Consequences of IBOR Reform on Insurance Sector

Consequences of IBOR Reform on Insurance Sector


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In the aftermath of IBOR scandals and due to a decrease on volume of transactions associated to interest rate indexes, regulators required a transition to new reference rates. In Europe, European Parliament and Council of the European Union adopted The Benchmark Regulation (BMR) which is intended to improve governance and controls over the benchmark process. Actual interest rates, like Euribor, Libor or Eonia have to be reformed to be BMR-compliant.
This new regulation impact all financial players. For insurance companies, both part of their balance sheet is affected. Assets are invested on products linked to those interest rate references and insurance companies face the same changes as banks or other asset managers. Insurance liabilities are discounted using the risk free rates based on EIOPA term structures. For Euro, they are currently based swap using 6 month Euribor then adjusted for credit and default risk with OIS rates linked to EONIA.
Even if Benchmark reforms could disturb interest rates used in solvency II, this one is absent of 2020 review because the transition in interest rates is still underway and work has not been completed on several subjects.
We will present this transition on European and international interest rates and possible consequences on Solvency II and the Best Estimate Liability.

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