The European Insurance and Occupational Pensions Authority
(EIOPA) has published changes to insurers' ultimate forward
rate (UFR) under the Solvency II framework, to be applied for the
first time at the beginning of 2018. The consequences will vary
across insurance products, but the main impact will be felt by life
insurers because of their long-term liabilities. As a result,
insurers might find it more difficult to obtain approval from the
Dutch Central Bank before distributing dividends.
Insurers' liabilities can have maturities of several
decades, making it difficult to determine their value. The market
for long-term liabilities is less liquid, making market information
less reliable. For this reason, the Solvency II's ultimate
forward rate is applied to convert the yield curve used to
calculate the present value of long-term liabilities (with
maturities exceeding 20 years) into a fixed level. As a result, the
solvency calculation is also more stable.
However, in the current low interest environment, the
application of the UFR (currently 4.2%) has the effect of
increasing rates with maturities exceeding 20 years. A lower UFR
intends to correct for the lower interest rates.
The Solvency II framework did not contain the methodology for
calculating the UFR. After launching a consultation in 2016, EIOPA
published the methodology on 5 April 2017. The methodology will be
applied for the first time at the beginning of 2018. According to
the methodology, the UFR for the euro is 3.65%. As annual changes
will not be higher than 0.15% and the current UFR is 4.2%, there
will be a phasing-in period. In January 2018, the UFR will be
In general, the change in UFR will impact Dutch life insurers,
which have many long-term liabilities. A consequence might be that
they may find it more difficult to obtain Dutch Central Bank
approval for dividend distributions. The Dutch Association of
Insurers has released a press release urging the European
Commission not to implement the UFR change in the short term. In
line with earlier statements by the European Parliament and the
Commission, the association suggests not reviewing the UFR in
isolation, but waiting until a full review of Solvency II can take
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