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Interest Curve in Solvency 2

T

tmtran99

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Hello,

I'm studying Solvency 2 and I know that the BEL is discounted by the curve with VA (Volatility Adjustment)
I would like to know if the Directive require the BOTH the projection of assets and the discounting with the curve with VA, or only the discounting the the curve VA ?
And if the Directive does not precise, is it possible to have the projection of assets with the curve without VA and have be BEL discounted with the curve with VA ?

Thanks.
 
Under Solvency 2 pillar 1, assets are valued at market value so will not be projected in the same way as the BEL. So no it wouldn't use the risk-free rate plus VA. However remember that the BEL includes projection of income and outgo.
 
Hi Francis,

Thank you for your reply.

Yes, I understand that assets are valued at market value as of the valuation date — that part is clear.

However, let’s consider a product with Profit Sharing, where we aim to project the future Balance Sheet and Income Statement stochastically. In such cases, I believe we need to project assets in a risk-neutral setting, meaning we should use the risk-free rate (RFR).

Implicitly, when allocating the cash flows generated between the Shareholder and the Policyholder, we are referring to cash flows generated under the RFR. Then, when calculating the Best Estimate Liability (BEL), we discount these cash flows using the adjusted RFR (i.e., RFR + VA).

Could you please confirm if my understanding is correct?
 
Hi
First of all, I would like to say that this level of detail is not required for SA2.
However you may want to read the following post:

Use of volatility adjustment for WP or UL business

Hi, I have a question on the use of volatility adjustment for WP or UL business. So the purpose of the VA is to reduce the risk of forced sales of assets (bonds) in the event of extreme bond movements. It does this by increasing the risk free rate used to discount liabilities, thus reducing...
www.acted.co.uk
 
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