The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published a task force report which has been submitted to the European Commission on the impact of allowing a liquidity premium in the risk-free rate for discounting technical provisions. This premium is being considered as an additional factor in the Level 2 implementing measures which the Commission are currently considering prior to drafting final rules in the Autumn.
The task force was set up late in October 2009 in response to considerable concern about whether a liquidity premium should be allowed in the risk-free rate. The insurance industry in the UK has lobbied for the recognition of such a premium when calculating liabilities in order to avoid what have been considered to be overly prudent capital requirements.
CEIOPS had originally suggested that a liquidity premium should not be included in Level 2 measures. However, in its final advice submitted to the Commission, CEIOPS conceded that this issue warranted further consideration.
The report considers a definition of the liquidity of insurance liabilities and considers the current debate on the inclusion of a premium including methods of calculation.
For further information: CEIOPS Task Force report on the Liquidity Premium