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Life (re)insurer ALM and Solvency II

In preparing for the upcoming 2020 Solvency II review an important area of focus for life insurers and reinsurers should be a reassessment of asset-liability management (ALM) strategies for long-term liabilities both from the perspective of legislative changes that are under consideration as well as shortcomings in practices that have already been highlighted by regulators. Firms should be assessing these issues for day-to-day solvency, the own risk and solvency assessment (ORSA) and overall risk management needs, bearing in mind the consequences for different types of business and the potential influence on business mix into the future.

In this blog post I highlight some of the key legislative changes currently under consideration regarding the treatment of long-term liabilities, including those that may affect each of the following areas which are important in the context of ALM:

  • The methodology and assumptions underlying the extrapolation of the risk-free rate curves for varying currencies including the last liquid point (LLP), the rate of convergence to the ultimate forward rate (UFR) and the level of the UFR itself
  • The volatility adjustment (VA)
  • The matching adjustment (MA)

I also summarise public feedback from the European Insurance and Occupational Pensions Authority (EIOPA) and national regulators regarding ALM best practices.

The long-term guarantee measures under Solvency II

As part of the final set of rules established prior to the commencement of the Solvency II regime in 2016, a set of measures was introduced regarding the treatment of ‘long-term guarantees’ or LTGs. These measures, commonly referred to as the ‘LTG measures,’ comprised the extrapolation of the risk-free rate, the VA, the MA and the transitional measures for the risk-free rate and technical provisions (TRFR and TTP).

Progress is well underway towards the review of the LTG measures, as originally envisaged to happen by the end of 2020 under the Omnibus II Directive. EIOPA has been charged with overseeing ongoing experience with regards to the LTG measures, publishing an annual report for each of 2016, 2017 and 2018. These annual reports are intended to be a key input informing the wide-ranging review of Solvency II. Indeed EIOPA is specifically required to submit an opinion on its assessment of the application of the LTG measures by the end of 2020.

Additional requests from the European Commission (EC) as part of the review process now make it clear that a point of focus regarding the LTG measures will be a reassessment of their appropriateness, particularly taking into account ALM practices of life (re)insurers.

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