Risk-free rates (RFR)
From 11pm on 31 December 2020 onward, UK insurance firms are required to use technical information published by the PRA to calculate the technical provisions required by Solvency II. The European Insurance and Occupational Pensions Authority (EIOPA) publishes similar information for use by EU insurance firms, including EU subsidiaries of UK insurance groups.
Our technical information consists of schedules of risk-free interest rates in a number of currencies. Firms use these rates to calculate the present value of the expected future costs of honouring their obligations to policyholders.
We publish technical information monthly (on or before the eighth working day of the month) and include the following information for each currency:
- Basic risk-free rate curves;
- Fundamental spreads (FS), used by insurers to calculate the risk-free curve for liabilities within a matching adjustment portfolio;
- Risk-free rate curves for liabilities where the insurers are permitted to use a volatility adjustment (VA).
For the publication of technical information, we rely on data obtained from established third-party providers. However, it may be necessary for us to amend, from time to time, technical information after it has been published if data errors are subsequently identified.
RFR updates due to Libor transitions
For technical information published with a reference date from and including Saturday 31 July 2021, the RFRs for GBP will be based on Sterling Overnight Index Average (SONIA) overnight index swap rates, with zero Credit Risk Adjustment.
From Saturday 1 January 2022, the RFRs for JPY will be based on Japanese government bonds, with zero Credit Risk Adjustment (CRA). From the same date, the CRA for EUR RFRs will be based on Euro Ibor (Euribor) and Euro short-term rate (€STR) data (instead of the Euro Over Night Index Average (EONIA) which will cease publication).
Further details can be found in Policy Statement (PS) 12/21 ‘Solvency II: Deep, liquid and transparent assessments, and GBP transition to SONIA’.
From Sunday 1 January 2023, the RFRs for USD will be based on Secured Overnight Financing Rate (SOFR) swap rates with zero CRA. This transition is consistent with the approach outlined in PS12/21. Details of the PRA’s DLT assessment for USD for January 2023 implementation will be set out below. For the avoidance of doubt, the 31 December 2022 RFRs for USD will not be subject to this change.
At the end of the transition period following the UK’s withdrawal from the EU, the PRA adopted EIOPA’s methodology for determining the CRAs for PRA relevant currencies (unless otherwise set out in statement of policy - The PRA’s approach to the publication of Solvency II technical information). The CRA for each PRA relevant currency is determined using a hierarchy of methods, depending on the data available for each currency (see p.33 of EIOPA 2020 technical documentation).
Due to the cessation of USD Libor in June 2023, the PRA is updating Method 3 for calculating the CRA:
- Method 3 only applies to currencies that do not have sufficient data on IBOR / OIS instruments to apply Method 1, and are not EEA currencies (meaning that Method 2 is not applicable).
- From 1 October 2023, the CRA determined using Method 3 will be calculated as a 15bps upward adjustment to the uncapped Euro CRA. The output of this calculation will then be constrained within 10 and 35bps.
- As Method 3 is not currently used for any PRA relevant currency CRA, this change is expected to have no immediate impact on the technical information published by the PRA.