The Ultimate Forward Rate (UFR) is an essential element in the construction of the risk-free yield curve provided by EIOPA. The extrapolation of the yield curve converges towards this rate beyond the Last Liquid Point (LLP).
Ultimate Forward Rate (UFR) Calculation methodology
Initially set at 4.2% in 2011 for QIS5 purposes, UFR’s value didn’t change when Solvency II entered into force on January 1st, 2016. In 2017. EIOPA introduced a calculation methodology to determine the UFR on an annual basis. Since then, it has published at springtime the applicable UFR for the following year.
The UFR is determined for each currency as the sum of two components:
- An interest-rate component, corresponding to the average real rates observed since 1961 on a panel of reference markets (Germany, France, Belgium, Italy, the United States, the United Kingdom and the Netherlands). Each year, the panel’s average real rate is included in the historical data (1.49% in 2024).
- A target inflation component, usually equal to the inflation target defined by the reference central bank. For Euro, the ECB set it at 2%.
The UFRn is obtained comparing the value (Sn), sum of these two components, with the UFRn-1 +/- 0,15 %. More concretely:
- UFRn = UFRn-1 – 0,15% if Sn < UFRn-1 – 0,15% ;
- UFRn = UFRn-1 + 0,15% if Sn > UFRn-1 + 0,15% ;
- UFRn = UFRn-1 otherwise.
Thus, the UFR:
- remains unchanged if the expected variation is less than +/- 15 bps ;
- varies by +/- 15 bps otherwise.
Value of the Ultimate Forward Rate in 2026 for the euro currency
In 2026, EIOPA published an unchanged UFR since 2024 applicable to the Euro currency:
UFR 2026 = 3,30%
Historical values of the UFR for the euro currency
UFR and LLP evolution from 2016 to 2026
The graph below shows the historical values of the UFR and the interest rates at the LLP.
Whereas the rate at LLP maturity is a market rate, and therefore subject to market volatility, the UFR has been designed to provide long-term stability within the Solvency II framework. The sharp rise in interest rates between 2022 and 2023 brought the LLP rate very close to the UFR, resulting in a relatively flat extrapolated part of the yield curve. Since the end of 2023, the LLP rate has moved further away from the UFR, hovering around 2.5%.
You can find the full EIOPA publication here.
This content is written by
Elie MERYGLOD
Senior Manager – Modeling & Risk Life
François BAYÉ
Director – Head of Actuarial Consulting
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