EU watchdog to cut interest rate for insurer liabilities from 2018
Reuters
Published Apr 05, 2017 01:02PM ET
EU watchdog to cut interest rate for insurer liabilities from 2018
By Huw Jones
LONDON (Reuters) - A European Union watchdog will cut an interest rate used to price liabilities at euro zone insurers such as Munich Re (DE:MUVGn), AXA (PA:AXAF) and Allianz (DE:ALVG), a step that could mean some firms having to hold more capital.
The European Insurance and Occupational Pensions Authority (EIOPA) said on Wednesday it would reduce the theoretical interest rate known as the ultimate forward rate (UFR), used to discount an insurer's liabilities over time.
Insurers have work out their liabilities from policies going forward up to 60 years, but there are no reliable euro market interest rates extending beyond 20 years, hence the need for regulators to compile an extrapolated rate covering the 40-year gap.
EIOPA is proposing to cut the UFR, currently set at 4.2 percent, to 3.65 percent over time from January next year. It would only be applied to liabilities denominated in euros.
The regulator said the annual change in the UFR would not be more than 15 basis points, meaning the UFR will fall in January to 4.05 percent from 4.2 percent.
Regulators believe a reduction would better reflect current historically low interest rates, and the impact will be to increase liabilities because the rate at which they are discounted is lower.
"This methodology strikes the right balance between a stable UFR and the need to adjust it in case of changes in long-term expectations about interest rates and inflation," EIOPA Chairman Gabriel Bernardino said.
"The methodology ensures that the UFR moves gradually and in a predictable manner, allowing insurers to adjust to changes in the interest rate environment and ensuring policyholder protection."
Higher liabilities could lower an insurer's solvency ratio, a closely-watched benchmark of overall health, forcing it to raise more capital to reassure investors.
Insurers say regulators should review the sector's solvency rules more broadly, rather than focus on changing just one number.
Get The News You Want
Written By: Reuters
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.