EIOPA UFR consultation and the 2016 insurance stress tests
The setting of the UFR has particular relevance for European life businesses with significant long-term guaranteed liabilities.
In April, EIOPA published a Consultation Paper on the methodology to be used to determine the Ultimate Forward Rate (UFR), an important parameter for setting long-term liability discount rates in Solvency II (SII). The document covers a range of technical methodology questions and also considers what limits should be placed on year-to-year changes to the UFR assumption.
This is an especially vexing topic for Eurozone life businesses with significant long-term guaranteed liabilities. Any reduction in the UFR for the Eurozone means the current environment of extraordinarily low long-term interest rates will have a fuller impact on SII liability valuations, placing further strain on SII solvency levels.
Chart 1: Long-term trend in global 10-year government bond yields
The regulatory focus on low long-term interest rates was further accentuated when EIOPA published details of its 2016 EU-wide Insurance Stress Test. This places particular emphasis on measuring the aggregate industry impact of a prolongation of the low-for-longer rate environment. Its potential to create a systemic risk exposure for the European life industry was recognised in EIOPA Chairman Gabriel Bernardino’s remarks that accompanied the Stress Test release.