Solvency II: insurers study hedging options for volatility adjustment

Adjustment to discount curve adds complexity to task of hedging liabilities

market volatility

UK insurers received a fillip on August 6 as a Treasury consultation paper provided reassurance that those who wish to use the Solvency II volatility adjustment (VA) will be able to do so. 

This is welcome news for firms because access to the VA will allow them to reduce the impact of spread volatility on their Solvency II balance sheets. The adjustment applies a parallel upward shift in the risk-free rate that firms use to discount liabilities – the higher the rate the lower their liabilities.

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