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“The European insurance industry maintains there is no need to make rushed changes to the UFR, because Solvency II already takes a very conservative approach and has several safeguards. When calculating their liabilities under Solvency II, insurers are required to assume that the current low interest rates will remain in place for the next 20 years. However, this is generally considered to be an extreme scenario, not a base case. As a result, insurers currently have to value 10 year liabilities using an interest rate of just 0.6%; even for 50 year liabilities the rate is below 2.7%2.
“Insurers must also hold capital in case of even lower rates. In addition to this, Solvency II has very significant governance and reporting requirements that are designed to ensure that company management take action early to address any problems, and if they do not, ensures supervisors have the powers and information for early intervention.
“The UFR is part of the valuation system of Solvency II. There are already concerns that this valuation system does not correctly reflect insurers’ long-term business and will have a detrimental impact on insurers’ ability to invest long-term. Changes therefore should only be finalised and implemented as part of the review already planned for completion by 2020 when the overall system and its impact will be assessed.
“When the European Commission receives the technical information from EIOPA on this particular aspect of the framework, it should take account of Solvency II’s sensitivity to interest rates and overall conservativeness and should avoid such isolated changes.”