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The European Insurance and Occupational Pensions Authority (EIOPA) is currently reviewing the methodology to derive the UFRs. The review will include a public consultation in 2016. EIOPA intends to decide on the outcome of the review in September 2016.
It is not intended to change the currently used UFRs until at least the end of 2016 in order to ensure the stability of the framework for the implementation of Solvency II by insurance and reinsurance undertakings and supervisory authorities.
The risk-free interest rate term structures are used by insurance and reinsurance undertakings to discount the technical provisions they set up for their insurance and reinsurance obligations under Solvency II. The UFRs are relevant parameters to determine the risk-free interest rates that are not directly derived from observed market rates but need to be extrapolated. For example, with regard to the term structure for obligations denominated in euro, the UFR influences the risk-free interest rates for maturities of more than 20 years.
The Solvency II Delegated Regulation requires that the ultimate forward rate take account of expectations of the long-term real interest rate and of expected inflation. For most currencies, including the euro, it is currently set at the level of 4.2% as the sum of these two components. The long-term real interest rate is derived from long-term averages of past real rates (2.2%). The inflation rate is based in particular on the inflation target of the European Central Bank (2%).