Finansinspektionen (FI) is proposing a new Solvency 2-based approach to calculating the discount rate for insurance companies. The approach is intended to be more stable and predictable for the companies, which in turn protects policy holders. The proposal is now being submitted for consultation.
In order for insurance companies to be able to manage and control their risks from a long-term perspective, FI believes that it is necessary for the approach to be similar to the approach that will apply when the Solvency 2 regulatory framework is implemented. This approach for calculating the discount rate will require companies to use market data to determine an discount rate curve for maturities up to ten years. After the ten year point (last liquid point), the discount rate curve will move towards an established long-term rate (the ultimate forward rate). This new approach makes the discount rate less sensitive to market fluctuations since it is based on both market and model assumptions.
Primarily life insurance companies and non-life insurance companies with life and disability annuities will be affected by the new regulations. Occupational pension funds will also be able to use the new approach.
The proposal is for the new discount rate calculation to take effect from 31 December 2013. The proposal is now being submitted for consultation and affected organisations will have until 19 July to submit comments. FI plan to hold a consultation meeting in the near future during which affected organisations will have the opportunity to ask questions and offer feedback to FI’s proposal.
FI’s supervisory tool, the traffic-light model, which measures insurance companies various risk exposures, will be developed so it is in agreement with the new regulations. FI will announce changes to the traffic-light model after the summer and the preliminary start date for the traffic-light tool will be the last quarter of 2013.
