EU watchdog to cut interest rate for insurer liabilities from 2018
This is a step that could mean some firms having to hold more capital.
The European Insurance and Occupational Pensions Authority (EIOPA) said 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. ■