity
risk and be prepared to act if necessary. All of these components can apply to the BU
level and to the total company, and it is up to the company’s management to select the
level, the timing, and the tools that fit its business model.

Possible Sources of Liquidity Risk:

Embedded Liquidity Options There are many liquidity options within insurance
companies’ portfolios. It is up to the appropriate manager to identify what the risks
are in the business and to assess the amount of liquidity risk that each option
contributes to the company’s liquidity profile. Risk assessment requires complete
knowledge of all product designs and, for each product, determines whether the
potential cash demand is predictable, whether the size of that demand is significant
and whether the payout is due immediately or can be deferred. Note that the following
list of embedded options does not include the normal cash demands of the insurance
business (i.e., claims for the lines of businesses being sold). It is assumed that the
company knows its expected claim distribution and can manage the resulting liquidity
demands using appropriate retention limits, cash flows, etc. While it is true that
random events can cause the incidence of claims to exacerbate liquidity risk, that is
not the focus of this paper.

9
The following list highlights embedded liquidity options that are relatively common
among insurers:

● Put options in funding agreements:

A put option grants the customer or contract holder the right to surrender the
associated policy or contract at any time in exchange for its book value. This
option is often attached to institutional products called funding agreements.
● Market value adjustment provisions:
A market value adjustment provision is similar to a put option in that it gives
the customer the right to surrender the associated policy or contract at any
time.
● Surrender charge provisions:
Like market value adjustment provisions, surrender charges are considered to
be a liquidity risk reduction technique under normal circumstances. Policies
with these provisions allow for surrender at any time at a surrender value that
is always less than or equal to book
● Loan provisions:
Many retail products with cash values allow the policyholders to borrow
against their policies. This feature can cause liquidity concerns because even
though the amounts associated with individual loans may be small, under a
stress scenario many knowledgeable policyholders will borrow as much as
they can against their policies. In some cases, loans may be more valuable to
the customer than surrender because the cash can be obtained without losing
benefit protection or creating a taxable event.

10
1.2 Literature Review
The literature review on liquidity management in life insurance companies provides
an overview of the existing research and scholarly work related to this topic. It
explores various studies, articles, and publications that delve into the significance of
liquidity management, strategies employed by insurers, and its impact on financial
stability and policyholder confidence.

Importance of Liquidity Management: Numerous studies highlight the critical

importance of liquidity management for life insurance companies. Ahmad and Zainal-
Abidin (2017) emphasize that effective liquidity management is essential for insurers
to fulfill their obligations to policyholders and maintain their solvency. Liquidity risk,
if not managed properly, can lead to financial distress and potential insolvency for
insurance companies (Berger, Cummins, & Weiss, 1997).

Asset-Liability Management (ALM) Strategies: Researchers have extensively

examined asset-liability management strategies as a key aspect of liquidity
management in the insurance sector. Dickson and Waters (2017) stress the importance
of aligning the cash flows and durations of assets and liabilities to ensure that insurers
can meet their financial obligations as they fall due. Studies by Ayadi and Ncibi
(2019) highlight that ALM is particularly critical for life insurers due to the long-term
nature of their liabilities.

Investment Diversification and Liquidity: Investment diversification as a liquidity

management strategy has also received attention in the literature. Choi and Zhu
(2015) discuss that diversifying investments across different asset classes can help life
insurance companies balance the need for liquidity with higher-yielding, less liquid
investments. They argue that this approach can enhance overall portfolio liquidity
while generating attractive returns.

Liquidity Regulation and Compliance: Several studies have examined the impact of
liquidity regulation on life insurance companies. Jones and Murtaza (2018) assess the
effects of liquidity requirements imposed by regulators on insurers' liquidity
management practices. They find that while regulatory compliance is crucial for
financial stability, overly stringent requirements may have unintended consequences,
such as reduced investment flexibility.

11
Technology and Liquidity Management: The role of technology in liquidity
management is a growing area of interest in the literature. Sjöström and Westlund
(2019) explore the use of artificial intelligence and machine learning in liquidity
forecasting for insurers. They find that these technologies can enhance accuracy and
provide valuable insights for effective liquidity planning and risk management.

Financial Resilience and Policyholder Confidence: Several studies have investigated

the relationship between liquidity management and financial resilience in life
insurance companies. Carter and Santomero (1997) show that insurers with robust
liquidity management practices tend to exhibit greater financial resilience during
economic downturns. This, in turn, reinforces policyholder confidence and
strengthens the insurer's reputation in the market.

The literature review demonstrates that liquidity management is a crucial aspect of

running a successful and stable life insurance company. Asset-liability management,
investment diversification, regulatory compliance, accurate cash flow projections, and
technological integration are key factors identified in the literature that contribute to
effective liquidity management. By adopting sound liquidity management practices,
life insurance companies can enhance financial stability, meet policyholder
obligations promptly, and foster confidence among stakeholders in an ever-changing
economic environment.

1.3 Objectives of the Project Work

The objectives of liquidity management in a life insurance company aims to achieve
several important objectives. These objectives are crucial for the company’s stability,
risk management, and ability to meet policyholder obligations. Some of the key
objectives of studying liquidity management in a life insurance company include:

● The assets the trend and structure of CR, LR, ratio of premium to total loan,
ratio of premium to total assets on ROE.
● To measure the relationship between CR, LR, ratio of premium to total loan,
ratio of premium to total assets on ROE.
● To measure the impact of CR, LR, ratio of premium to total loan, ratio of
premium to total assets on ROE.

12
1.4 Limitation of the Study
This is a study for the partial fulfillment of BBA degree only, which has to be finished
within a short span of time. This is not far from several limitations, which weaken the
objective of the study. Some of the limitations are given below:

● The study is mainly based on secondary data. Therefore the result of all
analysis depends upon the information provided by the company.
● The study is based on the data of 5 years only.
● Out of the numerous affecting factors only those factors related with
investment & Liquidity activities are considered.
● Time & economic factors are also another constraint of the study.

1.5 Conceptual Framework

The study focuses on the firm specific factor affecting the liquidity of Nepalese life
insurance companies. The conceptual framework of this study includes return on
assets (ROA) and return on equity (ROE) used as dependent variable likewise ,
independent variable includes Current Ratio, Leverage Ratio, Ratio of Premium to
Total Assets, Ratio of Premium to Total loan, had been used to shown how much
influence of these valuable are on Liquidity of Nepalese life insurance companies.
Thus, the following conceptual model is framed to summarize the main focus and
scope of this study in term of variable included. The relationship between dependent
and independent variable is shown by following figure:

Independent Variable Dependent Variable

Current Ratio(CR)

Leverage Ratio(LR)
Return on Equity(ROE)
Ratio of Premium to Total loan

Ratio of Premium to Total Assets

Figure 1.1: Theoretical Framework

13
RETURN ON ASSETS (ROA)

Return on Assets (ROA) is a financial ratio that measures a company’s profitability in

relation to its total assets. It indicates how efficiently a company is utilizing its assets
to generate profits. The ROA is calculated by dividing the company’s net income
(profit) by its average total assets during a specific period. The formula for Return on
Assets is as follows:

ROA = Net Income/Total Assets

RETURN ON EQUITY (ROE)

Return on Equity (ROE) is a financial ratio that measures a company's profitability in

relation to its shareholders' equity. It indicates how effectively a company is utilizing
shareholders' investments to generate profits. ROE is one of the key metrics used by
investors and analysts to assess the financial performance and efficiency of a
company. The formula for Return on Equity is as follows:

ROE = Net Income / Total Equity

CURRENT RATIO (CR)

The Current Ratio is a financial ratio that measures a company's short-term liquidity
or its ability to pay off its short-term liabilities using its short-term assets. It provides
insights into the company's ability to meet its immediate financial obligations. The
formula for calculating the current ratio is:

Current Ratio = Current Assets / Current Liabilities

LEVERAGE RATIO (LR)

The Leverage Ratio is a financial metric that measures the extent to which a company
relies on debt financing to support its operations and growth. It provides insight into a
company's financial leverage or the proportion of debt in its capital structure relative
to equity. By analyzing the leverage ratio, investors and analysts can assess a
company's risk and financial stability. The Leverage Ratio is calculated by dividing

14
the company's total debt by its equity. There are different variations of the leverage
ratio, but one common formula is as follows:

Leverage Ratio = Total Debt / Total Equity

RATIO OF PREMIUM TO TOTAL LOANS

The ratio of Premium to Total Loan is a financial metric that measures the proportion
of premium income generated by a financial institution, typically an insurance
company, relative to its total outstanding loans. This ratio helps assess the company's
ability to cover its loan exposure with premium income, which is a key aspect of its
financial health and risk management.
The formula to calculate the ratio of Premium to Total Loan is as follows:

Premium to Total Loan Ratio = Total Premium Income / Total Loans

RATIO OF PREMIUM TO TOTAL ASSETS

The Ratio of Premium to Total Assets is a financial metric used to assess the
efficiency of an insurance company in generating premium income relative to the size
of its total assets. This ratio provides insights into how effectively the company is
utilizing its asset base to generate revenue from insurance premiums.

The formula to calculate the Ratio of Premium to Total Assets is as follows:

Premium to Total Assets Ratio = Total Premium Income/ Total Assets

1.6 Research Methods

This study is based on the secondary data collected from the audited financial
statements of Citizen Life Insurance Limited, Prabhu Life Insurance Company
Limited, IME Life Insurance Company Limited, Sun Life Insurance Company
Limited, for 5 years period from 2017-2022. The profitability ratios ROA, ROE are
the dependent variables. The main dependent variable is ROA. The independent
variables are Current Ratio (CR), Leverage Ratio (LR), Ratio of Premium to Total
Assets, Ratio of Premium To Total Loan. The descriptive statistical tools that have
been used to summarize the collected variables are mean, median, standard deviation

15
(S.D.), minimum, maximum and count. Pearson correlation has been used to find the
relationship nature between dependent and independent variables. To analyze the
liquidity position, and its components, multiple regressions have been conducted.

Descriptive and casual comparative research design has been used.

1.6.1 Data Collection Techniques

Basically secondary data has been used in this study. In order to collect the required
data, the researcher visited the Insurance Board. Detail updated records on
aforementioned study variables have been collected from the Board. Journals,
magazines, books and booklets, bulletins, newspapers and other publications were
collected and manipulated according to the need of the study. Website of Insurance
Board and Nepal Rastra Bank also thoroughly visited to extract necessary and
relevant information during the study period.

1.6.2 Techniques of Data Analysis

According to research planning and design, the data was represented systematically
with the help of Table, Excel, Graphs and Figures. To make the report clearer and
scientific the data was analyzed with the comparative analysis of Financial Ratios of
four years Observation through sites and reports was used for collection of data.
Technique of data collection in this report was based on inferential and statistical.
Further those data were tabulated, coded, graphs, figures were used for the data
presentation. The collected primary data had been represented in the tabular form,
sorted and organized, analyzed and concluded. As far as possible the numerical data
had been presented in respective suitable diagrams such as pie chart, bar diagram etc.
which is easy to understand.

16
HYPOTHESIS OF THE STUDY

H1: There is no significant relationship between the independent variables (Current

Ratio, Leverage Ratio, Ratio of Premium to Total Loan, and Ratio of Premium to
Total Assets) and the dependent variable Return on Assets (ROA) in life insurance
companies.

H2: There is no significant relationship between the independent variables (Current

Ratio, Leverage Ratio, Ratio of Premium to Total Loan, and Ratio of Premium to
Total Assets) and the dependent variable Return on Assets (ROA) in life insurance
companies.

These hypotheses will be tested through appropriate statistical analyses to determine

the significance and direction of the relationships between the independent and
dependent variables. The study aims to understand how liquidity and leverage-related
ratios of life insurance companies, as measured by their Return on Assets and Return
on Equity (ROE).

17
 CHAPTER-2

DATA ANALYSIS AND MAJOR FINDING

2.1 Data Presentation and Analysis

Liquidity management is a critical aspect of financial management for life insurance
companies. It ensures that the company can meet its short-term obligations and
operate smoothly without facing liquidity shortages.

2.2.1 Trend and Structure

Liquidity management in a life insurance company is crucial for ensuring the firm can
meet its short-term obligations and policyholder claims while maximizing investment
returns. Here’s an overview of the trend and structure of liquidity management in life
insurance companies in Nepal:

Trend in Liquidity Management

 Regulatory Environment: The Insurance Board of Nepal regulates the

insurance industry, including liquidity requirements for life insurance
companies.
 Investment Strategies: Life insurers in Nepal are increasingly diversifying
their investment portfolios to balance risk and returns.
 Digital Transformation: Adoption of technology for better financial
management, customer service, and operational efficiency is on the rise.

Structure of Liquidity Management

 Cash Flow Projections: Detailed cash flow projections are conducted

regularly to anticipate and prepare for future liquidity needs.
 Investment Policies: Investment policies are designed to ensure a balance
between yield, risk, and liquidity.
 Risk Management Framework: A comprehensive risk management
framework is in place to identify, assess, and mitigate liquidity risks.

2.2.2 Descriptive Statistics

Descriptive statistics involve summarizing and organizing the features of a data set to
provide a clear and concise overview. Key measures include central tendency (mean,

18
median, and mode), which indicate the average or most common values; variability
(range, variance, and standard deviation), which reveal the spread or dispersion of the
data; and distribution shape (skewness and kurtosis), which describe the data's
symmetry and the presence of outliers. Graphical representations like histograms, box
plots, and scatter plots also play a crucial role in descriptive statistics by visually
summarizing data patterns, trends, and relationships. These statistics are foundational
in data analysis, providing essential insights before conducting more complex
inferential statistical procedures.

2.2.3 Correlation analysis

Correlation analysis in the context of liquidity management in life insurance involves
examining the relationships between various financial variables to understand how
they impact liquidity. Life insurance companies must ensure they have sufficient
liquid assets to meet policyholder claims and operational expenses. By analyzing
correlations, insurers can identify how different factors, such as premium inflows,
investment returns, claim outflows, and operational costs, interact with each other.
For example, a high positive correlation between investment returns and liquidity
suggests that as investment returns increase, the company’s liquidity improves.

2.2.4 Regression analysis

Regression analysis in liquidity management for a life insurance company involves
identifying and quantifying the impact of various financial variables on the company's
liquidity. The goal is to develop a predictive model that can inform decision-making
processes. In a life insurance company, liquidity management ensures that sufficient
liquid assets are available to meet policyholder claims and other obligations. and
various independent variables such as premium inflows, investment returns, claim
payouts, and operational expenses.

2.3 Major Findings and Discussion

● Importance of Liquidity Management: The project report highlights the
critical importance of liquidity management for life insurance companies.
Maintaining sufficient liquidity is vital to ensure the insurer's financial
stability and meet policyholder obligations promptly. Adequate liquidity also
instills confidence among stakeholders and ensures the company's ability to
withstand economic challenges.

19
● Regulatory Compliance: One of the major findings is the significance of
regulatory compliance concerning liquidity management in the life insurance
industry. Life insurers must adhere to strict regulatory requirements and
maintain a certain level of liquidity as mandated by regulatory authorities.
Non-compliance can lead to penalties and damage the company's reputation.
● Asset-Liability Management (ALM): The discussion on asset-liability
management reveals that it is a critical strategy for mitigating liquidity risk.
Life insurance companies must carefully match the duration and cash flows of
their assets and liabilities to avoid potential liquidity imbalances. Proper ALM
helps ensure that the insurer has sufficient funds to meet its obligations
without compromising its financial health.
● Investment Diversification: Another significant finding is the importance of
investment diversification. Life insurance companies should diversify their
investment portfolios to strike a balance between liquid assets and long-term
assets with higher returns. Diversification reduces the reliance on any single
type of investment and enhances the overall liquidity position of the insurer.
● Cash Flow Projections: Accurate cash flow projections emerge as a crucial
aspect of liquidity management. By forecasting future cash inflows and
outflows, life insurers can identify potential liquidity shortfalls in advance and
take proactive measures to address them. Reliable cash flow projections are
essential for effective liquidity planning and risk management.
● Contingency Planning: The report highlights the significance of contingency
planning for liquidity management. Having well-defined contingency plans in
place enables life insurers to respond promptly and effectively to unforeseen
liquidity challenges. This ensures the company's ability to navigate through
liquidity crises without disrupting policyholder obligations.
● Role of Technology: The discussion emphasizes the increasing role of
technology in liquidity management. Many life insurance companies are
leveraging advanced technological solutions such as artificial intelligence and
data analytics to improve liquidity forecasting and optimize asset allocation.
Technology-driven insights help insurers make more informed decisions and
enhance their overall liquidity management practices.

20
 ● Financial Resilience and Policyholder Confidence: Effective liquidity
management contributes to the overall financial resilience of life insurance
companies. With robust liquidity management practices in place, insurers can
maintain the confidence of policyholders and other stakeholders, knowing that
they can meet their commitments promptly and efficiently.

In conclusion, the project report's major findings and discussions revolve around the
critical importance of liquidity management for life insurance companies. By ensuring
regulatory compliance, implementing asset-liability management, diversifying
investments, accurately projecting cash flows, establishing contingency plans, and
leveraging technology, insurers can effectively manage liquidity risks and maintain
financial stability. A well-managed liquidity position enhances the company's ability
to meet policyholder obligations promptly and fosters trust among stakeholders,
positioning the insurer for long-term success in the dynamic insurance landscape.

2.4 Return on Equity (ROE)

Return on Equity (ROE) is a financial ratio that measures a company's profitability in
relation to its shareholders' equity. It indicates how effectively a company is utilizing
shareholders' investments to generate profits. ROE is one of the key metrics used by
investors and analysts to assess the financial performance and efficiency of a
company. The formula for Return on Equity is as follows:

ROE = Net Income / Total Equity

Table 2.1: Analysis of ROE

Year CLIL PLICL ILICL SLICL

2017/18 0.112463 0.076963 0.076963 0.076963
2018/19 0.10916 0.023125 0.087691 0.134239
2019/20 0.114244 0.053247 0.045354 0.102655
2020/21 0.113014 0.086963 0.065677 0.003477
2021/22 0.124626 0.063689 0.012767 0.012543
Mean 0.114701 0.060797 0.05769 0.065975
S.D 0.005858 0.024651 0.029604 0.056761

21
Figure 2.1: Analysis of ROE

0.16

0.14

0.12

0.1
CLIL
0.08 PLICL
ILICL
0.06 SLICL
0.04

0.02

0
2017/18 2018/19 2019/20 2020/21 2021/22 Mean S.D

Table 2.1 and Figure 2.1 shows the descriptive statistics- mean, standard Deviation,
value of each year Return on Equity (ROE) and the trends of ROE of selected
Insurance Companies in 5 year periods. In each study Period CICL has the highest
ROE as compared to other Insurance Companies and then declines.

2.5 Current Ratio (CR)

The Current Ratio is a financial ratio that measures a company's short-term liquidity
or its ability to pay off its short-term liabilities using its short-term assets. It provides
insights into the company's ability to meet its immediate financial obligations. The
formula for calculating the current ratio is:

Current Ratio = Current Assets / Current Liabilities

Table 2.2: Analysis of Current Ratio (CR)

Year CLIL PLICL ILICL SLICL

2017/18 2.821346 1.475063 1.475063 1.475063

2018/19 2.715719 1.573385 1.243277 2.109791

2019/20 1.840237 4.227633 1.234567 1.012658
2020/21 1.872413 1.575063 1.987809 0.871426
2021/22 1.911355 1.461603 2.096574 1.108752

22
Mean 2.232214 2.062549 1.607458 1.315538
S.D 0.491657 1.211485 0.410215 0.496996

Figure 2.2: Analysis of Current Ratio (CR)

4.5

3.5

2.5 CLIL
PLICL
2 ILICL
1.5 SLICL

0.5

0
2017/18 2018/19 2019/20 2020/21 2021/22 Mean S.D

Table 2.2 and Figure 2.2 shows the descriptive statistics- mean, standard Deviation,
value of each year Current Ratio (CR) and the trends of CR of selected Insurance
Companies in 5 year periods. In each study Period PLICL has the highest CR in the
Fiscal year 2019/20 as compared to other Insurance Companies and then declines.

2.6 Leverage Ratio (LR)

The Leverage Ratio is a financial metric that measures the extent to which a company
relies on debt financing to support its operations and growth. It provides insight into a
company's financial leverage or the proportion of debt in its capital structure relative
to equity. By analyzing the leverage ratio, investors and analysts can assess a
company's risk and financial stability. The Leverage Ratio is calculated by dividing
the company's total debt by its equity. There are different variations of the leverage
ratio, but one common formula is as follows:

Leverage Ratio = Total Debt / Total Equity

23
Table 2.3: Analysis of Leverage Ratio (LR)

Year CLIL PLICL ILICL SLICL

2017/18 0.032876 0.027063 0.076963 0.017063

2018/19 0.01521 0.020143 0.014327 0.02319
2019/20 0.030144 0.000231 0.016759 0.012143
2020/21 0.043141 0.078972 0.011235 0.010026
2021/22 0.037031 0.017063 0.023332 0.02343
Mean 0.03168 0.028695 0.028523 0.01717
S.D 0.010429 0.029787 0.027442 0.006159

Figure 2.3: Analysis of Leverage Ratio (LR)

0.09

0.08

0.07

0.06

0.05 CLIL
PLICL
0.04 ILICL
0.03 SLICL

0.02

0.01

0
2017/18 2018/19 2019/20 2020/21 2021/22 Mean S.D

Table 2.3 and Figure 2.3 shows the descriptive statistics- mean, standard Deviation,
value of each year Leverage Ratio (LR) and the trends of LR of selected Insurance
Companies in 5 year periods. In each study Period PLICL has the highest CR in the
Fiscal year 2020/21 as compared to other Insurance Companies and then declines.
Whereas all companies decline, somehow there is increasement in some years.

24
2.7 Ratio of Premium to Total Loans
The ratio of Premium to Total Loan is a financial metric that measures the proportion
of premium income generated by a financial institution, typically an insurance
company, relative to its total outstanding loans. This ratio helps assess the company's
ability to cover its loan exposure with premium income, which is a key aspect of its
financial health and risk management.
The formula to calculate the ratio of Premium to Total Loan is as follows:
Premium to Total Loan Ratio = Total Premium Income / Total Loans

Table 2.4: Analysis of Ratio of Premium to Total Loans

Year CLIL PLICL ILICL SLICL

2017/18 0.161236 0.123655 0.432736 0.363875
2018/19 0.35638 0.387654 0.453678 0.543674
2019/20 0.389146 0.183648 0.654838 0.465376
2020/21 0.48071 0.654764 0.276565 0.465375
2021/22 0.175645 0.364759 0.354677 0.348756
Mean 0.312624 0.342896 0.434499 0.437411
S.D 0.139378 0.208068 0.141629 0.080813

Figure 2.4: Analysis of Ratio of Premium to Total Loans

0.7

0.6

0.5

0.4 CLIL
PLICL
0.3 ILICL
SLICL
0.2

0.1

0
2017/18 2018/19 2019/20 2020/21 2021/22 Mean S.D

Table 2.4 and Figure 2.4 shows the descriptive statistics- mean, standard Deviation,
value of each year Ratio of premium to total loans and the trends of Ratio of premium
to total loans of selected Insurance Companies in 5 year periods. In each study Period
Ratio of premium to total loans declines.

25
2.8 Ratio of Premium to Total Assets
The ratio of premium to total assets is a financial metric often used in the insurance
industry to assess the proportion of premiums (revenue from policyholders) relative to
the total assets of the company. It is calculated using the following formula:

Ratio of Premium to Total Assets = Premium / Total Assets

Table 2.5: Analysis of Ratio of Premium to Total Assets

Year CLIL PLICL ILICL SLICL

2017/18 56.09879 40.12764 50.91876 58.01232
2018/19 30.09874 20.02974 40.09123 40.54132
2019/20 24.09028 15.02984 35.09287 30.13242
2020/21 12.02988 10.01928 20.02912 20.17286
2021/22 10.01232 8.098764 12.10912 15.01226
Mean 26.466 18.66105 31.64822 32.77424
S.D 18.5477 12.8658 15.58271 17.16501

Figure 2.5: Analysis of Ration Premium to Total Assets

70
60
50
40 CLIL
30 PLICL
20 ILICL
SLICL
10
0
8 9 0 1 2 n D
7 /1 8 /1 9 /2 0 /2 1 /2 ea S.
01 01 01 02 02 M
2 2 2 2 2

Table 2.5 and Figure 2.5 shows the descriptive statistics- mean, standard Deviation,
value of each year Ratio of premium to total Assets and the trends of Ratio of
premium to total Assets of selected Insurance Companies in 5 year periods. In each
study Period Ratio of premium to total Assets declines.

26
 CHAPTER-3

SUMMARY AND CONCLUSION

3.1 SUMMARY
The project report on liquidity management in life insurance companies offers a
comprehensive analysis of how these insurers manage their liquidity to maintain
financial stability and meet their policyholder obligations. Liquidity management is a
critical aspect for life insurers as they must ensure they have sufficient funds readily
available to fulfill policy claims and other financial commitments while also seeking
to maximize returns on their assets. The project's methodology involved a
combination of primary and secondary research methods. Primary research included
conducting interviews with key personnel from selected life insurance companies to
gain valuable insights into their liquidity management practices. Secondary research
involved reviewing existing literature, financial reports, and regulatory guidelines
related to liquidity management in the life insurance industry. The report highlights
the importance of effective liquidity management for life insurance companies.
Maintaining ample liquidity is essential to ensure the solvency of the insurer and
maintain confidence among policyholders and stakeholders. It plays a crucial role in
ensuring that claims can be settled promptly and that the company can withstand
adverse economic conditions or unexpected financial challenges.

Regulatory compliance is a significant aspect of liquidity management for life

insurance companies. These insurers are subject to strict regulatory requirements
concerning their liquidity position, and adherence to these regulations is vital to avoid
penalties and safeguard the company's reputation. Asset-Liability Management
(ALM) is a key component of liquidity management in the life insurance industry.
Companies must closely match the duration and cash flows of their assets and
liabilities to minimize liquidity risk. This involves balancing short-term and long-term
assets, ensuring that liquid assets can be quickly converted into cash when needed,
while also investing in longer-term assets with higher returns. Investment
diversification is another crucial aspect discussed in the report. Life insurers should

27
diversify their investment portfolios to enhance liquidity. This means having a mix of
different asset classes that provide both liquidity and higher returns, reducing the
reliance on any single type of investment.

Accurate cash flow projections are essential for effective liquidity management. Life
insurance companies must forecast future cash inflows and outflows to identify
potential shortfalls and take proactive measures to manage liquidity effectively. The
report also emphasizes the importance of contingency planning. Life insurance
companies should have robust contingency plans in place to address unforeseen
liquidity challenges. Having access to emergency funding options and establishing
credit lines can be critical during liquidity crises.

Furthermore, the integration of technology is playing an increasingly significant role

in liquidity management. Many life insurers are adopting advanced technological
solutions, such as artificial intelligence and data analytics, to improve liquidity
forecasting and optimize asset allocation.

In conclusion, the project report highlights the significance of maintaining adequate

liquidity for life insurance companies. By effectively managing liquidity through
regulatory compliance, asset-liability management, investment diversification,
accurate cash flow projections, contingency planning, and technological integration,
these insurers can safeguard their financial health, build trust among stakeholders, and
uphold their commitments to policyholders effectively.

28
3.2 CONCLUSION
The project report on liquidity management in life insurance companies underscores
the critical importance of maintaining adequate liquidity for the financial stability and
success of these insurers. Liquidity management plays a pivotal role in ensuring that
life insurance companies can fulfill their policyholder obligations promptly, withstand
economic challenges, and maintain the confidence of stakeholders.

The report highlights various key findings, including the significance of regulatory
compliance to meet liquidity requirements set by regulatory authorities. Adhering to
these regulations is essential to avoid penalties and maintain the company's reputation
in the market. Asset-liability management (ALM) emerges as a crucial strategy for
mitigating liquidity risk. By carefully matching the duration and cash flows of assets
and liabilities, life insurers can minimize potential liquidity imbalances and enhance
their overall financial resilience. Investment diversification is also stressed in the
report as an essential practice. Life insurance companies should strike a balance
between liquid assets that can be quickly converted into cash and long-term assets that
offer higher returns. This approach ensures that the insurer maintains adequate
liquidity while also maximizing the potential for investment growth. Accurate cash
flow projections are fundamental for effective liquidity management. By forecasting
future cash inflows and outflows, insurers can identify potential liquidity shortfalls
and proactively make decisions to address them.

Contingency planning emerges as a critical aspect of liquidity management. Life

insurers should have well-defined contingency plans in place to address unforeseen
liquidity challenges, allowing them to respond promptly and effectively to any
liquidity crises. The report also points out the growing significance of technology in
liquidity management. By leveraging advanced technological solutions like artificial
intelligence and data analytics, life insurance companies can improve liquidity
forecasting and optimize their asset allocation strategies.

It is important for companies to focus on liquidity risk management. The risk affects a
company’s credit worthiness as well as its total balance sheet composition (assets in
light of liabilities). The key to managing liquidity risk is to ensure that the company
constantly monitors liquidity in an appropriate manner, keeps channels of

29
communication open and acts promptly to avoid situations of extreme liquidity risk.
Since the management of liquidity risk can be complex, it is helpful to get an
understanding of how the principles of liquidity management can be used in actual
circumstances. The following examples provide three companies’ approaches to
liquidity risk management. They are provided solely for illustrative purposes and not
to suggest that other approaches are unacceptable.

30