The European Insurance and Occupational Pensions Authority proposed to cut the ultimate forward rate, which is used to discount an insurer's liabilities.
The methodology would be applicable to liabilities denominated in euro from January 2018.
The EU watchdog proposes to cut the rate to 3.65% from the current 4.2% in stages. The rate will decrease to 4.05% in January 2018, with further annual rate changes not more than 15 basis points.
Higher liabilities could eat into an insurer's solvency ratio, pushing it to raise more capital, according to an April 5 Reuters report. Insurers quantify their liabilities going forward up to 60 years, but an extrapolated rate is needed for that because there are no reliable interest rates extending beyond 20 years.
Meanwhile, insurance lobby groups Insurance Europe and the Association of Mutual Insurers and Insurance Cooperatives in Europe expressed their disapproval of the EIOPA's new rate methodology, Intelligent Insurer reported April 6.