Today, the European Insurance and Occupational Pensions Authority (EIOPA) published for the first time the discount rates for the new regulatory system Solvency II. European insurers will apply these discount rates to determine the regulatory technical provisions for their insurance obligations. Sufficient technical provisions are a key factor for the insurers’ ability to pay appropriate benefits to their policyholders. According to the European Directive Solvency II, EIOPA is required to provide risk-free interest rates for the purpose of discounting. For insurance liabilities in euro with a maturity of 30 years EIOPA’s discount rate will be 1.86%, significantly higher than the low-risk rates of the ECB of 1.48% (Euro area yield curve for AAA rated government bonds as of 31 December 2014, maturity 30 years). As a consequence of these exaggerated discount rates, the amount of money that insurers will have to put aside is lower than their expected needs.
Sven Giegold, Green shadow rapporteur on Solvency II and economic and finance spokesperson of the Greens in the European Parliament comments:
This financial scandal over the weekend puts at risk the security of long-term insurance, in particular of annuity insurance. EIOPA disguises the financial problems of insurance companies instead of ensuring transparency. The European insurance regulator violates its mandate which foressees explicitely consumer protection.
EIOPA violates the requirement of the European Directive Solvency II to base insurance supervision on risk-free interest rates. High long-term rates are currently out of touch with reality. The reason for EIOPA’s high discount rates is the assumption that discount rates will converge for high maturities to an ultimate forward rate of 4.2%. In view of the low market interest rates, there is no justification for this assumption. The low interest rates are a consequence of high accumulation of private wealth and a low growth dynamic in all Western industrialised countries. There is no sign that this will change. The public insurance regulator arrogates without evidence to know the devolpment of markets better than investors. EIOPA behaves like a “super speculator” whose dine and dash the insured will have to pay.
The date of the publication of this key regulatory data on a Saturday afternoon is a fishermen’s story itself. Obviously market reactions and media reporting shall be obstructed equally.
It is a scandal that the German government supported behind these measures in EIOPA. Once again the German insurance regulator Bafin is involved in regulatory capture – at the disadvantage of the insured. German life insurance is suffering from low market interest rates because they promised high long-term guaranties in the past and have not stopped distributing profits, still paying high remunerations and maintain a costly system of insurance intermediation. This will further impair the trust in the insurance industry.
The figures published by EIOPA also show the problematic impact of the controversial long-term guarantee measures, which were introduced into the insurance Directive Solvency II by the European Parliament and the Council against Green opposition in 2013. Accordingly, insurers can increase the euro discount rates by a so-called volatility adjustment of 0.17%, thereby further deviating from economic reality.
Faced with this financial scandal the EU commission must step in as well as the European Parliament which has to act in its watch dog function over EIOPA. It is unacceptable that national insurance regulators through its presence in EIOPA’s decision making bodies disguise the tilt of European insurers. It has to be inquired why the staff of EIOPA could not convince in the decision making bodies of the regulator. It seems that the network structure of EIOPA proofs as ineffective as in the banking regulator EBA. A European insurance union seems as necessary as the banking union was.
EIOPA has just published for the first time discount rates for Solvency II today (risk-free interest rate term structures). More precisely: EIOPA has published interest rates for all relevant currencies for 31 December 2014 and the methodology to calculate them. From March on, EIOPA will update the discount rates on a monthly basis.
The methodology for the calculation of the discount rates is to a large extent determined by the Directive and the Delegated Acts on Solvency II. Nevertheless, EIOPA was able to decide on several parts of the calculation, the most prominent being the so-called ultimate forward rate (UFR), now fixed at 4.2%. The UFR is a target rate that discount rates will approach with increasing maturity. The UFR has an impact on the euro interest rates for maturites above 20 years. The interest rates for the euro are: 0.7% (10 years), 1.3% (20y), 1.9% (30y), 2.3% (40y), 2.7% (50y), up to 3.7% (150y). The increase of interest rates beyond 20 years is mainly due to the UFR. The market interest rates (e.g. swap rates) are flat from 30 years on at a level of about 1.5%. The ECB yield curve for AAA rated government bonds has an interest rate of 1.48% for the maturity of 30 years.