European Insurance and Occupational Pensions Authority (EIOPA) reaches agreement on Long Term Guarantee (LTG) package

On Wednesday 13 November 2013 the Trilogue reached agreement on the Long-Term Guarantee (‘LTG’) package.  Whilst some insurers will be left disappointed with points of detail, more generally the clarity which this agreement brings will be welcomed, as it allows the industry to begin making preparations necessary for Solvency II readiness.

The LTG package will require insurers to actively choose between three main measures:

The ‘matching adjustment’, under which the discount rate will be based on the risk-adjusted yield earned on the assets backing liabilities, but with strict qualifying criteria.  This will only be available for annuities and PPO claim liabilities. 

The ‘volatility adjustment’  which has been made more generous and doesn't have the same onerous requirements as the matching adjustment.

Two ‘transitional measures’ have been introduced, one in respect of the discount rate and the other a “catch all” covering technical provisions.   Whilst these could prove a benefit to some insurers, they are also likely to lead to significant operational challenges.

The optimal methodology choice is not obvious and will vary between insurers.  Firms will be required to perform an impact assessment to understand the strategic implications of each option under a range of economic conditions.