An alternative model for extrapolation

The proposed method for extrapolating the risk-free yield curve under Solvency II could have serious consequences for insurers, changing their risk profile and distorting the swap market. As a result risk management will become more complex and potentially less effective. Theo Kocken, Bart Oldenkamp and Joeri Potters propose that the damaging consequences of the changes can be avoided through minor adjustment of the proposed extrapolation method

technical blocks

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Recently, both insurance and pension regulators in Europe have been moving away from market-consistent valuations of long-dated liabilities. Market-consistent valuation was intended to bring transparency to the balance sheet, but it also brought low interest rates and high balance-sheet volatility. Given the lack of liquidity of ultra long-dated interest rate swaps, European policy-makers have suggested that the illiquid part of the curve

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