The European Insurance and Occupational Pensions Authority (EIOPA) launched the consultation on IBOR transitions in April 2020. In the introductory remarks to its Discussion Paper, EIOPA stressed out that "IBOR transitions are a big challenge for both the regulators and the industry since they will primarily affect: (a) Liability valuations (b) Derivative valuations as well as (c) the structure of numerous (existing and new) financial and insurance products."
IBOR transitions is a change driven by a new legal requirement which seeks to increase the robustness and reliability of financial benchmarks. In Europe, the new EU Benchmark Regulation (EU BMR) came into force in 2018 and requires financial benchmarks to be transparent and to measure the underlying economic reality in a representative way. In addition to this, the administrator of LIBOR, ICE5, announced that the majority of the Libor panels will cease at end of 2021.
Currently the 'world' is split into currencies that are expected to change benchmarks at the end of 2021 (GBP, CHF and the JPY), currencies for which the change is postponed from the previous stated timetable (for the USD the change moved to mid-2023) and currencies for which a date has not yet been set (EUR).
EIOPA produces risk free rate term structures that for many currencies have been based on IBOR based swaps. Based on the new legal requirement these structures would need to be changed as they can no longer be based on existing instruments. Therefore, EIOPA intends to adjust its risk-free rate (RFR) production to the new reality by adopting a common approach for all currencies on the transition to the new rates. Preparing for this change, the European body has asked all stakeholders to express their opinion on the methodology, impact and other technical issues related to the announced change.
"As this is a technical change to the risk-free rate curve, any detrimental impacts should be minimized. EIOPA should ensure full transparency on the potential impact of the IBOR transition to ensure that it can be appropriately considered in the context of the review of Solvency II," Insurance Europe answer reads. It also adds that "to avoid undue solvency volatility, EIOPA should also ensure that the preconditions do not result in instability in key parameters used to derive the risk-free curve. Moreover, regular communication from EIOPA on the progress of the transition would help to prepare insurers for a change and could support a speedier adoption of new OIS-based curves."
Besides all technical issues, the European insurers' federation has emphasized that "EIOPA must provide sufficient time to implement the switch and give due consideration to the impact on insurers' risk management."