2006-12-15
FI has decided how life insurance companies and friendly societies (tjänstepensionskassor) shall calculate the discount rate for occupational pension insurance. The method has been modified in relation to the original proposal as a result of the comments received in the referral process. An average of government bond and swap interest rates shall be used instead of government bond interest rates only.
The discount rate is used by life insurance companies and friendly societies to value technical provisions, i.e. commitments to policy holders. FI’s decision entails that the nominal rate for occupational pension insurance shall be the average of government bond interest rates and swap interest rates with equal maturities. The swap rate less a deduction shall be used for longer maturities.
There are several reasons behind FI’s decision to regulate the discount rate. If the rate that is used is too high, technical provisions are undervalued and equity is overvalued. The financial positions of life insurance companies and friendly societies may therefore be portrayed as being stronger than what they in reality are. Regulation provides FI with improved grounds for intervention when the rates companies are using are too high and also ensures comparability between companies. Supervisory authorities within EU have predominantly opted to regulate the discount rate. FI has taken into consideration the concern that surfaced in many responses regarding the limited access to long-term government bonds and subsequent ramifications for the accuracy of the calculation of a risk-free interest rate. By including the price of both government bonds and swaps, the discount rate will be calculated from as wide of a base of financial instruments as is possible.
The new regulation entails that the majority of companies will experience a slight decrease in the valuation of their commitments, although the commitments of a few companies will slightly increase in value. In the third quarter’s traffic-light measurement, only the friendly society Prometheus reported red light. According to Finansinspektionens estimates, no additional company would have reported red light if the new regulation had been in force.
The change will enter into force on 1 January 2007.
