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?
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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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