Basis risk looms for insurers in Libor transition

UK insurers may need to pay more and run basis risk to hedge interest rates after transition

There may be no buy-side firms on the Bank of England’s working group on sterling risk-free reference rates, but scrapping Libor may prove to be as much of a headache for UK insurers as for banks.

Insurers could find their hedges cost more, stop working and incur capital charges as they run basis risk over the years the market transitions from Libor to a new rate benchmark, most likely to be the sterling overnight index average (Sonia) in the UK.

Just like banks, insurers will face the lengthy

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