Maturity beyond which the supervisor deems the bond market insufficiently deep, and from which the regulatory curve stops being observed and starts being extrapolated.
The last liquid point is the pivot of the whole regulatory curve: below it, the rate comes from the market; beyond it, from a convention. Its choice rests on criteria of depth, liquidity and transparency in the swap or sovereign bond market of the currency concerned, assessed from traded volumes and bid-ask spreads. Its reach is considerable and often underestimated. Pushing it out for a currency immediately exposes life insurers' own funds to market moves at the newly observed maturities, which raises solvency ratio volatility. Keeping it low smooths that volatility but moves regulatory valuation away from economic valuation, and creates an incentive not to hedge a rate risk the prudential balance sheet does not show. That point concentrated a large share of the Solvency II review debates, precisely because it moves billions of own funds without any management decision being taken.
For the euro the last liquid point is set at twenty years, a choice unchanged since Solvency II came into application in 2016, even though sovereign issues and swaps trade commonly at thirty and fifty years. For sterling it is set much further out, at fifty years, reflecting the depth of the British annuity market and explaining why the same liability is not valued the same way on either side of the Channel.
LLP, last liquid point, dernière maturité liquide, frontière d'observabilité