The U.K. Financial Conduct Authority and Prudential Regulation Authority at the Bank of England are seeking input on how insurance companies are assessing key risks relating to LIBOR's 2021 expiration and what action they plan to take to mitigate these risks.
The regulators warned CEOs of insurance companies about the risks stemming from transition that they will undergo following the phasing out of LIBOR, in a letter Wednesday. Firms are also asked to identify the senior manager who will oversee the implementation of transition plans.
The London interbank offered rate is used by insurance companies and pension funds as a reference rate in interest rates swaps transactions, among other uses. In addition, insurance companies under Solvency II requirements discount liabilities using risk-free rate curves that are in many currencies currently derived from LIBOR.
LIBOR, considered the key derivatives and fixed-income valuation benchmark, is being phased out, due to scarcity of term unsecured deposit transactions, at the end of 2021.
The regulators seek "assurance that firms' senior managers and boards understand the risks associated with this transition and are taking appropriate action so firms can transition to alternative rates ahead of end-2021," the letter said.
Despite improvements made to LIBOR since April 2013, in the interests of financial stability and market integrity, it is important that participants transition away from LIBOR and toward alternatives, the letter said.
"Insufficient preparations for transition to alternative rates could have a negative impact on the safety and soundness of firms and cause harm to their clients and to the markets in which they operate," it said.
The regulators are seeking input on the transition via email until Dec. 14.