Question ID: 402
Regulation Reference: Risk-Free Interest Rate - General questions
Article: 43
Status: Final
Date of submission: 23 Jul 2015
Question
When calculating forward rates on the basis of the official EIOPA spot curves after applying the interest rate downward shock, jumps in the rates after the LLP can be observed due to the specification of the shock factors. Is this behaviour in the long tail intended and compatible with EIOPA’s guidelines?
EIOPA answer
The shocks of the interest rate risk sub-module of the standard formula specified in the Delegated Regulation on Solvency II are based on spot rates. The downward shock factors for maturities after 20 years are piecewise linear with a kink at maturity 90 years. That kink may give rise to non-monontonic behaviour of the forward rates of the shocked term structures.
Apart from that, please note that calculating forward rate curves from rounded spot rates may result in an unsmoothed path for higher maturities.