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In addition, changing the UFR before the Solvency II review is unnecessary. This is because the current framework already has several additional layers of protection in place to ensure policyholder claims will be paid.
In its response to a European Insurance and Occupational Pensions Authority (EIOPA) consultation on possible changes to the methodology for calculating the UFR, Insurance Europe said there is no need to change it for either prudential or policyholder protection reasons.
Igotz Aubin, head of prudential regulation at Insurance Europe, commented: “Calls for hurried changes to the UFR appear to be based on a misunderstanding of its purpose and how it impacts Solvency II liability valuations. The UFR of 4.2% is not the risk free rate used for Solvency II valuations; rather it is a parameter used to generate them. The actual risk free rates are far lower. For example, the risk free rate for euros in June at year 10 was 0.32% and even at year 60 was 2.76%.”
Insurance Europe believes that changing the UFR now could also cause unintended adverse consequences for both policyholders — by pushing insurers towards locking their products into long-term low returns — and for the European economy, by creating unnecessary difficulties and encouraging sub-optimal changes to investments at a time when insurers’ capacity to invest and provide financial stability is especially important.
It should also be noted that the UFR is defined in Solvency II as a long-term, stable parameter and its current calibration was agreed at political level during the Omnibus II negotiations. Therefore, the current low interest rate environment does not constitute a change in long-term expectations for interest rates, especially given that the current low rates are linked to current European Central Bank policy, which is intended to be temporary.