Sven Giegold

Insurances/Solvency II: Fanciful interest rates: hope dies last

The article first appeared in German on


The ultimate forward rate (UFR) is one of the cornerstones of the new Solvency II supervisory system. This discount rate determines the risk-free interest rate at the long end of the interest rate curve. The higher this interest rate is, the lower the mandatory reserves an insurer is required to have in order to meet long-term liabilities in connection with life insurance policies. Because at the long end the market is illiquid, the interest rate is not calculated on the basis of market data, but extrapolated by the supervisory authority. Under the terms of the EU insurance directive Solvency II, EIOPA is required to lay down risk-free interest rates as discount rates. In this case, however, the EIOPA has extrapolated a fanciful rate of 4.2%, which becomes the eurozone standard for policies with a life of more than 20 years. This is specified in a recital of the Solvency II Directive; in the UK, meanwhile, the UFR is used only for policies with a life of at least 50 years. It is doubtful whether this decision was guided by the imperatives of regulatory prudence and economic plausibility. The fact is that a reduction in the interest rate, a move more consistent with market realities, would necessitate an enormous, but entirely appropriate, increase in the capital required to back life-insurance policies based on long-term guarantees.

The Dutch supervisory authority has thus reduced the ultimate forward rate for pension funds to 3.4%; it was able to do this because there is no EU legal framework governing the minimum capital requirements for such funds.

The International Association of Insurance Supervisors (IAIS) recently took an ultimate forward rate of 3.5% as the basis for its survey of global systemically important eurozone insurers. This has given rise to an absurd, unbelievable and incomprehensible state of affairs whereby, for example, the German insurer Allianz is supervised in Germany and Europe on the basis of an ultimate forward rate of 4.2%, but investigated internationally on the basis of a rate of 3.5%.

Two months ago, in a staff working paper, the European Systemic Risk Board (ESRB) voiced similarly grave doubts about the excessively high ultimate forward rate ( Detailed analyses led the ESRB staff to conclude that a UFR of 4.2% is too optimistic by 0.5 to 1%.

But the national insurance supervisors are unmoved. At its meeting of 29-30 September 2015, the Board of Supervisors, the key decision-making body in EIOPA, decided that the ultimate forward rate would remain unchanged until the end of 2016. In so doing, the EIOPA acted in breach of EU law in the form of the Solvency II Directive. Despite all the good arguments emerging from the Netherlands, the IAIS and the ESRB, steady as she goes is the watchword. The fear of undermining insurance markets with stringent long-term guarantees, such as those in Germany, Sweden or the Netherlands, was clearly too great. Instead, the EIOPA is clearly hoping that ‘something will come up’. All the supervisors are behind this approach. Not one of them called for a different timetable, but at least in 2016 there will be a consultation on the topic. A decision on whether or not to overhaul the method for calculating the ultimate forward rate is to be taken by September 2016, but the rate itself will still not be changed before the end of 2016.  For some time now, this attitude has left the staff of the EIOPA and many supervisors and insurance companies shaking their heads. Because, in the final analysis, what is being undermined is the key principle underpinning the whole insurance industry: trust that the pledges made to policy holders can be met in the long term.

The German supervisor BaFin is also choosing to ignore the evidence. Its recent assessment that the sector is ‘well prepared’ is irresponsible (;jsessionid=2DB75B301C2DC6DFA4760046371B769C.1_cid290?nn=2819248).

It is also unrealistic because the CDU-CSU-SPD coalition government in Germany continues to refuse point blank to countenance an investment programme which represents the only way of getting long-term interest rates moving upwards once again. We Greens, in contrast, will continue to advocate a significant increase in private and public investment as part of a Green New Deal. Indirect subsidies for the insurance industry in the form of questionable public-private partnerships are subsidies which are both inefficient and detrimental to taxpayers’ interests.

Rubrik: Wirtschaft & Währung

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