10

Risk-Free Interest Rates

10.1

A firm may only apply the risk-free interest rate transitional measure:

  1. (1) in respect of admissible insurance and reinsurance obligations; and
  2. (2) if it has received approval to do so from the PRA.

10.2

Where a firm applies the risk-free interest rate transitional measure, it must calculate the adjustment for each currency as a portion of the difference between:

  1. (1) the interest rate as determined by the firm in accordance with INSPRU 3.1.28R to INSPRU 3.1.47R of the PRA Handbook as at 31 December 2015; and
  2. (2) the annual effective rate, calculated as the single discount rate that, where applied to the cash-flows of the portfolio of admissible insurance and reinsurance obligations, results in a value that is equal to the value of the best estimate of the portfolio of admissible insurance and reinsurance obligations where the time value is taken into account using the relevant risk-free interest rate term structure.

[Note: Art. 308c(2) of the Solvency II Directive]

10.3

The portion referred to in 10.1 shall decrease linearly at the end of each year from 100% during 2016 to 0% during 2032.

[Note: Art. 308c(2) of the Solvency II Directive]

10.4

Where a firm applies the volatility adjustment in accordance with Technical Provisions 8, the relevant risk-free interest rate term structure referred to in 10.2(2) shall be based on the risk-free interest rates adjusted with the volatility adjustment.

[Note: Art. 308c(2) of the Solvency II Directive]

10.5

A firm that applies the risk-free interest rate transitional measure must:

  1. (1) not include the admissible insurance and reinsurance obligations in the calculation of the volatility adjustment;
  2. (2) not apply the technical provisions transitional measure; and
  3. (3) as part of its SFCR publically disclose that it applies the risk-free interest rate transitional measure and the quantification of the impact of not applying the risk-free interest rate transitional measure on its financial position.

[Note: Art. 308c(4) of the Solvency II Directive]