GNAIE: Use The Right Discount Rate

Forcing insurers to use a “risk-free discount rate” to discount life insurance contract liabilities could cause huge problems in the insurance and pension sectors, according to Douglas Barnert.

Barnert, executive director of the Group of North American Insurance Enterprises, New York, made that argument recently at an actuarial conference in Mumbai, India, that was organized by the International Actuarial Association, Ottawa, Ontario, and the Institute of Actuaries of India, Mumbai.

Life insurers should estimate the value of life contract liabilities using an “earned discount rate” comparable to the yields they really get rather than a hypothetical risk-free rate.

“Using a risk-free rate for discounting such liabilities would result in a reported loss for many contracts at issue,” Barnert warned, according to a summary of his remarks provided by the GNAIE.