Dossier : The discount rate under SII

Article published in the 'Forum Financier / Revue Bancaire et Financière' by Mathias Wambeke, member of IA|BE.

Solvency II long-term guarantee measures are aimed at reducing the effect of artificial volatility for long-term insurance products.

In this article, the effectiveness of long-term guarantee measures, in particular the volatility adjustment (VA), will be analysed.

First, we replicate the VA over the past crisis periods and test its effectiveness for an average insurance undertaking.

We find that, despite the mitigating impact of the VA, spread movements still cause a significant volatility of own funds.

Furthermore, we critically analyse the composition of the euro VA reference portfolio.

Finally, the illiquidity premium of equity investments and mortgage loans is discussed.

Remark: the views and opinions expressed in this article are those of the author and do not necessarily represent the position of IA|BE.