Volatility adjustment

Use of a volatility adjustment

Overview of the measure

Insurance institutions can apply a volatility adjustment to the relevant risk-free interest rate curve to be used to calculate the best estimate of their liabilities.

This measure does not require prior approval by the ACPR. However, it may only be used under certain conditions.

For each currency, EIOPA provides, on the “technical information” page of its website, the risk-free interest rate curve as well as a curve that takes into account the volatility adjustment.

For each currency, the adjustment depends on the difference between the interest rate that it would be possible to derive from the assets included in a reference portfolio in that currency and the rates from the relevant risk-free interest rate curve corresponding to that currency.

 

Regulatory references

The volatility adjustment is defined in Articles L.351-2 and R.351-6 of the Insurance Code, applicable to institutions covered by each of the three codes, which transpose point 5 of Article 77 of Directive 2009/138/EC, known as “Solvency II”, and Articles 49 to 51 of Delegated Regulation (EU) 2015/35, known as “Level 2”.

The terms of application set out below are laid down in Articles R.354-2, R.354-2-1, R.354-3-2 and R.355-7 of the Insurance Code.

 

Terms of application

The application of the volatility adjustment may be combined with the transitional measure on technical provisions but not with the matching adjustment.

Institutions must state in their Solvency and Financial Condition Report whether they use the volatility adjustment.

Institutions that use the volatility adjustment must comply with the following obligations:

  • They must put in place a liquidity plan including forecast incoming and outgoing cash flows connected with the assets and liabilities covered by the volatility adjustment.
  • They must regularly assess the following, and submit their assessments to the ACPR:
    • sensitivity of technical provisions and eligible own funds to the assumptions underpinning the volatility adjustment calculation
    • potential consequences of a forced sale of assets on eligible own funds
    • consequences of a reduction in the volatility adjustment
  • Where the reduction of the volatility adjustment to zero would result in non-compliance with the solvency capital requirement, the institution must also submit an analysis of the actions it could take to restore the level of eligible own funds or reduce its risk profile.
  • The written risk management policy must include a policy on criteria for applying the volatility adjustment.
  • As part of the second ORSA assessment, ongoing compliance with capital requirements must be verified both with and without the volatility adjustment.
  • The description in the Solvency and Financial Condition Report of the bases and methods used to assess prudential technical provisions and other liabilities must include a quantification of the effects of cancelling the volatility adjustment.

 

Consequences for the group

If an institution using this procedure belongs to a group, the group’s combined or consolidated financial statements are prepared on the basis of the individual financial statements after applying the measure. The group is subject to the reporting requirements in connection with the use of that measure.

Updated on: 07/17/2017 15:28