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    EIOPA Updates Data to Calculate Volatility Adjustments Under SII

    December 16, 2020

    EIOPA published the updated representative portfolios for use in the calculation of the volatility adjustments to the relevant risk-free interest rate term structures for Solvency II. EIOPA will start using these updated representative portfolios for the calculation of the volatility adjustments at the end of March 2021, which will be published at the beginning of April 2021. EIOPA also published a report that provides an overview of the administrative sanctions or other measures imposed by national competent authorities under the Insurance Distribution Directive (IDD). The report shows that, in eight member states, nearly 1,923 administrative sanctions or other measures were imposed.

    For the calculation of volatility adjustments under Solvency II, EIOPA published the updated representative portfolios three months in advance to allow insurers and reinsurers sufficient time to prepare for this change. The updated portfolios are based on the end-of-2019 annual reporting templates as reported by European insurance and reinsurance companies to their national supervisory authorities. Due to the departure of UK from EU, the representative portfolios no longer include data from UK insurance and reinsurance undertakings. The updated portfolios enable more accurate reflection of the impact of market volatility under the Solvency II framework. EIOPA plans to revise the representative portfolios annually, with the next update being scheduled for the end of 2021, according to Article 194 of the Technical Documentation. EIOPA also updated the Technical Documentation on the methodology to derive risk-free rate term structures, with the results of Deep Liquid and Transparent assessment and the representative portfolios update for 2021.

    The volatility adjustments are derived from spreads of representative portfolios of assets. The representative portfolios are derived in accordance with Article 49 of the Commission Delegated Regulation 2015/35. The volatility adjustment is a measure to ensure the appropriate treatment of insurance products with long-term guarantees under Solvency II. Insurers and reinsurers are allowed to adjust the risk-free rates to mitigate the effect of short-term volatility of bond spreads on their solvency position. This way, the volatility adjustment prevents procyclical investment behavior of insurers and reinsurers.

     

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    Keywords: Europe, EU, Insurance, Solvency II, IDD, Insurance Distribution Directive, Volatility Adjustment, Risk-Free Rates, EIOPA

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