Limitations of Volatility Adjustment

The Omnibus II Directive, which amends the Solvency II Directive, contains a package of measures aimed at mitigating the effect of artificial market volatility on the balance sheet of insurance and reinsurance undertakings. One important measure is the Volatility Adjustment, which is an adjustment to the liquid part of the risk free interest rate curve, used for the discounting of technical provisions. This paper intends to highlight the limitations of the standardized measure, illustrate the impact these could have on the solvency position assessment and discuss the opportunity for undertakings to compute a specific Volatility Adjustment, namely in the context of their “Own Risk and Solvency Assessment”. Samuel Silber and Dr. Adrien Lebègue