Question ID: 2736
Regulation Reference: Risk-Free Interest Rate - VA calculations, Risk-Free Interest Rate - VA representative portfolios
Topic: Risk Free Rate (RFR)
Article: N/A
Status: Final
Date of submission: 13 Jul 2023
Question
My question is related to the composition of the ZC ECB curve used in the calculation of the Currency VA for the countries of the euro zone. I understand that this curve does not use an explicit weighting of the various countries of the euro zone but implies an implicit weighting in its composition (based on ECB methodology). However, the ECB does not publish the weighting/composition of this curve. With a view to calibrating an insurer's exposure to a sovereign spread, it is important to identify the protection offered by the VA to a country's spread widening. However, it is not possible to correctly calibrate this strategy without having the composition of this curve. As EIOPA uses this curve in its VA methodology, could you give me more information regarding the composition of this curve? Is it linked to the composition of EIOPA's representative portfolio? Does the composition change frequently? How does EIOPA monitor this composition?
Background of the question
The question is asked in connection with the protection offered by the VA by country in the eurozone in order to be able to best calibrate a hedging strategy if necessary.
EIOPA answer
We are not able to give your more information regarding the composition of the ECB curve, neither is it linked to the composition of EIOPA's representative portfolio.
EIOPA’s representative portfolios are based on the assets reported by all undertakings reporting under Solvency II and they are updated on an annual basis.
In the calculation of the currency VA for the euro the ECB curve is used for the sovereign portfolio yield on government bonds issued in euro. This portfolio yield takes into account to what extent each reporting country has issued government bonds denoted in euro and their corresponding durations.
A detailed description of the methodology to derive the representative portfolios is available in EIOPA’s Technical Documentation on the RFR Methodology (ANNEX F).
The representative portfolios are representative for the entire insurance sector reporting under Solvency II and as such will most likely deviate from an individual insurance undertaking’s exposures to bonds.