EIOPA Launches Consultation on Interbank Offered Rate Transitions
EIOPA launched a consultation on the Interbank Offered Rate (IBOR) transitions, in context of the EU Benchmarks Regulation. EIOPA seeks to adopt a common approach, for all currencies, on transition to the new rates to continue producing consistent risk-free rate term structures. The comment period for this consultation ends on July 23, 2021. In parallel, EIOPA issued an information request under which certain insurance and reinsurance undertakings from the European Economic Area that are subject to Solvency II are requested to provide information on the impact of IBOR transitions on the solvency position of undertakings, with reference date March 31, 2021. Insurance and reinsurance undertakings that are requested to participate should submit the completed reporting template to the respective national supervisory authority by June 25, 2021.
EIOPA had published a discussion paper on IBOR transitions in January 2020. The recent market developments as well the responses received to that discussion paper have enabled a new opportunity, which is expected to facilitate the switch to the new instruments in a way that the impact can be minimized as much as possible. Thus, in this consultation paper, EIOPA presents a modified approach of the instant change option included in the discussion paper published in 2020. Furthermore, proposals on the treatment of the credit risk adjustment (CRA), the impact of the Deep Liquid and Transparent assessment, and the long-term average spreads (LTAS) are also considered. The focus of this consultation is to address the issues identified within EIOPA’s risk-free rate methodology and production and to propose solutions for consultation. Additional issues related to the IBOR transitions, which emerge outside the risk-free rate environment and may affect directly or indirectly the insurance industry and the policyholders are not covered in this consultation. The 2020 review proposes additional changes in the methodology, which are under review.
The risk-free rate methodology of EIOPA seeks to produce consistent risk-free rate term structures based on replicability, market consistency of the risk-free rate term structures produced, stability for insurance undertakings, interests of policyholders, and capability of being implemented via the production process of EIOPA. Consequently, EIOPA wants to remain transparent, follow rather than lead the market and avoid unnecessary material impact on undertakings, arising from a technical change due to IBOR transitions. The proposal included in this consultation is generic and can be applied to all currencies allowing at the same time some degree of flexibility on when to perform the switch.
Related Links
Comment Due Date: July 23, 2021
Keywords: Europe, EU, Insurance, IBOR, Risk Free Rates, Benchmarks Regulation, Solvency II, EIOPA
Featured Experts
Paul McCarney
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Brian Robinson
Actuary; risk management specialist; corporate and capital modelling expert
Previous Article
PBC, NDRC, and CSRC Release Green Bond Endorsed Projects CatalogueRelated Articles
EBA Finalizes Templates for One-Off Climate Risk Scenario Analysis
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
EBA Mulls Inclusion of Environmental & Social Risks to Pillar 1 Rules
The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.
BCBS Consults on Disclosure of Crypto-Asset Exposures of Banks
As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.
BCBS and EBA Publish Results of Basel III Monitoring Exercise
The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.
PRA Updates Timeline for Final Basel III Rules, Issues Other Updates
The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.
US Treasury Sets Out Principles for Net-Zero Financing
The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.
EC Launches Survey on G7 Principles on Generative AI
The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.
ISSB Sustainability Standards Expected to Become Global Baseline
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
BCBS Assesses NSFR and Large Exposures Rules in US
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
