Use of a volatility adjustment
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.
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”.
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:
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: 06/07/2018 15:12