| LONDON, April 5
LONDON, April 5 A European Union watchdog will
cut an interest rate used to price liabilities at euro zone
insurers such as Munich Re, AXA and Allianz
, a step that could mean some firms having to hold more
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
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
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
(Editing by David Holmes)