For the valuation of year-end 2016, the interest rate model was changed in order to allow for negative interest rates, including the calibration on absolute instead of relative swaption implied volatilities. Furthermore, the yield curve derivation was altered from the QIS5 approach to the current Solvency II principles and specifications.
The reference rates used for the calculation of the MCEV 2016 are based on the swap rates as at 31 December 2016 and include, where appropriate, a credit risk adjustment (CRA) and a volatility adjustment (VA). As some of Swiss Life’s liabilities are running longer than asset durations are available on financial markets in sufficient depth and liquidity, an extrapolation of yields is applied to assess swap rates beyond this horizon. Extrapolation of the yield curves, including ultimate forward rate and last liquid point, and determination of CRA and VA follow the Solvency II principles. EIOPA’s technical specifications are applied, with refinements for Swiss franc regarding the last liquid point and the volatility adjustment.
The last liquid point for Swiss franc is set to 15 years based on an assessment of the depth, liquidity and transparency of the corresponding financial markets. The volatility adjustment for Swiss franc applies EIOPA’s methodology with the refinement that the Swiss Life Switzerland asset portfolio is used instead of the reference portfolio provided by EIOPA. All other parameters, including those for the extrapolation of the yield curve, e.g. the ultimate forward rate, are used as specified by EIOPA for Solvency II.
The spread (over swap rates) applied for the valuation of the hybrid debt was updated based on a subordinated bond index and amounts to 318bp as at 31 December 2016. For the opening MCEV the spread amounted to 319bp.
The entire yield curve is shifted for the 100bp increase/decrease in reference rate sensitivity including the extrapolated part beyond terms where market data is used for calibration of the reference rates.
1 No credit risk adjustment was applied as at 31 December 2015.
Volatility assumptions for the year-end 2016 and 2015 calculations are derived from market data as at 31 December 2016 and 2015.
For year-end 2016, the interest rate volatilities are based on absolute swaption implied volatilities. For year-end 2015, the interest rate volatilities are based on relative implied volatilities of at-themoney receiver swaptions. The tables below show rates for euro and US dollar with 20-year tenors and rates for Swiss franc with 10-year tenors.
The correlation assumptions between different asset classes are based on historical market data. The correlations between returns on equities and on 10-year zero coupon bonds are assumed to be 16% for 2016 and 15% for 2015.
The inflation assumptions have been derived from inflation-linked bond prices, where inflationlinked bonds are traded. For the Swiss economy, the real interest rate model is calibrated on the inflation forecast of the Swiss National Bank.
1 Following French legislation the tax rate assumption applied for 2017-2019 is 34.4%.