Best’s Commentary: LIBOR transition poses operational and legal challenges for Insurers

2020-10-14T08:33:00

With less than a year and a half to go before the London Interbank Offered Rate (LIBOR) will no longer be available, several areas of concern remain, according to a new AM Best commentary.

A review of AM Best-rated insurer debt, as detailed in a Best’s Commentary, titled, “LIBOR Transition Poses Operational and Legal Challenges for Insurers,” found that nearly 80% of USD debt with LIBOR provisions will mature after year-end 2021, when LIBOR is no longer in use. Included in the USD debt are floating rate surplus notes with LIBOR provisions, which are heavily regulated by state insurance departments; therefore, any changes in coupon rates as a result of reference rate changes will need approval. A significant portion of AM Best-rated debt with LIBOR provisions will need to be modified using fallback provisions agreeable to all parties involved, which may have implications for capital management. Other issues include term structures for new reference rates, market liquidity, capital requirements and consistent supervisory guidance to eliminate cross-border issues.

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