Liquidity risk reserve (France, PRE)

In French insurers' statutory accounts, investments other than bonds, equities, real estate, fund units, are carried at historical cost. Any unrealized loss on them does not appear on the balance sheet until they are sold, except for line-by-line permanent impairment. The liquidity risk reserve fills this blind spot. When the market value of all these investments together falls below their book value, the insurer must reserve the net overall loss, because it might be forced to sell them to meet its commitments, notably a wave of surrenders. The name states the reasoning: it is not the fall in value that is reserved for its own sake, but the risk of having to pay earlier than planned with impaired assets. Regulation allows the charge to be spread over several years, which makes it a shock absorber: in 2008, 2011 and 2020, market falls triggered large charges whose spreading avoided a sudden hit to results. Under Solvency II, all assets are at market value and the reserve has no direct equivalent, but it remains in the statutory accounts and reduces distributable profit, and therefore profit sharing.