Insurance and reinsurance undertakings use the risk-free interest rate term structures to discount the technical provisions they set up for their insurance and reinsurance obligations under Solvency II. The risk-free interest rate term structures change over time, depending on market parameters, in particular the level of market interest rates. Therefore, the amount of technical provisions will usually increase when market interest rates decrease and vice versa. Insurance obligations may have a longer term to maturity than the assets available in the financial market to determine the term structure of the interest rate used for the valuation of technical provisions. The Smith-Wilson yield curve extrapolation method is used to determine the risk-free interest rate term structure for maturities, for which no reliable market data exists (i.e. when financial markets for bonds or for reference instruments cannot be considered to be active, deep, liquid and transparent anymore). The interest rate risk sub-module should capture interest rate risk in relation to all interest rate sensitive assets and liabilities of (re)insurance undertakings. Our results show that the solvency capital requirement for interest rate risk sub-module measured by the EU-wide standard formula is equivalent to the solvency capital requirement for interest rate risk sub-module measured by a partial internal risk model that we develop using the Vasicek (1977) model.     «

Insurance and reinsurance undertakings use the risk-free interest rate term structures to discount the technical provisions they set up for their insurance and reinsurance obligations under Solvency II. The risk-free interest rate term structures change over time, depending on market parameters, in particular the level of market interest rates. Therefore, the amount of technical provisions will usually increase when market interest rates decrease and vice versa. Insurance obligations may have a...     »