ICS – IAIS – Documents – Stakeholders

2015 0205 - ManuLife / IAIS - Determination of discount rates for Insurance Capital Standard, IAIS Stakeholder Meeting - 10p
- Choice of discount rate is among the most important decisions impacting the level and behaviour of the insurance capital metric
- Beyond deep and liquid markets, observable rates are not reliable or do not exist at all – need to be constructed
- Small changes in the long-term discount rate cause large movements in reserves for companies offering significant long term products
- These reserve movements are only partly offset by asset movements as availability of matching long-term fixed income assets is often limited
- Volatility of reserves would result in volatile and misleading capital ratios
- “3-bucket approach” proposed for the construction of the discount curve based on principles to be consistently applied across jurisdictions:
- The investment challenge: Liabilities are often longer than available fixed income assets
- This approach may be acceptable also to IASB for IFRS 4 Phase II
- Summary of Key Themes
  - Discount rate determination will influence investment choices of companies and will impact the viability of long term insurance products
  - Excessive reliance on “markets” where their signals are not reliable could destabilize reported capital and encourage inappropriate action