Question ID: 2429
Regulation Reference: Other
Topic: Other
Article: N/A
Status: Final
Date of submission: 27 Apr 2022
Question
Regarding the 2022 EIOPA IORP Stress tests shocks (as provided in EIOPA excel file eiopa-22-315_2022_iorp_st_inputs_helper_tool.xlsx), we have two set of questions: A. Risk-free interest rate curve (adverse transition scenario) [1] 1. Can you confirm which of the following approach has been used to determine the adverse risk free interest rate (RFR) curve: a. RFR(NGFS_Disorderly_2033) b. RFR(EIOPA_EoY2021) + [RFR(NGFS_Disorderly_2033) - RFR(NGFS_Disorderly_2031)] 2. Can you explain the benefits/disadvantages of using formula 1.a vs 1.b? a. With formula 1.a we fear that NGFS scenario has not been calibrated taking into account 2021 end-of-year market condition and hence comparison with baseline would not be consistent 3. Can you explain the decision rationale of selecting one or the other approach? 4. If none of the above formula has been used, can you please detail your approach? B. Sovereign yields shocks (adverse transition scenario) [2]? 1. Can you confirm which of the following approach has been used to determine the shocks to be used in the adverse scenario: a. Yield(NGFS_Disorderly_2033) - Yield(Market data_EoY2021) b. Yield(NGFS_Disorderly_2033) - Yield(NGFS_Disorderly_2031) 2. Can you explain the benefits/disadvantages of using formula 1.a vs 1.b? a. With formula 1.a we fear that NGFS scenario has not been calibrated taking into account 2021 end-of-year market condition and hence comparison with baseline would not be consistent. b. In particular, we are surprised that Belgium would have its yield to increase in adverse transition scenario (ex: 10Y yield: +121bp) while Poland would have its CS to decrease (ex 10Y yield: -100bp) in similar scenario. Are these opposite shocks expected? Can you explain? 3. Can explain the decision rationale of selecting one or the other approach? 4. If none of the above formula has been used, can you please detail your approach? [1] See sheet [RISK-FREE RATE & INFLATION], column D. [2] See sheet [SOVEREIGN YIELDS], table B12:K47.
EIOPA answer
Please be advised that the scenario has been provided by the ESRB and is based on the disorderly transition scenario, as elaborated by the NGFS. The information reflected in EIOPA’s input helper tool (baseline) has been defined according to the following:
1. For risk-free rates: the Solvency II term-structures as of 31/12/2021 as published by EIOPA (i.e. without VA and including UFR).
2. For sovereign yields: the observed yields for 3M and 10Y as of 31/12/2021 as provided by Refinitiv using the relevant tickers according to EIOPA’s RFR technical documentation.
The information reflected in EIOPA’s input helper tool (adverse scenario) has been defined according to the following:
1. For risk-free rates: the adverse scenario as provided by the ESRB. As only two tenor points have been provided, the corresponding levels have been translated into shocks for each tenor point, followed by linear interpolation and extrapolation to arrive at the shocks for the other tenors. The unchanged UFR has been applied to the adverse scenario as well.
2. For sovereign yields: a similar approach has been taken as for the risk-free rates using now the observed sovereign yields from Refinitiv and the levels from the ESRB adverse scenario to define the shocks.