The current edition of "Regulation and supervision compact" provides an analysis of EIOPA‘s suggestions for reforming the first pillar of the Solvency II framework dealing with capital requirements. These suggestions pertain to, among others, the extrapolation of interest rates, the risk margin and the volatility adjustment.
The proposed changes would have complex implications. What it boils down to, in effect, is substantially stricter rules for the mathematical extrapolation of interest rates. Companies would have to assume lower interest rates for longer and hold considerably more equity than before – even though there are no reliable data for projections that far into the future. What's more, inadequate data would make the interest rate curve more volatile and pro-cyclical, which would diminish the insurance sector's stabilising effect as a long-term investor.