1) CAS answer above explains that LIC is illiquid because policyholder is unable to liquidate the claims payment. What does this really mean? How would you liquidate a liability?
1) I believe they're saying it's hard to force an insurer into paying your claims any faster than they are, so the outstanding claim payments are illiquid
2) LRC is more liquid than LIC because it's easier to cancel a contract and get premium refund than wait for outstanding claims to be paid out
1) Liquidity in discounting here means an ability to "sell" your asset. It would be difficult to pass on your liability to another buyer without compensating them with an illiquidity premium. In other words, it will be difficult for a policyholder to "sell" their insurance claim to another buyer which is why we consider it illiquid. You can always liquidate a liability by paying off what you owe. How difficult it is to extinguish your liability determines your illiquidity.
2) LRC is generally more liquid than the LIC because it is easier to obtain an exit value. However, for some cases like title insurance or ADCs your LRC could be quite a bit illiquid.
Comments
1) I believe they're saying it's hard to force an insurer into paying your claims any faster than they are, so the outstanding claim payments are illiquid
2) LRC is more liquid than LIC because it's easier to cancel a contract and get premium refund than wait for outstanding claims to be paid out
1) Liquidity in discounting here means an ability to "sell" your asset. It would be difficult to pass on your liability to another buyer without compensating them with an illiquidity premium. In other words, it will be difficult for a policyholder to "sell" their insurance claim to another buyer which is why we consider it illiquid. You can always liquidate a liability by paying off what you owe. How difficult it is to extinguish your liability determines your illiquidity.
2) LRC is generally more liquid than the LIC because it is easier to obtain an exit value. However, for some cases like title insurance or ADCs your LRC could be quite a bit illiquid.