The purpose of this report is to measure the performance of Solvency II’s adjustments to the interest rate term structure. More specifically we analyze the effectiveness of the Volatility Adjustment in reducing balance sheet volatility caused by Solvency II’s risk-based approach. This is achieved with a prospective analysis where we simulate an arbitrary balance sheet 1 year into the future using a calibrated one-factor Hull-White model; and subsequently an analysis of hedging portfolios in retrospect where we use solvency ratios to measure the performance of the Volatility Adjustment over the past 8 years. The simulations show that regardless of the correlation structure or duration match the insurer’s own funds is destabilized when the Credit Risk Adjustment or Volatility Adjustment is applied to the interest rate term structure. The impact of the VA is however much lower when an insurer has lower asset duration than liability duration, making the VA more interesting for these insurers. Furthermore we find that standard duration matching is not adequate in the Hull-White model and therefore we use a more sophisticated duration matching technique. It turns out that the choice of fitted swaption maturities in the calibration procedure is highly important for the simulation results. The analysis of hedging portfolios in retrospect shows that solvency ratios increase dramatically if the Volatility Adjustment is used in volatile times. This is caused by both lower Solvency Capital Requirements as well as relative high own funds. The most stable solvency ratios are obtained with hedging portfolios similar to the VA reference portfolio.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

MEER OVER NETSPAR


Missie en strategie           •           Netwerk           •           Organisatie           •          Podcasts
Board Brief            •            Werkprogramma 2019-2023           •           Onderzoeksagenda

OVER NETSPAR

Onze partners

B20160708_university of groningen
B20160615_pggmgroengrijs_grijswaarden_small
B20220518_BNP Paribas logo_voettekst
B20211201_Cardano_Logo 2021_website
B20160708_afm
Bekijk al onze partners