Applying Solvency II Interest Rate Shocks to Asset Valuation
Summary
The document asks which interest rate curve should be shocked when valuing interest-sensitive assets under Solvency II. The questioner understands that future asset cash flows are discounted with shocked rates, but is uncertain whether to shock risk-free rates or another base curve on the asset side.
The response describes the available specifications as unsettled at the time and points to impact-study materials, including several base rates. It interprets the approach as valuing interest-sensitive assets with the relevant stressed curve applied to the selected unstressed base rate, without matching or transitional adjustments. This is a historical, qualified interpretation rather than definitive current regulatory guidance; the document does not provide the curve specifications or establish how later rules settled the question.
Key ideas
- The question concerns which base interest rate curve to shock for asset valuation under Solvency II.
- The response refers to impact-study specifications and multiple candidate base rates.
- Its interpretation applies the stressed curve to the selected unstressed base rate for interest-sensitive assets.
- The response excludes matching and transitional adjustments and is presented as an opinion based on then-available material.
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# Applying interest rate shocks under Solvency II # Applying interest rate shocks under Solvency II I'm trying to figure out how one would apply the stress scenarios defined under the interest rate risk sub module of Solvency II. I understand that all future cash flows of an interest rate sensitive asset (e.g. a coupon bond) have to be discounted using shocked rates. The magnitude of shock to be applied for each maturity is provided by EIOPA for the up- and downward scenario. I'm not sure, however, to which rates the shocks should be applied. Regarding liabilities this seems to be the risk-free rate, but what about the asset side? Official documents don't seem very explicit on that. Could anyone clarify on that? ## Answer by g g (score 3) https://quant.stackexchange.com/a/7146 In my opinion "risk-free rate" and "of Solvency II" are still not entirely defined terms. This is why the answer to your question is not entirely defined as well. As Solvency II is not yet in force the only specific information available is from the various impact studies and subject to change. The most recent impact study is the LTGA. You find the specs for this here. There are several base rates to be tested, all found here. As I understand it, interest-sensitive assets under stress are to be valued according to the respective stressed curve applied to the unstressed base rate from above. Of course, without applying adjustments like matching or transitional measures.
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