Opinion: Dr Frank Grund on contemporary insurance supervision

It has been a year since Solvency II was introduced, and one thing is clear: the market participants are getting better and better at dealing with the new supervisory system, although they still have more to learn. But in view of the complexity of the new regulatory framework, anything else would be surprising. Insurance Supervision will continue helping to foster understanding of the new system by issuing its own publications on Solvency II.

The next milestone on the way to the new supervisory world will be the publication of the Solvency and Financial Condition Reports.¹ For the 2016 financial year, the undertakings must publish extensive information on their regulatory capital requirements at the latest 20 weeks after the year-end – and do so in electronic form, and therefore as a rule on their websites.

The public will then be faced with the task of interpreting the information correctly. Analysis of the key indicators will require a differentiated approach, reflecting the particular characteristics of the undertakings and the extent to which they are able to take individual circumstances into account on request when determining these figures – for example using internal models or undertaking-specific parameters in the standard formula. It will take a few years before we have a reasonably complete picture – once corresponding time series are available.

Differing responses and objectives

Solvency II has created a uniform supervisory system across Europe, but the legal frameworks under which insurers operate are a long way from being harmonised – one only has to think of civil law, commercial law or tax law. Finding the right balance between further harmonisation and the recognition of different national realities is a challenging task. BaFin sees this on a daily basis in the course of its work in the various committees of the European Insurance and Occupational Pensions Authority (EIOPA): the individual member states have divergent views on topics such as the ultimate forward rate or dynamic modelling of the volatility adjustment.

In Germany, legislators have already responded to the low interest rate environment with the Life Insurance Reform Act (Lebensversicherungsreformgesetz – LVRG). But it can be observed that other member states are pursuing particular macro- or microprudential objectives via Solvency II that Germany, for example, has already addressed in other ways.

We must also not forget that introducing a supervisory system based on market value cannot alter other aspects of the legal and economic environment. Moreover, business will not conform to the new supervisory system from one day to the next. The European legislature has therefore provided for transitional measures, which ensure that Solvency II will have a gradual effect on the capital requirement. In parallel, insurers will be running down the portfolios that they built up before Solvency II came into effect. This will have the effect of softening the impact of Solvency II on the business strategy pursued in the previous era.

Transitional measures for customers

This should also be borne in mind when undertakings are criticised for using the transitional measures. To do so is not necessarily a sign of weakness – it can also be a strategic decision to ensure a smooth transition, for customers as well. For this reason, it is not always advisable to avoid using such measures; if they are not used, the undertaking has to accept the consequences for its own portfolio at the same time: significant increases in capital requirements for business involving long-term guarantees. In combination with the volatility of a market value-based system such as Solvency II, such decisions could result in capital requirements so high that an insurer has to modify its investment strategy to the disadvantage of customers – away from higher-yielding asset classes towards investments that are less risky but also less profitable. For these reasons, one can only warn against stigmatising undertakings that make use of the transitional measures. It might even be a very sensible decision in the interests of the customers.

Principles-based supervision

Solvency II represents a move away from a purely rules-based system to a more principles-based system for insurance supervision. There was initially some uncertainty on the part of the undertakings in dealing with this new supervisory approach, which is not surprising, especially as BaFin had to focus first of all on formal topics and on the plausibility checks for quantitative reporting. However, BaFin has provided initial guidance in the form of its interpretative decisions to help the insurers find their bearings, for example regarding the groups of issues around deferred taxes and the ORSA.² BaFin's next step will be to address the content of the ORSA in greater detail: the ORSA reports received to date show that there is still room for improvement. BaFin will make its position clearer on this subject – as always in the context of a constructive dialogue with the undertakings, of course.

Proportionality

The principle of proportionality allows the undertakings a considerable degree of flexibility in implementing many, though not all, of the requirements. Proportionality does not mean that the insurers do not have to comply with the applicable requirements; it is a question of "how", not "whether". There is in principle no provision for exemption from the requirements. There is one – explicitly stipulated – exception: the quantitative reporting obligations.³ As a general rule, the undertakings are required in the first instance to comply with this core component of Solvency II and to implement the regulatory requirements in a manner appropriate to the nature, scope and complexity of their risks. The Supervisory Authority will then review whether the implementation is in fact appropriate and require adjustments to be made, where necessary. As far as possible, BaFin will also provide the industry with detailed guidance on the proportional application of Solvency II – as it has done in connection with technical provisions, for example. BaFin already permits the undertakings to use a simplified procedure for the calculation of expected profits included in future premiums (EPIFP) (only available in German) and of the natural disaster risk for comprehensive vehicle insurance (only available in German). An interpretative decision issued by BaFin also permits the use of specific simplified procedures for assessing the effects of new business on the existing portfolio's future discretionary benefits (only available in German).

Drivers of the Solvency II ratios

In 2017, BaFin will look more closely at the drivers of the Solvency II ratios. In keeping with forward-looking supervisory practice, it will put a stronger focus on the sensitivity of the SCR ratio⁴ to market movements. The main focus will be on the life insurers, since their SCR ratios are highly sensitive to changes in interest rates as a result of their long-term obligations. BaFin's objective is to develop early warning indicators and supervisory tools so that adverse developments can be counteracted at an early stage.

Rather than being the legislator, BaFin applies the laws as the Supervisory Authority. At the same time, however, it is involved in the development of regulation in Germany as well as on a European and global level. For example, this role involves analysing the potential need to adjust the standard formula in the context of the ongoing SCR review. In BaFin's opinion, it would be desirable for the standard formula to be simplified. There is also a need for adjustment from an actuarial point of view, for example with respect to the calibration of the interest rate risk to reflect very low and negative interest rates. It is unlikely that the capital backing for the risks of government bonds will also be looked at once again as part of the SCR review. But the topic should remain on the agenda.

Consumer protection

Important regulatory decisions affecting the future for consumer protection will also be made in the next two years. The new requirements will represent a challenge for the undertakings in the true sense of the word.

An example is the Insurance Distribution Directive (IDD), which must be transposed into German law by 23 February 2018.⁵ Under the IDD, the supervision of distribution activities will start right at the product development stage in future. The intention is to take the needs of consumers into account even when the product is still being developed. Conflicts of interest between intermediaries and consumers should be avoided or at least made transparent. Anyone in breach of the new regulations can expect to feel the effects of significant sanctions. This development should be particularly interesting against the background of digitalisation – insurtech companies will also have to meet these requirements.

Another regulatory project relating to consumer protection is the PRIIPs Regulation, the regulation on key information documents for packaged retail and insurance-based investment products.⁶ The PRIIPs Regulation is intended to establish the framework for the new key information document for retail investors, the PRIIPs KID.

As far as products distributed in the German market are concerned, the scope of the regulation is, unfortunately, not absolutely clear. BaFin will therefore publish appropriate interpretative guidance on the subject. BaFin is currently assuming that, in addition to insurance-based investment products, including traditional endowment life insurance, unit-linked life insurance, hybrid products and variable annuities, deferred annuity insurance could also be covered by the definition of insurance-based investment products. A clearer reference to pure investment products in the PRIIPs Regulation would have been preferable, in order to regulate pension products specifically. The Riester contracts provide a precedent, after all.

The PRIIPs Regulation will take effect one year later than planned, namely from 1 January 2018. The undertakings are not required to have the European key information document available until then. The application of the regulation was delayed because the European Parliament raised some criticisms regarding the associated Regulatory Technical Standards and these must now be revised. There was also a desire to give the undertakings more time to prepare.

These and other regulatory requirements relating to consumer protection – including those not dealing with insurance supervision – are inspired by the basic idea that the financial market is structured such that consumers are in a weaker position than providers and undertakings. That is undoubtedly true. And yet one should not lose sight of two things: the general concept of the responsible consumer and the appropriateness of each regulation. Consumer protection must not result in patronisation. And if the provision of financial products becomes too expensive or involves unpredictable legal risks, providers may withdraw from the sector. That would be no help to consumers.

Outlook

On a global level, it remains interesting to see whether the International Association of Insurance Supervisors (IAIS) will succeed in agreeing on the main features of an initial global solvency regime.⁷ BaFin is arguing for wide-ranging compatibility with Solvency II, but will certainly also have to find a willingness to make compromises.

By the end of 2017, we will perhaps also know more about the future relationship between the European Union and the United Kingdom, and its effects on the insurance industry. 2017 is and will continue to be an exciting year.

HGB and Solvency II: Differences in reporting

One of the general obligations to which insurance undertakings and insurance groups are subject is to report regularly on their economic position – to the public and to the Supervisory Authority. Various statutory requirements specify what has to be reported, as well as when, how often and to whom. In addition, there are rules governing the policies applied for the measurement of assets and liabilities and which data transfer methods should be used.

Until the start of Solvency II on 1 January 2016, the financial supervision of insurance undertakings was based on reporting in accordance with the accounting requirements of the German Commercial Code (Handelsgesetzbuch – HGB). Now, the Solvency II measurement system for supervisory purposes applies across Europe to all insurance undertakings concerned. This means that a very wide-ranging and complex reporting system has come into effect, which is consistent and has been designed on a collective basis at European level. Its scope and complexity reflect the fact, among other things, that a variety of countries have contributed their own differing experiences in the past. The standardised electronic reporting procedure enables the information to be submitted to the European Insurance and Occupational Pensions Authority (EIOPA).

Reporting under HGB

In principle, the reporting obligations of the Commercial Code continue to apply to insurance undertakings as well. In accordance with section 341a of the Commercial Code, insurance undertakings are required to prepare annual financial statements and a management report for the previous financial year in the first four months of each financial year, and to submit them to their auditors. These documents must also be published in the Federal Gazette within 15 months.

Reporting to the public must also comply with the Regulation on Insurance Accounting (Verordnung über die Rechnungslegung von Versicherungsunternehmen) – in addition to the provisions of the Commercial Code. The regulation is based on section 330 (3) of the Commercial Code, but also contains prescribed formats for the balance sheet and profit and loss account of insurance undertakings as well as particular requirements for the reporting and measurement of individual items in the balance sheet and profit and loss account.

The measurement policies stipulated by the Commerical Code and the Regulation on Insurance Accounting are essentially based on the principles of prudence and the protection of creditors. As a general rule, assets are recognised at no more than their cost, less depreciation and amortisation, and liabilities at their settlement amount. Section 341e of the Commercial Code lays down general accounting principles for insurers' technical provisions.

BaFin's reporting requirements are considerably more detailed. The requirements for the reports on the economic position are mainly contained in the Insurance Reporting Regulation (Versicherungsberichterstattungs-Verordnung). However, since that regulation was based on the German Insurance Supervision Act (Versicherungsaufsichtsgesetz) that was in force until the end of 2015, it had to be suspended with a view to being re-issued later. This means that any changes for which the need arises in the meantime can be incorporated directly. The relevant amendment is expected in the second quarter of 2017.

Among other things, the draft of the amended Insurance Reporting Regulation contains provisions governing the form and content of the internal report to be submitted to BaFin, as well as the deadline and the number of copies required. The report consists of a balance sheet prepared using a classification designed for supervisory purposes and a statement of profit or loss classified according to lines of business and types of insurance, as well as special explanatory notes. The forms required by the Insurance Reporting Regulation may be submitted in paper form or electronically.

Reporting under Solvency II

Reporting under Solvency II applies across Europe to all insurers that fall within the scope of the Solvency II Directive. But it does not consist solely of additional reporting requirements; for German undertakings, some have also been removed, such as the quarterly statements as well as notifications and reports on investments and the financial projections. BaFin has published additional information on reporting in its guidance notice on reporting for primary insurers and reinsurers, insurance groups and Pensionsfonds (only available in German).

A delegated act⁸ and two implementing technical standards⁹ contain the detailed reporting requirements under Solvency II (see Figure 5 "Legal bases under Solvency II”):

• Delegated Regulation (EU) 2015/35 contains rules for the measurement of positions required to be included in the solvency statement¹⁰, among other things. The principle underlying Solvency II that all assets and liabilities are measured at fair values on a going concern basis is of course applied in this context. Fair value accounting is a significant difference from HGB measurement principles.
• Implementing Regulation (EU) 2015/2450 contains the reporting forms and the accompanying explanatory notes, among other items.
• Implementing Regulation (EU) 2015/2452 is mainly concerned with stipulating the quantitative information required to be included in the Solvency and Financial Condition Report (SFCR) and the form in which it must be presented.

Two EIOPA guidelines are relevant in addition to these regulations.¹¹ The requirements for primary insurers and reinsurers under the Solvency II Directive¹² generally also apply analogously at group level (see info box "Information on Solvency II").

Every insurance undertaking falling within the scope of the Solvency II requirements must publish an annual Report on its Solvency and Financial Condition (SFCR), including the related quantitative forms, and make it available to the public. The report must also be submitted to BaFin. In addition, annual and quarterly quantitative reports are provided electronically to BaFin only. Furthermore, a regular supervisory report (RSR) and – following each own risk and solvency assessment (ORSA)¹³ – an ORSA supervisory report (OSR) must also be submitted to BaFin every year, or every two or three years as applicable, both also in electronic form.

Until 2019 extended periods for submitting the reports still apply; after that date, the final deadlines stipulated in Article 312 of the Delegated Regulation must be complied with. The undertakings must also observe the formal requirements of the templates referred to in the Insurance Reporting Regulation (Versicherungs-Meldeverordnung). If the information to be transmitted electronically does not comply with these requirements, it is rejected by BaFin and treated as not having been submitted as it is important for the Supervisory Authority that the undertakings comply with the deadlines and provisions. Moreover, BaFin promptly passes the Solvency II information on to EIOPA, which is not the case for the HGB figures.

In summary, reporting under Solvency II is complex and focuses on essential principles which differ from reporting under HGB, for example fair value accounting. Furthermore, since under Solvency II measurement is based on fair values and the going concern assumption, the undertakings' key indicators are subject to greater fluctuation. Just one year after the introduction of the new Solvency II supervisory regime, its reporting system is still in the initial phase – and will be subject to further development.

Claims provisions – New measurement principles under Solvency II

Claims provisions recognised in the HGB financial statements are crucially important for property and casualty insurance undertakings. In accordance with the principle of prudence and pursuant to section 341e (1) of the Commercial Code, they must always be measured in such a way as to make absolutely sure that the insurer can meet its obligations over the long term.

This remains the case under the new Solvency II supervisory system on the basis of section 294 (4) of the Insurance Supervision Act. However, in the Solvency II balance sheet the best estimate is reported for obligations arising from non-life insurance business. This comprises the best estimates for the claims provisions and the newly introduced premium provision, which must be calculated separately. As a result, claims provisions – and also the calculation of a risk margin which must now be performed – are measured on a new basis which differs from the HGB approach.

The best estimate of the claims provisions is the probability-weighted estimate of the future cash flows for a homogeneous risk group (HRG) until the end of the contract. Any implicit or explicit safety loading is not taken into account in recognising economic values. The measurement must be in accordance with market conditions. As a consequence, the estimated claims cash flows must be discounted at the risk-free yield curve taking account of the time value of money (present value approach). As a present value, the best estimate will therefore generally be lower than the HGB value.

The principle of individual measurement that must be observed under the HGB with regard to claims settlement for reserving incurred and reported claims at their fulfilment value continues to apply. However, that does not rule out incorporating the payment-related data for known individual claims under HGB into the best estimate for a homogeneous risk group.

The best estimate of the claims provisions is based on a more future-oriented perspective and accordingly an economic ultimate view: insurers therefore estimate the development of claims, using stochastic reserving methods in some cases, with explicit reference to individual subsequent years up to the ultimate claims expenditure. This requires cash flow projections forecasting the exact amount and timing of future cash flows. Undertakings' internal validation procedures can provide initial methods of assessing these calculations, as well as the robustness and forecasting accuracy of the best estimate. In addition, at least once a year the undertakings analyse the data, assumptions, methods and amounts underlying their best estimates. The standard against which these values are assessed is once again the homogeneous risk group. Instruments used in this internal quality assurance process include backtesting and sensitivity analyses.

ORSA in the management of undertaking

With the entry into force of Solvency II, insurance undertakings are required to carry out regular own risk and solvency assessments (ORSAs). The resultant findings must be fed back into the management of the undertaking on a continuous basis. Implementing and making use of the ORSA as an integral component of the risk management system represents a challenge for the undertakings – not least because of the high degree of freedom in carrying out the ORSA. On 1 January 2016, BaFin summarised its expectations in an interpretative decision on the ORSA (only available in German).

Provision of cover at all times

Insurance undertakings must ensure that they are always in a position to cover their solvency capital requirement (SCR) and minimum capital requirement (MCR, see info box "SCR and MCR") with eligible own funds. In accordance with section 27 of the Insurance Supervision Act, (ad hoc) ORSAs must therefore be carried out regularly (at least annually) and when there are material changes in the risk profile.

As a component of Pillar II of Solvency II (governance system), the ORSA represents a significant element of the risk management system. If the analysis makes it clear that an undertaking is below its SCR, it must take countermeasures by making appropriate adjustments to its risk profile in good time and/or providing additional eligible own funds.

The central function of the ORSA is therefore to assess whether the regulatory capital requirements are being complied with at all times. Equally important is the forward-looking determination of solvency needs on an economic basis – i.e. independently of the regulatory capital requirements. This determination is based on the undertaking's general planning horizon (normally three to five years) and, in addition to current risks, takes into account risks which may only become clear over the long term. The ORSA also represents a corrective to Pillar I of Solvency II (solvency capital requirement): the variance analysis required to determine the differences between the undertaking's actual risk profile and the assumptions on which the SCR calculation is based serves the purpose of establishing whether the SCR adequately covers all material quantifiable risks. This includes both risks to which the undertaking is already exposed and those to which it could be exposed. If risks have not been taken into account to a material extent, the Supervisory Authority may intervene.

Integration with management processes

Business decisions and external factors may give rise to relevant changes in the risk profile. In consequence, the findings of the ORSA are intended to be fed back into the business and risk strategy and taken into account on an ongoing basis when making strategic decisions. Undertakings must assess the effects on their risk profile and therefore on the regulatory capital requirements and their overall solvency needs prior to taking essential measures. In particular, the findings of the ORSA must be incorporated into business planning and capital management as well as product development. The ORSA process and report in this way contribute to the long-term management of business.

The central responsibility for the ORSA therefore lies with the management board and may not be delegated to individual board members or transferred in its entirety to committees. BaFin expects all members of the management board to have thorough knowledge of the risk profile and the resulting capital needs – if not in the same degree of detail. A general understanding of the SCR calculation is also a requirement. On this basis, the management board must actively control the ORSA process, discuss the undertaking's risks and capital needs and inform BaFin of the findings and conclusions of the ORSA by submitting the corresponding report.

Supervisory practice

In view of the outstanding importance of the ORSA, BaFin paid particularly close attention to its implementation even in the preparatory phase. However, a varied picture emerges from the first year of application of Solvency II as far as dealing with the ORSA is concerned. For some undertakings it presents major challenges (see info box "Insurance Supervision Annual Conference"). In keeping with the principle of proportionality, every insurance undertaking must establish appropriate, individual ORSA processes and draw up a corresponding ORSA report. Certain minimum requirements can be reflected in the ORSA relatively easily. These include, for example, the performance of stress tests and scenario analyses as well as scrutiny of the SCR calculation. The assessment of whether such requirements have been adequately met is also straightforward.

On the other hand, it is considerably more demanding for undertakings to put into practice two of the fundamental principles of the ORSA: the multi-annual perspective and – related to that – the use of the ORSA for the management of the undertaking.

Multi-annual perspective

The responsible persons for the ORSA in the insurance undertakings sometimes take a sceptical view of the multi-annual perspective required. A forward-looking assessment ties up resources and forecasts are always subject to uncertainty. The assessment of those forecasts and the preparation of detailed documentation – so that they can be understood by knowledgeable third parties – represents a challenge. A further factor is likely to be concern on the part of the responsible persons that they may be criticised at a later date if the estimations turn out to be wrong. BaFin pays careful attention to the appropriateness of the assessment of future risk-bearing capacity and to the conclusions derived from it, which then form the basis for the undertaking's strategic decisions.

Use for the management of the undertaking

The ORSA is not intended to be an unavoidable obligation imposed by BaFin but should be used – as described above – for the management of the undertaking. The undertakings are continuing to work on implementing appropriate ORSA processes and are integrating the risk management procedures they established under Solvency I with the ORSA. The communication of the ORSA findings to relevant units within the undertakings so that they can be taken into account in essential management decisions is also developing further.

The same applies to the performance of ORSAs in preparation for strategic decisions. Ad hoc ORSAs of this kind should be carried out, for example, prior to an intended portfolio transfer – at least in cases where this is expected to have a significant effect on the undertaking's risk profile and therefore its long-term risk-bearing capacity. At the same time, the definition of sufficiently specific events triggering the need for an ad hoc ORSA in the undertakings' own ORSA guidelines may sometimes conflict with their desired degree of freedom in carrying out ORSAs.

Outlook

The ORSA is an essential instrument providing undertakings and the Supervisory Authority with a comprehensive overview of current and future risks and the related capital requirements. The findings of the ORSA are increasingly being used as the basis for strategic management decisions. BaFin will continue its dialogue with insurance undertakings for the purpose of further developing the ORSA.

Changes in the legal framework

Amendment of Delegated Regulation (EU) 2015/35

In November 2014 the European Commission launched an Investment Plan for Europe. The objective of the plan is to facilitate investments in infrastructure by insurers, which are large institutional investors. A new asset class for infrastructure investments with reduced capital requirements was to be established for this purpose under the framework of the new Solvency II supervisory regime. This required changes to be made to the Delegated Regulation¹⁴ (see Figure 5 "Legal bases under Solvency II").

The European Commission issued a corresponding amending regulation¹⁵ on 1 April 2016. The Commission had sent a call for advice to EIOPA in February 2015. A particular focus of the amended regulation was on building a more interconnected single market. In addition, the new asset class was not to be limited to specific sectors or physical structures, but should include all systems and networks that provide and support essential public services.

Figure 5 Legal bases under Solvency II

Legal bases under Solvency II

Source: BaFin

The amending regulation also corrects editorial errors in the original Delegated Regulation. Furthermore, it contains requirements for adjusting the reporting templates to include information on infrastructure investments. Following public consultation, the Commission published a corresponding amending regulation for this purpose in the Official Journal of the European Union on 21 October 2016.¹⁶

Review of the Solvency II standard formula

In mid-July 2016 the European Commission presented a call for advice in which it explains its plans for the review of the standard formula under Solvency II. The Commission's call for advice is essentially based on recital 150 in the Delegated Regulation and on an earlier call for evidence¹⁷ issued by the Commission, which gave the European insurance industry the opportunity to present reasoned criticisms and suggestions for improving the standard formula to the Commission.

The consultation on the call for advice began in December 2016 and ended in March 2017. The Commission is expected to complete its review of the standard formula during 2018.
In BaFin's view, the following topics in the discussion paper are particularly significant for the German market in the first instance:

• Review of the interest rate risk module
• Simplifications of a general nature
• Simplifications in specific risk modules (in particular counterparty default risk, catastrophe risk module, non-life lapse risk)
• Review and potential recalibration of risk factors in the premium and reserve risk module
• Potential expansion of the scope for undertaking-specific parameters
• Review of the catastrophe risk module (in particular in relation to man-made catastrophe risks)
• Review/recalibration of the volume measure for premium risk in the premium and reserve risk module

As far as possible, data from the quantitative reporting templates (QRTs) were used for the purpose of reviewing the standard formula, in order to keep the additional expense for national supervisors and in particular for the undertakings as low as possible. Nevertheless, EIOPA required additional information from the (re)insurance undertakings for a small number of analyses and potential recalibrations. BaFin requested this information from all undertakings falling within the scope of Solvency II. The undertakings were allowed time until 29 March 2017 to submit the information to BaFin.

The undertakings were not legally obliged to participate in this data collection exercise, but it was in the interests of the German insurance industry. The data of the German (re)insurers enables their risk profile to be more fully reflected in the European standard formula. BaFin therefore advised the undertakings to participate.

Revision of the methodology for determining the ultimate forward rate

Since the entry into force of Solvency II, all (re)insurers have measured their technical provisions using a standard, risk-free yield curve, calculated by EIOPA and issued by the European Commission. The yield curve is based on market data for swap and bond interest rates. Interest rates for maturities for which reliable market data are no longer available are determined by extrapolation, based on a long-term forward interest rate, the ultimate forward rate (UFR).

In March 2015, EIOPA decided to revise the methodology for determining the UFR. The main point of criticism was that the raw data and the details of the methodology were private and not available under licence. EIOPA's announcement of its work on the UFR came immediately after the introduction of monthly publication of the risk-free yield curves.

Following the first consultation in summer 2015, EIOPA redefined the methodology. This is based on data published by the Commission (annual macro-economic database – AMECO) and the Organisation for Economic Co-operation and Development (OECD). The new methodology envisages a UFR made up of the inflation target of the relevant central bank and an average value based on historical data for real interest rates. It delivers UFR values which are lower than the values produced by the old methodology. A consultation exercise for the proposed UFR methodology was carried out from April to July 2016.

The main criticism reflected in the comments on the consultation was that the UFR lacked the stability required by Article 47 of Delegated Regulation 2015/35.

At the end of March 2017, the Board of Supervisors of EIOPA agreed on a compromise for the new methodology, intended to balance out the interests of the different countries. A number of stabilising elements were incorporated into the draft submitted for consultation.

The new methodology is expected to be used for calculating the risk-free yield curve from 2018 onward. The European Commission can then declare the yield curve calculated by EIOPA to be legally binding by adopting an implementing act.

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