Solvency II changes may threaten investment returns for policyholders

Rushed changes to the ultimate forward rate (UFR) could risk pushing insurers towards sub-optimal investment strategies, which could unnecessarily impact policyholders’ returns negatively, according to Insurance Europe, the European insurance and reinsurance federation.

It says that it is unnecessary to change the UFR before the Solvency II review stressing that the current framework has several additional layers of protection in place already to make sure policyholder claims will be paid.

On possible changes to the methodology for calculating the UFR to a European Insurance and Occupational Pensions Authority meeting, Insurance Europe said there is no need for changing it either for prudential or policyholder protection reasons.

“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,” said Igotz Aubin, head of prudential regulation at Insurance Europe.

“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 unintentional opposing consequences for both policyholders and for the European economy, by creating unnecessary difficulties and encouraging sub-optimal changes to investments when insurers’ capacity is especially important.

Aubin added: “While low interest rates are creating real challenges for the industry, companies have been taking action — in some cases, for many years — to adapt their products, investment mix, hedges and capital levels.

“Solvency II makes this a requirement for all companies, creating multiple layers of buffers and protection, as well as introducing very detailed monitoring and powers to allow supervisors to ensure the necessary actions are being taken.”

Insurance Europe also thinks that when the UFR is eventually reviewed, given its key role as an anchor for solvency liability calculations and the potential significant impact of any change, that an impact analysis should be undertaken before any methodology and implementation planning is confirmed.