(1) How does the degree of liquidity risk differ for financial institutions, insurance companies, and property-casualty companies?
An organization experiences liquidity risk if most of the company resources are not liquid. Therefore the assets cannot help to pay organization bills and it will take longer to convert the assets into cash. Financial institutions face liquidity only in overstated proportions in the firm liquidity risk is experienced when the investments cannot be sold to recompense the debts at a particular time. While insurance company liquidity involves situations that include; lack of enough financial resources to learn the company and when the company can only access the required financial resources at an affluent cost. Therefore the company might fail to meet the required obligations or achieve its target. The liquidity risk in the insurance company cannot be exaggerated (Lee, 2020). The risk of liquidity in the property-casualty companies occurs as a result of the increase in the investment value of property over time. The insurance property companies draft a promise to the clients during contract signing and some of the promises greatly influence the company’s prospect due to lack of cash when the risk occurs.
(2) What can these types of companies do to defend themselves against liquidity risk?
minimizing debts is one-way financial institutions can defend themselves from liquidity risk. financial companies should borrow only what they need to cover loans that are not longterm and to cover longterm loans the companies should make plans of selling off investments in the days to come instead of them taking loans more. insurance companies also face the problem of liquidity risk. to overcome this risk the companies depend mostly on the spreadsheet solutions that are on mutual input. another way insurance companies avoid liquidity risk is by stressing the cashflows they have for both longterm and short-term horizons and also comprehending their projections on cash flow (king, Nesmith, Paulson, and prono, 2020). by use of stress tests, insurance companies can know the level of assets they have in liquid form that can cater for net cash outlets needs over many time horizons. by doing this the companies can overcome crises during downtown and also optimize the liquidity they have in excess in the business. property casualty companies most of the times insure their properties in insurance companies for them to be compensated in case of a loss. to overcome this liquidity risk the companies by having a good estimate of the money they are to be compensated in case of a loss.