To protect the interests of insurance policy holders, Finansinspektionen will soon propose that insurance companies are temporarily given the possibility to apply a floor for the discount rate.
Life insurance companies and occupational pension funds have recently found themselves under considerable pressure as market rates have fallen substantially. Interest rates are now at historically-low levels.
Finansinspektionen considers the market conditions at present to be exceptional and difficult to predict and therefore wishes to give insurance companies the possibility to apply a floor for the discount rate*. The companies are given the opportunity to calculate discount rates according to the current method, but based on the closing rates as of 31 May 2012. It is proposed that the floor will apply for one year.
This proposal is intended to counteract for insurance companies selling their shares short and buying interest-bearing assets. Otherwise, the companies’ actions risk creating a negative spiral of continued falling share prices and interest rates, which could further aggravate the situation. In the long run, there is a risk that insurance policy holders would receive smaller pensions.
– We would like to avoid short-sighted behaviour that could have consequences in the long run, says Martin Andersson, Director General of Finansinspektionen.
At the same time, Finansinspektionen would like to emphasise once again the importance of companies reviewing the fundamental problems with the guarantees given to customers that are difficult to fulfil in a situation with low interest rates.
The proposal is supplemented with a general guideline that the companies who have at some point during the period used the floor should be restrictive in paying dividends or making other distributions to their owners.
The proposal will be submitted for comments on 11 June 2012.
* Life insurance companies and occupational pension funds have made long-term commitments to their policy holders in the form of promises of future payments from insurance policies and pensions. According to the current regulatory framework the companies calculate the present value of these obligations to policy holders in accordance with a discount rate curve that is based on the relevant market rates. If the market rates fall, the value of the debt to the policy holders increases.