On 22 January 2013, the European Insurance and Occupational Pensions Authority (EIOPA) released a pre-publication spreadsheet setting out the discount rates curves for each major currency to be used by firms in the upcoming Long-Term Guarantee Assessment (“LTGA”).
The LTGA is currently scheduled to run from 28 January 2013 and is intended to assess the impact of the proposed Long-Term Guarantees package (“LTG”) as part of the on-going discussions on Omnibus II. While the Terms of Reference for the LTGA have not been made publicly available, the assessment is expect to test different applications of the following components through a number of scenarios:
- The counter-cyclical premium
- The matching adjustment
- Extrapolation of the risk-free rate
- A transitional measure.
The spreadsheet sets out discount rates for 13 scenarios, of which scenario 0 represents the base position (with no LTG measure applied), scenarios 1 to 9 test different applications of the LTG measures using a reference date of 31/12/2011, and scenarios 10, 11 and 12 test how the measures would have fared under the economic conditions at 31/12/2009 and 31/12/2004.
The scenario summary tab, included with the spreadsheet, details the extrapolation parameters used to derive the curves beyond the point where market data can be used, and the level of any counter-cyclical premium (“CCP”) that has been applied under each scenario, as follows:
- The last liquid point (“LLP”), representing the point at which extrapolation starts, for the Euro and Sterling is set at 20 years and 50 years respectively (with an Euro LLP of 30 years used for the base position in scenario 0). The rates for all currencies converge to the ultimate forward rate within 10 years for all scenarios, except scenarios 0 and 4 where a convergence of 40 years is used
- The credit risk adjustment has been increased from 10 basis points, as used under QIS5, to 35 basis points, for all scenarios using a reference date of 31/12/2011, and 20 basis points as at 31/12/2009 (consistent with the increased credit concerns observed in the market as indicated by the widening differences between 3 month and overnight swap rates); and
- For the purposes of the LTGA, the CCP to be tested is applied as fixed rates, set at 50, 100 and 250 basis points under the various scenarios.
The discount rates are published in advance of Part 2 of the technical specifications for the LTGA, which are currently expected to be released by EIOPA on 28 January 2013. Part 1 of the technical specifications to be used by firms participating in the assessment were published by EIOPA on 18 October 2012, and subsequently revised on 22 December 2012 (and are discussed in three Milliman summary papers which are available on our website).
Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found at UK.Milliman.com.
We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.
Please contact your usual Milliman consultant for more information.
This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.