Q&As about the publication of the Solvency II relevant
risk free interest rate term structures
What is being published?
The publication consists of Technical Information and Technical Documentation.
Technical Information consists of:
• Risk-free interest rates term structures for 53 countries - 2 sets of term
structures per country for the interest rates with and without volatility
adjustment;
• Values of the volatility adjustment to the relevant risk free interest rate term
structure;
• Values of the fundamental spread to be applied for the calculation of the
matching adjustment.
The Technical Documentation consists of the methodology, assumptions and
data used to calculate the Technical Information.
Why is EIOPA publishing these Solvency II relevant risk_free interest
rate term structures?
Insurance and reinsurance undertakings have to set up technical provisions for
their insurance and reinsurance obligations. Under Solvency II those technical
provisions will be discounted with risk-free interest rates. The Solvency II
Directive requires EIOPA to publish risk-free interest rate term structures for
that purpose.
For whom is the Technical Information relevant?
The Technical Information is relevant for insurance and reinsurance undertaking
falling under Solvency II and their supervisory authorities.
What is the purpose of the Technical Documentation?
The Technical Documentation specifies the methodology that EIOPA applies to
the calculation of the risk-free interest rate term structures in line with Solvency
II. By publishing the Technical Documentation EIOPA ensures transparency
about the methodology. In particular, by means of the Documentation
stakeholders can understand how the term structures will change when the
market inputs of the calculation change.
Solvency II starts in 2016. Why does EIOPA publish Technical Information
already now?
Insurance and reinsurance undertakings need to prepare for the introduction of
Solvency II. The availability of the Technical Information at this stage will
facilitate that preparation. Moreover, some approval procedures for Solvency II
start already in April 2015, for example for the use of internal models to
calculate capital requirements. Knowing how the risk-free interest rate term
structures are calculated will help the undertakings in specifying their
applications.
What will happen from 2016?
From January 2016 insurance and reinsurance undertakings will have to use the
updated term structures for the calculations of the technical provisions under
Solvency II.
What will be the impact of calculating technical provisions with the
published term structures?
The risk-free interest rate term structures will change over time, depending on
market parameters, in particular the level of market interest rates. Therefore,
the amount of technical provisions will usually increase when market interest
rates decrease and vice versa. This will allow undertakings and supervisors to
better assess the risks that changes in market interest rates will pose to
insurance and reinsurance undertakings. Better risk management will ultimately
be of benefit for consumers.
Why did EIOPA change parts of its model to calculate the technical
information?
EIOPA has calculated and published the technical information during 2015 in
order to allow the insurance industry and other stakeholders to prepare for
Solvency II. EIOPA used the preparatory phase to increase the robustness of the
calculations.
Changes to the EIOPA model come from different sources:
-
EIOPA reviewed parts of the methodology used to derive the technical
information;
EIOPA published on its website the source code used to calculate the
technical information and asked stakeholders for feedback;
-
An external review was conducted during November 2015 and led to
several improvements;
Finally, the internal validation process continued during 2015 to ensure a
consistent implementation of the technical information.
When will be those changes implemented?
EIOPA decided to finalise the implementation of the changes decided by its
Board of Supervisor for the November 2015 production. This will allow
stakeholders to familiarise themselves with the results and EIOPA’s final model.
What are the changes and what is their impact?
The below table summarises all the changes made that have an impact on the
results.
After these last changes, will the new RFR source code be re-published?
The new RFR source code will be re-published before 18 December.
Changes on the basic risk-free rates
Where does it Description of the change
Impact of the change
come from?
EIOPA
(BoS A new DLT assessment has been The impact is limited to that
decision)
carried out and implemented in currency.
October. The calculations for the
Turkish lira have been aligned to
the DLT assessment.
External review Implementation of the credit risk The impact is nil for all currencies
and
adjustment calculations have but the Hong Kong dollar and the
STAKEHOLDERS been aligned with the technical Thai
baht.
For
those
two
documentation
for
those currencies, the impact is medium.
currencies where the third
situation (as described in section
5.C
of
the
technical
documentation)
should
be
applied:
- Detection of when the
third situation should be
applied;
- Calculation of the ratio,
used in the third situation,
now takes the rates that
are
both
DLT
and
available.
Clarification of the technical The impact is medium for those
documentation as regards the currencies where there is missing
situation where there is not data. This situation is exceptional.
enough data to calculate a riskfree curve. Cf. section 7.A and
paragraph 120.
Changes on the long-term average spread (LTAS)
Where does it Description of the change
Impact of the change
come from?
EIOPA
Correction
of
erroneous For those currencies/countries that
corporate bond rates that had have a high percentage of nonbeen provided to EIOPA. On 13th financial bonds of credit quality
and 14th April 2006, the rates of step 5 and 6, the impact on the
the non-financial bonds of credit volatility adjustment (VA) is high.
quality step 5 and 6 are not Those
countries
are
Croatia,
representative of the market Denmark, Greece and the United
situation at that time (outlying Kingdom. The change leads to an
yield of 100 000%). Those rates increase of the VA.
were deleted and are not taken
into account in the LTAS
calculation.
EIOPA
Replacement of the corporate Small impact on the LTAS.
bond yields: yields-to-worst had
been provided to EIOPA, where
those should have been usual
yields.
EIOPA
(BoS Change on the methodology to The impact is limited to the LTAS
decision)
derive the LTAS on government for the pound sterling.
and corporate bonds for the
pound
sterling.
Adjustment
factors have been introduced
(cf. annex 14.H of the technical
documentation).
External review Alignment
of
the
LTAS The impact is medium for the
and EIOPA
calculation for the Danish krone Danish krone VA.
with
the
technical
documentation with regards to
the duration to be used and the
comparison of the yields with
the krone basic risk-free interest
rates and not the euro basic
risk-free rate.
External review
Alignment of calculations of the Impact is small on the LTAS and
LTAS on corporate bonds with not visible in the VA.
the technical documentation:
- Correct application of the
K factor formula for pound
sterling and US dollar
bonds of credit quality
step 4 and 5;
- Correct calculation of the
number of dates without
data;
- Correct application of the
rule that the 1 year LTAS
is equal to the 2 year
LTAS for bonds of credit
quality step 0.
Changes on the probability of default and cost of downgrading
Where does it Description of the change
Impact of the change
come from?
EIOPA
(BoS Change on the methodology to Medium impact on the fundamental
decision)
derive the cost of downgrading. spread and small impact on the VA.
Cf. annex 14.I of the technical
documentation.
Changes on the volatility adjustment
Where does it Description of the change
Impact of the change
come from?
STAKEHOLDERS Alignment of the weights to be Medium impact on the VA of
and
external used in the national part of the Greece and Hungary.
review
VA
with
the
technical
documentation.
EIOPA
(BoS Calculation of a VA for the High impact for the Icelandic króna
decision)
Icelandic króna (cf. section 9.D as no VA was calculated before.
paragraph 231 of the technical
External review
documentation).
The calculation of the euro VA Small impact for the euro VAs.
on
government
bonds
for
exposures to non-euro area
governments was changed to be
based on the government bond
indices of those governments
instead of the ECB curve.