Impact of modeling assumptions on the holistic balance sheet

  • Lars Koopman Lars Koopman

EIOPA is forced to provide more guidance concerning the modeling assumptions for the holistic balance sheet, before implementation of the new supervisory framework for pension funds within the European Union, IORP II, is possible.When varying the underlying short rate models, this results in signi cantly different holistic balance sheets and solvency capital requirements. The impacts on the SCR when changing between the Hull-white one- and two-factor are in the order of magnitude of -0.8% to 1.2% of the current value of liabilties for our data.The impact on the holistic balance sheet is less sensitive to the variation in short rate parameters per model, where the variation in parameters comes from altering the weights in a short rate calibration over a set of liquid swaptions.We see that the Hull-White one- and two-factor are suitable for modeling purposes, however the Cox-Ingersoll-Ross++ model is not suitable due to its large probability of generating complex values.We also see that the correlation structure does have an impact on the holistic balance sheet and solvency capital requirement. The exact size of the impact is yet to be investigated, however the implementation of correlations in the economic scenario generator resulted in a decrease in the capital requirement.Due to the assumption of a static portfolio for our fictitious fund, we have that the impact on the SCR may be positive for a different correlation structure as well.Besides modeling assumptions for the generating of risk-neutral scenarios, this thesis also discussed the impact on the holistic balance sheet and solvency capital requirement when varying policies. The more steering mechanisms available to the fund, the higher the loss absorbing capacity will be. This results in a significant decrease of the solvency capital requirement. Finally the impact on the solvency capital requirement is shown when the evaluation horizon of the options of the holistic balance sheet decreases from 15 to 10 years. This results in a decrease of the loss absorbing capacity, after which the resulting solvency capital requirement decreases as well. Although it may be difficult for EIOPA to argument some of their decisions concerning modeling assumptions for the holistic balance sheet, such as the length of the evaluation horizon, one does have to keep in mind the main purpose of thesolvency capital requirement. This is to prevent any large shocks on the pensions of the particants of a pension fund over time.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.


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