Developing an early warning system for liquidity risk management in local general insurance companies

Abstract

Purpose: An Early Warning System (EWS) can be used to monitor and regulate risks within a company. This study intends to develop an EWS by analysing in-depth information to establish the Key Risk Indicators (KRIs) relating to liquidity risk within general insurance companies. Design: The inside-out approach is used, in this study, whereby as much information as possible is gathered about liquidity risk in general insurance companies. Then data analysis process took place and all the gathered information was examined in great detail to make sure that those KRIs that relate to the liquidity risk would be included and only those. Findings: An EWS made up of liquidity-related KRIs was presented in the form of a dashboard. The KRIs were split into three different sections according to their importance to liquidity risk. A table showing the suggested actions to be taken, with reference to the EWS result, was also presented. The EWS was calculated for a particular local general insurance company. Conclusions: An EWS can be a very convenient and effective tool to measure and monitor risks. Although an EWS requires a lot of subjective judgements, the one developed in this study turned out to be feasible because the result indicates that the suggested action is the most reasonable one. Implications: The main implications of this study are that local general insurance companies and regulatory bodies might decide to monitor and assess their liquidity risks using the developed EWS and that the process used to develop this EWS can be used for various different risks.