Current Liquidity (IRIS)
In business, liquidity is a term to indicate the capacity of a company or individual to immediately convert its assets to cash without having to incur significant losses. A company that is considered liquid faces lesser risk of not being able to pay its debts. It also has a greater financial flexibility for better opportunities to invest. Liquidity in business is of two types. The first one is quick liquidity. Quick liquidity includes funds such as cash, the most liquid asset; government bonds, and short term investments that can be turned to cash quickly as the need arises. The second type is the current liquidity, which indicates real estate possessions and other similar assets that cannot be liquidated instantly, but can eventually be sold or converted to cash easily. However, fixed assets are not considered liquid assets since it is not actively traded in highly-controlled markets.
There are several ways to determine liquidity. The most common is through the use of liquidity ratios, such as current ratio, quick ratio, inventory turn over, and current liability ratio. These ratios are computed using a formula for each type. All liquidity ratios measure the practicality of a certain company.
On the other hand, liquidity in insurance designates the capacity of the insurance holder to acquire the cash value of an insurance policy collected before death. A best example to this is a whole life insurance policy because policy holders of this type of insurance secure a loan against the accrued cash value of the policy. Life insurances are considered one of the best investment strategies. This is because a life insurance policy can turn out to be a liquid asset source for the beneficiary on the death of the policy holder. Thus, a life insurance policy that is more liquid is more beneficial. One reason is because beneficiaries of such insurance policies can opt to collect the insurance proceeds in lump sum, allowing the receiver to use the money for final expenses in line with the insurance as well as for other financial obligations. A proceeds taken as lump sum is also tax-free. However, beneficiaries can collect the proceeds aside from the lump sum method by way of purchasing an annuity. In this case, the beneficiary will receive a fixed amount of the proceeds every month throughout his life.
There is also a ratio to measure current liquidity in life insurance policies. This is called the current liquidity (IRIS). This ratio determines the fraction of liabilities protected by productive cash and investments that are unaffiliated. The current liquidity ratio presumes the degree of collectability for all recoverable amounts on paid losses, unpaid losses, and premiums unearned from reinsurers. This is computed by adding cash, invested assets that are unaffiliated, other property encumbrances to total net liabilities, and the balance payable on reinsurance ceded. This ratio must be expressed in percentage form. If the ratio falls below 100, the solvency of the company relies on the marketability or collectability of investments in affiliates and premium balances.