EIOPA Sets Out Approach for IBOR Transition in EU
The European Insurance and Occupational Pensions Authority (EIOPA) published a report setting out its approach for the implementation of Interbank Offered Rate (IBOR) transitions. EIOPA will apply this methodology for the calculation of the risk-free interest rates for the first time in January 2022 for the British pound (GBP), Swiss franc (CHF), and Japanese yen (JPY), in accordance with the specified implementation approach. For the euro (EUR) and the US dollar (USD), EIOPA will not perform any major changes and will continue to monitor market developments closely. For the euro Credit Risk Adjustment (CRA), the overnight indexed swap (OIS) will change from EIONIA to ESTER in January 2022.
The EIOPA methodology on IBOR transitions suggests that the change to the new curves shall take place instantaneously subject to several conditions that depend on whether the cessation of IBOR curve was announced and the time left before the cessation. The impact of the transition of the GBP, CHF, and JPY was estimated to be negligible for undertakings from the European Economic Area. It has been found that only a small number of undertakings, which are also well-capitalized, will be affected by this transition. EIOPA will implement the following changes from January 2022 onward:
- GBP LIBOR curve will change to SONIA curve; the Last Liquid Point (LLP) will change from 50 to 30 years
- CHF LIBOR curve will change to government bond curve; LLP will change from 25 to 15 years
- JPY LIBOR curve will change to government bond curve and the LLP will remain unchanged at 30 years
For the EUR, to this day, the transition remains uncertain since the EURIBOR is still very liquid and the discontinuation of the publication has not been decided. For the USD, the change is expected by mid-2023. Overall, the combined impact of the transition of the five currencies (EUR, GBP, CHF, JPY, and USD) was calculated to be on average -6.1% points to the solvency capital requirement (SCR) ratio, across the representative sample of 334 undertakings. In terms of impact, life and composite insurers seem to be the most affected compared to non-life insurers. To ensure a smooth transition, EIOPA will support market participants with the publication of two sets of curves (dual run) for three consecutive months prior to the transition date.
Keywords: Europe, EU, Insurance, LIBOR, EONIA, ESTER, Benchmark Reforms, IBOR, IBOR Transition, Risk-Free Rates, Benchmark Regulation, SCR, Solvency II, EIOPA
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