On 15 December, EIOPA informed stakeholders of a change ahead of end-December calculation of the risk-free interest rates. EIOPA recently became aware that the Bloomberg government bond rates are continuously compounded rates since August 2016, while the risk-free rate calculation is based on the assumption that the rates are annually compounded.
To ensure consistency, EIOPA will convert the continuously compounded rates into annually compounded rates. EIOPA will to implement the change ahead of the calculation of the risk-free interest rates for end-December 2017. The change will affect all Bloomberg government bond rates, except for the Icelandic krona.
The change will increase the risk-free interest rates that are derived from government bonds, ie for the currencies of Croatia, Hungary, Poland, Romania, Brazil, Colombia, India and Taiwan. The size of the increase depends on the level and maturity of the rates. For low interest rates, the impact will be immaterial while for high interest rates it can be more visible. Theoretically there is also an impact on the volatility adjustment, also for those currencies where risk-free interest rates are derived from swaps. In EIOPA’s test calculations, however, no impact on the rounded volatility adjustments was observed.