Standard Life Investments

Inside Global Insurance Investment

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.

July 2016

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

EIOPA UFR consultation and the 2016 insurance stress tests

Source: OECD

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.