Solvency II / QIS 5 Yield Curve Methodology
Scanrate's comments on Solcency II/ Quantitative Impact Study 5 yield curve methodology
On May 5th 2011 Scanrate partner Svend Jakobsen was invited by the EIOPA Financial Requirements Expert TP Subgroup in Frankfurt to comment on the Solvency II / Quantitative Impact Study 5 yield curve methodology.
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 troubles 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.