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Best’s News & Research Service - November 17, 2021 08:14 AM (EST)

Best’s Special Report: Key LIBOR Transition Dates Loom on Horizon

  • November 17, 2021 08:14 AM (EST)

Oldwick //BestWire// - As the London Interbank Offered Rate (LIBOR) is phased out as a benchmark for short-term interest rates, insurers are weighing their options and cautiously entering instruments and hedges based on the Secured Overnight Financing Rate (SOFR), due to the unknowns and limited liquidity, according to an AM Best report.

The Best’s Special Report, titled, “Key LIBOR Transition Dates on the Horizon,” notes that insurers are facing numerous challenges in the transition period away from LIBOR, and are continuing to identify LIBOR exposures as key dates approach. With the changeover, insurer debt structures could be impacted, especially those with floating-rate obligations currently tied to LIBOR. Although SOFR has been identified as the replacement for the U.S. dollar-based LIBOR rate, non-LIBOR rate alternatives also are being considered by companies, including Ameribor rates. The key difference between SOFR and Ameribor, according to the report, is that the latter is generated from unsecured transactions, which may result in rates that more accurately reflect the cost of funds.

The report states that one of the most significant risks that will emerge when LIBOR is transitioned to other reference rates is the potential for litigation. Some fallback provisions require the use of alternative bank reference rates in the event LIBOR is no longer available. Issues may arise if the parties involved have not agreed to replacement reference rates. Fallback provisions requiring discretionary recalculations of reference rates also may also lead to litigation, as finding rates reasonably comparable to LIBOR may be difficult. Legislative efforts are under way to minimize litigation risk, potentially establishing recommended benchmark replacement rates as reasonable substitutes for LIBOR. However, the adoption of safe-harbor benchmarks also could face court challenges.

Exposure to LIBOR liabilities is lower in the United States than in the United Kingdom, where significant levels of insurers’ reserve liabilities are LIBOR-based. Key issues for insurers will be the nature of fallback provisions, term structures for new reference rates, market liquidity, capital requirements and consistent supervisory guidance to eliminate cross-border issues. According to a March decision by the U.K. Financial Conduct Authority, which is overseeing the transition, LIBOR rates will cease to be published after Dec. 31, 2021, in the case of euros, Swiss francs, Japanese yen, British pounds and one-week and two-month U.S. dollar tenors. The deadline for remaining U.S. dollar tenors is June 30, 2023.

To access the full copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=314774 .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.



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