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July 10, 2020 at 12:19 AM
A major deadline is rapidly approaching for life and annuity issuers, and many aren’t taking the necessary steps to be fully prepared.
It has been a few years since regulators announced that the London Interbank Offered Rate (LIBOR) would be discontinued by December 2021. The average interest rate at which major global banks borrow from one another, LIBOR is linked to around $400 trillion in financial instruments, including derivatives, options, floating rate notes, loans, securitizations and other short-term products.
(Related: SEC Preps LIBOR Transition Exams)
Many of these agreements are owned within the investment portfolios of life insurance companies and are indexed on LIBOR rates. These instruments will need to be revised to account for the new rates being used. In addition, on the liability side, life insurance companies may have some impacts on their annuities policies or other policies that contain guaranteed rates that reference LIBOR.
And yet, while banks seem to be quickening the pace of their own transitions, many life insurers have been stuck in the starting block and are underestimating what a Herculean lift the transition away from LIBOR will be.
Here are five things many life insurers are behind on and should address sooner than later:
1. They should understand their current exposure to LIBOR.
Insurers need to understand what financial instruments have exposure to LIBOR and what the fallback rate is in each of these contracts. This is no small task given the variety of products across the investment book as well as on the liability side with indexed products, broker compensation agreements, and reinsurance treaties.
2. They should develop a strategy to remediate their investment portfolio within the compressed timeline.
David Gane is the 