QIS 5 Yield Curve Methodology for Solvency II


Scanrate's Comments on Solvency II/Quantitative Impact Study 5 Yield Curve Methodology  



On May 5th 2011 former Scanrate partner Svend Jakobsen was invited by the EIOPA Financial Requirements Expert TP Subgroup in Frankfurt to comment on the QIS 5 yield curve methodology for Solvency II.


The presentation covered the following topics:

  • The Smith Wilson estimation procedure
  • Use of short term rates in the yield curve sample
  • Choice between OIS and interbank swap contracts
  • Selection of the entry point to extrapolation
  • Recommendations on the choice of the universal, unconditional forward rate (UFR)


The main conclusions were:

  • The Smith Wilson method is an effective methodology which works well for the typical swap curve. Some allowance for smoothing should be made to avoid jagged forward curves.
  • The choice of UFR has important consequences for the solvency capital requirement (SCR): If the UFR is too low life insurance companies may have trouble meeting current SCR. However, the present value of long term liabilities will increase with the UFR and a UFR above current market return would lead to future solvency problems. A possible choice would be to set UFR equal to the market forward rate at the last liquid maturity.


Download the presentation here


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