EIOPA Publishes Discussion Paper on IBOR Transitions
EIOPA published the discussion paper on interbank offered rate (IBOR) transitions. This discussion paper addresses, for the first time, the subject of the ongoing changes to the new benchmark rates, along with the issues identified in the EIOPA risk-free rate environment. The comment period for this paper is open until April 30, 2020. Based on the feedback received to this discussion paper, EIOPA will launch a consultation, which will include specific policy recommendations on the subject of IBOR transitions.
The focus of this discussion paper is to address the issues identified with the EIOPA risk-free rate methodology and the EIOPA risk-free rate production and to propose solutions and options for consideration. The paper highlights the potential impact of IBOR transitions on the definition and the use of the Credit Rate Adjustment currently applied on the risk-free rate term structures. Furthermore, the paper proposes options and a coherent approach for dealing with the new term structures calculated with the new benchmark rates for all currencies. The proposed approaches are generic and can be applied to all currencies.
The IBOR transition is a big challenge for both the regulators and the industry. New rates have differences between each other and the timing of the change for each jurisdiction may vary, thus posing additional challenges. Overall, the impact of the IBOR transitions in all currencies will be directly reflected on liability valuations, asset-liability management calculations and derivative valuations, and the structure of numerous (existing and new) financial and insurance products, which will refer to the new rates. Re-calibration of existing products and revaluations is expected to take place.
The risk-free rate methodology of EIOPA seeks to reflect the current market conditions rather than leading them to continue producing consistent risk-free rate term structures. According to the risk-free rate methodology, the approach of EIOPA is designed to secure the objectives of replicability of the methodology by undertakings, market consistency of the risk-free rate term structures produced, stability for insurance undertakings, and interests of policyholders. All four criteria, along with the criterion of the feasibility of the implementation within the risk-free rate framework have been considered thoroughly. Additional issues related to the IBOR transitions, which emerge outside the risk-free rate environment and may, directly or indirectly, affect the insurance industry and the policyholders are not covered in this paper.
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Comment Due Date: April 30, 2020
Keywords: Europe, EU, Insurance, Benchmarks Regulation, Risk-Free Rates, ALM, IBOR Transition, Benchmark Reforms, EIOPA
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