Solvency II newsflash
LIBOR transition – EIOPA risk-free rate curve… at last!
05 Mar 2020
The London Interbank Offered Rate (“LIBOR”) is being discontinued after 2021, and is set to be replaced by the sterling Overnight Index Average (“SONIA”) – the underlying reference rate for the sterling Overnight Index Swap (“OIS”) market.
LIBOR is a significant reference rate for UK insurance companies – it forms the basis of the Solvency II sterling risk-free rate (“RFR”) curve. However, until now there has been no news on how or when the Solvency II curve may change when LIBOR ceases to exist. Naturally, this has been a source of frustration for firms.
On 6 February 2020, however, the European Insurance and Occupational Pensions Authority (“EIOPA”) finally broke its silence on the treatment of the EIOPA RFR term structure following the future discontinuance of Interbank Offered Rate (“IBOR”) instruments by publishing a discussion paper setting out the options considered and its proposed approach.
As highlighted in our previous newsflash on this topic, the impact to moving from LIBOR to SONIA could be material and will have wide-ranging implications for UK insurers.
In this newsflash, we set out the proposals from EIOPA and what this may mean for firms. Whilst EIOPA’s discussion paper covers all currencies affected by the transition away from IBOR, this newsflash will focus on the implications for sterling.