The definition states..........rather than the risk arising from long term matching of assets and liabilities which is taken as insurance risk. Isnt alm risk a market risk? Last paragraph of core reading refers to incorporating the liquidity risk into rbc framework only if it is material. Aren't we always allowing for this risk in sii pillar 1 in scr under sf model?
Yes, if assets and liabilities are mismatched then this will generate higher market risk (eg interest rate risk). However, if you read on to the next paragraph of Core Reading, this section is more about how assets and liabilities become mismatched as a result of claims volatility and unexpected levels of option take-up rates. In the short-term, not having enough liquid assets to meet such higher than expected claim payments is considered to be liquidity risk. In the longer-term, higher than expected claims or option take-up is considered to be insurance risk. This is the aspect that this section is focussing on. If you look at the diagram in Chapter 12, you will see that there is no "Liquidity risk" sub-module of the Solvency II Pillar 1 standard formula. Liquidity is a subset of spread risk, which does have its own sub-module, but this is only in relation to a certain aspect of liquidity and does not fully encompass the short-term cashflow liquidity risk that is described in Chapter 23. Insurers should consider this under Pillar 2, but may not make an allowance for it if it is not material. The phrase "risk-based capital framework" will also encompass any internal economic capital calculations - which should be closely related to Pillar 2 capital quantifications, although bear in mind that not all insurers are subject to Solvency II. Hope that helps.
