Financial Services Regulatory Authority of Frankfurt Creates Formula for Occupational Pension Discount Rate Computation

Financial Services Regulatory Authority of Frankfurt is soon to release its new formula on how to estimate accurate discount rate for occupational pension insurance that would directly benefit life insurance companies. End Quote

(1888PressRelease) April 21, 2011 - The new calculation method has been altered in connection to the initially released proposal based on the comments received in the recommendation process. Using the new computation, the average swap interest rates and government bond will be utilized instead of government bond interest rates only.

The new discount rate estimation will be used by the life insurance entities to appreciate technical provisions such as policy holder's commitments. The new formula indicates that the supposed interest rates for occupational pension insurance will be used as the standard of government bond interest rates and swap interest rates with uniform maturities. In connection, the swap rate minus a deduction will be used for extended maturities.

The creation of new formula for estimating discount rate of occupational pension has various reasons. Primarily, the calculation formula aims to regulate the discount rate of the occupational pension insurance. If the currently used interest rate is too high, it follows that the technical provisions are often underrated while equity is overestimated. Due to this, the financial positions of insurance companies are sometimes projected as stronger than its real conditions. As part of the regulatory functions of Financial Services Regulatory Authority of Frankfurt, it provides a more enhanced basis for intervention when the insurance companies are employing too high rates which can also be used as basis for comparability among other companies.

Financial Services Regulatory Authority of Frankfurt also considers other concerns that emerged in many responses concerning the inadequate access to long-term government bonds and consequent implications for the precision of the estimation of a free-risk interest rate. With the inclusion of both swaps and government bonds, the discount rate will be normally computed from as wide of a base of any financial instrument as is possible.

In general perspective, the new regulation on the computation of discount rate denotes that most companies will be experiencing a minor decrease in the appraisal of the commitments while the commitments of few companies will slightly escalate in value. According to Financial Services Regulatory Authority of Frankfurt, it is estimated that in the near future, no additional company will be experiencing red light if the new regulation will be enforced. The new formula will be used and shall take effect on the third quarter of the current business year.

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