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August 17, 2017

ESRB published a report on regulatory risk-free yield curve properties and their macro-prudential consequences. The report brings a macro-prudential perspective to the discussion on the design of the regulatory risk-free yield curve used in insurance supervision. The design of the regulatory yield curve is determined by the Solvency II framework and the insights in this report may inform possible amendments to Solvency II.

The report outlines the importance of the regulatory risk-free yield curve, including from a macro-prudential perspective. It also describes the requirements that the regulatory risk-free yield curve should fulfill from a macro-prudential perspective, along with how the regulatory risk-free yield curve is designed in Solvency II. The report then compares the current design with the macro-prudential requirements and draws policy conclusions. This report makes three proposals, which, under current market conditions and along with the forthcoming reduction in the Ultimate Forward Rate (UFR), would result in a lower regulatory risk-free yield curve. The findings of this report suggest that the current curve may underestimate insurers’ liabilities and, thus, generate unrealized losses. Specifically, the report proposes the following:

  • A new method to derive the last liquid point (LLP) and to extend the LLP for the euro regulatory risk-free yield curve from 20 to 30 years. 
  • Extending the convergence period (from LLP to UFR) from 40 years to 100 years. 
  • Blending the extrapolated part of the curve partly with market data, provided that sufficiently reliable market data are available, as, for instance, is done in the regulation of Swedish and Dutch pension funds. 


The exact impact of the proposed changes on the technical provisions of life insurers’ solvency should be carefully assessed before arriving at a conclusion about further changes to the regulatory risk-free yield curve. Comparison with the low-for-long yield stress curve used in the 2016 EIOPA stress test indicates that the overall impact of the proposals put forward in this report should be less significant than that of the EIOPA stress test. Potential second-round effects of a lower risk-free yield curve, such as those caused by insurers hunting for duration, should be monitored and may require additional macro-prudential policy measures. The analysis performed in this report provides a basis for further, ongoing reviews of the regulatory risk-free yield curve.


Related Link: ESRB Report (PDF)

Keywords: Europe, Insurance, Risk Free Yield Curve, Macro-prudential Policy, Solvency II, ESRB

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