I read Cathal Rabbitte's article with interest.
He considers that valuing loss reserves using a negative discount rate was not considered likely when Solvency II was developed, and he wants a new word to replace 'discounting'. I do not want to get into a long technical discussion about the European Insurance and Occupational Pensions Authority's risk-free interest rate term structure. I do want to mention that the directive talks about "time value of money", with no opinion on whether that allowance is positive or negative. If money is decreasing in value over time, then this needs to be allowed for.
It's not rocket science, or something other than discounting, it's merely arithmetic. And there is no need for a new word at all.
Rabbitte then moves on to the concept of "risk-free sovereigns", which is one of the assumptions in the standard formula calculation of regulatory capital.
It is worth looking at the requirements for an insurer's calculation of the capital requirement. As part of the Own Risk and Solvency Assessment, (ORSA), an insurer has to assess the extent to which its risk profile deviates from the assumptions in its capital calculation, however calculated.
If an insurer considers that the risks from assets that it holds (which it can select in line with the prudent person principle) are not reflected properly in its Solvency Capital Requirement (SCR) calculation, it must change the calculation so that it does. No one could reasonably expect that a Europe-wide formula could reflect the risks of each individual insurer; the standard formula is a complex beast that should not be regarded as gospel.
I do agree that insurers have a big job to do in pricing business to reflect low yields. Perhaps it will make them think more carefully about the risks in their business and the assumptions they are making, as well as the appropriateness of their investments.
We have been here before - look at all the 'free' guarantees added into life insurance contracts in the high-yield days of the 1970s, a period when yields below 5% were unimaginable.
Kathryn Morgan 6 August 2015