Regulatory risk-free rate curve
The curve published by the supervisor for discounting insurance liabilities, which makes solvency comparable across insurers at the price of some convention.
Every month, the European Insurance and Occupational Pensions Authority publishes the Solvency II risk-free rate term structure, under a regime in force since January 1, 2016. Every undertaking in the Union discounts its technical provisions with that curve. The reason is the weight of the rate: half a percentage point moves a life insurer's solvency ratio by several points. If each company picked its own curve, balance sheets would stop being comparable and the curve would become a window-dressing tool. The build stacks three layers that should be kept apart. At the base, rates observed in liquid markets, in practice swaps for the euro. Then a credit risk adjustment, which strips out the part of the swap rate that pays for counterparty risk. Beyond the last liquid point, set at twenty years for the euro, the curve is extrapolated toward an ultimate forward rate. That last layer is where the argument is, because it covers the distant maturities of pensions and annuities, where no market quotes a price. The curve is more a convention than an observation, which is both its theoretical weakness and its practical merit: here, comparability counts for more than accuracy.
Each month, the European Insurance and Occupational Pensions Authority publishes the risk-free rate term structure applicable under Solvency II, a regime in force since January 1, 2016. Every undertaking in the Union uses it to discount technical provisions.
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