Testing interest rate models for Solvency II applications

Alexey Botvinnik and Vladimir Ostrovski propose a validation method for interest rate models

Interest rates are one of the main risk factors for insurance companies. Both assets and liabilities react to the movement of interest rates. Therefore, it is essential to have an adequate model of interest rates for Solvency II applications. Here, we address some of the existing issues under the Solvency II framework, and take a deeper look at internal models for interest rates and the ways in which it can be demonstrated that these models are fit for purpose.

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