EIOPA on Portfolios to Calculate Solvency II Volatility Adjustments
EIOPA published updated representative portfolios that will be used for 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 2020 and these will be published at the beginning of April 2020.
The updated representative portfolios are published 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-2018 annual reporting templates as reported by European insurance and reinsurance companies to their national supervisory authorities. The updated portfolios enable more accurate reflection of the impact of market volatility under the Solvency II framework. EIOPA is revising the representative portfolios on a yearly basis, with the next update being scheduled for the end of 2020, according to Article 194 of the technical documentation of the methodology to derive the risk-free interest rate term structures of EIOPA.
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 (EU) 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 rate to mitigate the effect of short-term volatility of bond spreads on their solvency position. In that way, the volatility adjustment prevents procyclical investment behavior of insurers and reinsurers.
Keywords: Europe, EU, Insurance, Solvency II, Risk-Free Rates, Volatility Adjustment, Long-Term Guarantee, EIOPA
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