The rate toward which the regulatory curve is extrapolated beyond the last liquid maturity, an administered parameter that sets the value of the longest liabilities.
Bond markets stop being liquid long before the horizon of life insurance liabilities, often around twenty years for the euro, while annuities are paid out to fifty. Beyond that last liquid point the regulatory curve no longer reads prices; it converges toward an ultimate forward rate set by the supervisor from long-term assumptions about real growth and inflation. The parameter is decisive and administered, which is a peculiarity: one extra point of ultimate rate mechanically lowers the present value of long liabilities and improves reported solvency without any asset changing value. That is why its revision is framed by capped annual steps, so that a change of method does not read as a balance sheet shock. For an analyst, the ultimate rate is the exact point where solvency measurement stops being a market observation and becomes an avowed prudential convention, and any international comparison must begin by checking which one is in use.
The European authority began in 2017 a gradual reduction of the ultimate forward rate applied to the euro, initially set at 4.2 per cent, through annual steps capped at fifteen basis points so as to avoid a cliff effect on balance sheets.
UFR, ultimate forward rate, taux à terme ultime, extrapolation de la courbe