In this episode of AM BestTV, Mira Laze, associate director, and George Hansen, senior industry research analyst, both with AM Best, examine the likely impact on insurers as the key reference rate is changed from the London InterBank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR). Click on http://www.ambest.com/v.asp?v=libor319 to view the entire program.
Hansen spoke about the reasons behind the transition away from LIBOR.
The issue stems from the methodology that is used to determine LIBOR, said Hansen. LIBOR is based on a survey of roughly 20 banks, indicating what they believe would be the overnight rate that they would use with intercompany or interbank loans. This has been subject to manipulation in the past, which has led to lawsuits and other forms of fines that banks have been assessed. LIBOR wont be available after 2021, as the banks are not going to be required to post those rates after 2021.
Laze highlighted the specific areas in which insurers should be concerned.
Some of the potential insurers exposure are the assets owned that are tied to LIBOR. In addition, insurance that links to LIBOR is another area to be concerned about, as well as reinsurance contracts, derivatives used in hedging, and any other external debt. AM Bests goal is to be able to understand where the firms have LIBOR exposure and to quantify the risk associated with LIBOR transition, she said.
To access a copy of this special report, titled, Transition From LIBOR: A Known Unknown for Insurers, visit http://www3.ambest.com/bestweek/purchase.asp?record_code=283394.
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