Transitional measure on the risk-free interest rates

Approval of the use of the transitional measure on the risk-free interest rates

Overview of the measure

The Solvency II prudential regime provides for transitional measures to allow insurance and reinsurance institutions time to adapt before having to fully comply with the provisions of the new regime, and to smooth the financial effects of the changes over time. These measures require prior approval from the supervisory authority.

The transitional measure concerning the relevant risk-free interest rate curve enables institutions to spread the impact on technical provisions of the change in interest rates from a calculation based on “Solvency I” standards to one based on “Solvency II” standards over 16 years.

This measure is based on the difference between the overall discount rate across the portfolio of eligible liabilities, equivalent to the total of discount rates currently used to calculate “Solvency I” technical provisions, and an effective annual rate based on the calculation of “Solvency II” technical provisions.

The transitional adjustment is a linear function of the resulting difference in rates that decreases over time and is added to the interest rate used to calculate Solvency II technical provisions. The transitional measure may only be applied to contracts that give rise to an insurance liability before 31 December 2015. Renewals of such contracts fall outside its scope. This transitional measure, across a given scope, is not compatible with the use of the matching adjustment or the use of the transitional measure on technical provisions.

Furthermore, institutions making use of this transitional measure and which would not cover their capital requirement without it must submit a phased implementation plan to the ACPR detailing how they intend to achieve compliance with the new regime at the end of the transitional period.

 

Regulatory references

The transitional measure on the relevant risk-free interest rate curve is laid down in Articles L.351-4 and R.351-16 of the Insurance Code, applicable to institutions covered by each of the three codes, which transpose point 4 of Article 308 of Directive 2009/138/EC, known as “Solvency II”.

The terms of this authorisation are laid down in ACPR Instruction 2015-I-07 on requests for approval to use the transitional measure on the relevant risk-free interest rate curve and its annexes. These are available via the following links:

 

Content of the application

A full list of documents to be submitted is laid down in the annex to the aforementioned instruction. In summary, the application must contain the following:

  • documentation supporting the calculation of this transitional measure, including the following:
    • a description of the planned scope and the liabilities concerned
    • a calculation of the Solvency I overall discount rate across all eligible liabilities, together with a description of the underlying method
    • a calculation of the Solvency II effective annual rate
    • future regulatory report S22.04.b, as described in the draft Implementing Technical Standard published by EIOPA, which details how the transitional measure is to be calculated
    • documentation on the calculation of Solvency II technical provisions across the relevant scope
  • documents on the calculation of technical provisions in accordance with regulations in force until 31 December 2015 across the relevant scope
  • the solvency capital requirement coverage ratio with and without applying the transitional measure
  • where the solvency capital requirement is not covered without applying the transitional measure, a phased implementation plan setting out measures planned by the institution to ensure that it complies with the solvency capital requirement by the end of the transitional period

 

Procedure

Applications should be sent by post to the following address, as well as by e-mail to the inspection team responsible for the group:

Secrétariat général de l’Autorité de contrôle prudentiel et de résolution
Brigade de contrôle des organismes d’assurance
61, rue Taitbout
75436 Paris Cedex 09

For applications filed on or after 1 January 2016, the ACPR will reach its decision within a maximum of three months from receipt of the completed application.

For applications filed before 30 September 2015, the maximum response period is six months.

For applications filed between 1 October and 31 December 2015, the ACPR will reach its decision by 31 March 2016.

 

Consequences for the group

If an institution using this procedure belongs to a group, the group’s combined or consolidated financial statements are prepared on the basis of the individual financial statements after applying the measure; the group need not request the same authorisation. However, the group is subject to the reporting requirements in connection with the use of that measure.

Updated on: 07/17/2017 15:29