This white paper is the third discussion in our Solvency II Rate Hedging series, exploring the intertemporal dynamics as hedged liabilities age. First, we construct a hedge program for a typical life insurance company. The hedge targets stabilising the short-term Solvency II ratio. We then examine how this hedge performs over time, as the Solvency II yield curve deviates from the market curve. After identifying the challenges facing this hedge program, we walk through several possible solutions, depending on the insurer’s primary goal, and whether the capital model uses the standard formula or an internal model. We conclude with a discussion of issues still unresolved and opportunities for further research.
A series of practical papers on Interest Rate Risk Management under Solvency II Part 3: Solvency II hedging
ByJosh Dobiac, Maarten Ruissaard, and Freek Zandbergen
4 May 2021
A series of practical papers on Interest Rate Risk Management under Solvency II Part 3: Solvency II hedging