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.

 

Download the presentation here

 

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