Swedish regulator to introduce Solvency II discount rate in 2014

The Swedish financial regulator is to introduce Solvency II’s discount rate methodology for calculating the value of life insurance and pension fund liabilities next year.

Finansinspektionen will also extend the temporary floor on the discount rate, introduced last year in response to low interest rates, until the end of 2013. The floor was originally intended to expire on June 15, 2013.

The regulator said a long-term solution to the discount rate was needed because of the delays to Solvency II.

It said in a statement: “When the discount rate floor was implemented, it was expected that Solvency II would enter into force on January 1, 2014. In other words, it would only have been six months until the new rules for the discount rate would go into effect.

“The timeline for when Solvency II will go into effect is at this point unclear. In practice, undertakings need to take into consideration both the current and pending regulations when managing their investments. With this proposal, we are shrinking the gap between the two regulations and, at the same time, reducing the problems with pro-cyclicality,” it added.

Finansinspektionen said it was too early to comment on the precise design of the discount rate methodology, but the intention was to implement a method that in practice was very similar to what will be implemented in Solvency II. It plans to consult on the proposal in the spring, with the new regulation coming into force on December 31, 2013.

The Solvency II discount rate curve consists of two parts. Market rates are used for maturities that have deep, liquid, active and transparent markets, while the interest rates for longer maturities beyond a last liquid point (LLP) converge toward a long-term equilibrium rate called the ultimate forward rate (UFR).

European legislators have suggested an LLP of 20 years and a UFR of 4.2% – a figure that reflects an assumed long-term average real yield of 2.2% and expected inflation of 2%.

The Dutch and Danish regulators introduced Solvency II discount rate methodology last year in response to persistently low interest rates.

 

This article was first published on Risk

 

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