‘Unhedgeable’ risk-free curve extrapolation method implied in Omnibus II text
Controversial Smith-Wilson technique expected to be confirmed in level 2 implementing measures
European member states are gearing up for a heated debate over what methodology should be used for extrapolating the risk-free rate in Solvency II.
The final compromise text of the Omnibus II Directive, agreed last month, outlines key elements of the risk-free yield curve to be used by insurers for discounting long-term liabilities. These include the preferred starting point of extrapolation (known as the last liquid point or LLP), ultimate forward rate (UFR) and rate of convergence for euro
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