Technical Provisions (TPs)

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Article 77 states that "The best estimate shall correspond to the probability-weighted average of future cash-flows, taking account of the time value of money (expected present value of future cash-flows), using the relevant risk-free interest rate term structure."

Example (from reinsurance company perspective): reinsurance contracts with Polish cedants, where the contract currency is EUR. Functional currency of the company is EUR as well. What is the most suitable currency for the relevant risk-free interest rates in order to calculate the best estimate for this contract by the company in this example?

• Settlement currency of reinsurance contracts is EUR;

• Currency of insurance policyholders' country is PLN.

European Insurance and Occupational Pensions Authority · Accepted Answer

As per Article 33 of the Commission Delegated Regulation (EU) 2015/35 (DR), the “best estimate shall be calculated separately for cash flows in different currencies". While contract currency and functional currency are not further specified, the question seems to suggest that the currency of all cash flows associated with the contract – especially claims, premiums and expenses – is EUR. Under this consideration, the relevant risk-free rate to be used for the calculation of the best estimate is EUR.

Another related question – on the use of a country adjustment for the volatility adjustment in a currency other than that of the home Member State – has been covered by Q&A 761.​

Technical Provisions (TPs)

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