EUROPEAN ACTUARIAL CONSULTATIVE GROUP INVESTMENT AND FINANCIAL RISK

EUROPEAN ACTUARIAL CONSULTATIVE GROUP INVESTMENT AND FINANCIAL RISK COMMITTEE YIELD CURVE SURVEY: FIRST RESULTS Paolo De Angelis BRUXELLES, 9 th APRIL 2002 BRUXELLES 2002 - P. De Angelis

Communication plan ü The questionnaire scheme and its structure ü The correspondent and answer list ü The main viewpoints of interviewed ü Final remarks BRUXELLES 2002 - P. De Angelis 2

Questionnaire scheme • SURVEY AIMS: v. To gather information about the construction and use of yield curves in evaluating medium-long term liabilities in the financial and/or insurance fields in various european countries. v. To know the yield curve’s definition in the practice of different european insurance and financial markets. v. To qualify methods and criteria of calculating the yield curve, specifying deterministic or stochastic approach. BRUXELLES 2002 - P. De Angelis 3

Questionnaire scheme • SURVEY AIMS: v. To check the need of an official yield curve, verifying: Ø the presence on a local market of a published official yield curve. Ø the future aim to provide an official yield curve. Ø the future aim to publish an official yield curve in euro on behalf of the European Actuarial Associations. BRUXELLES 2002 - P. De Angelis 4

Questionnaire structure • 8 questions , in which 4 of them on technical tools in estimating the term structure : Ø 3 items about the definition and the use of yield curves in local market practice. Ø 3 items about the methods of estimating the yield curve in deterministic way. Ø 1 item about stochastic approaches, specifying the models and the criteria to estimate the parameters. Ø 1 item about the information reliability, specifying the source of the information. BRUXELLES 2002 - P. De Angelis 5

Correspondent list v The questionnaire has been sent to all Actuarial Association members of the Investment and Financial Risk Committee: Austria Belgium Cyprus Denmark Estonian Sweden Germany Hungary Ireland Italy Greece U. K. Lithuanian Portugal BRUXELLES 2002 - P. De Angelis Slovenian Spain Switzerland Norway Finland France 6

Answer list v AUSTRIA v FINLAND v FRANCE v HUNGARY v ITALY v NORWAY v UNITED KINGDOM BRUXELLES 2002 - P. De Angelis 7

Is a yield curve used to evaluate insurance liabilities…? …. . YES v France a flat yield curve to evaluate liabilities; yield curve maturity dependent for ALM studies. v U. K. a flat yield curve. v Italy a yield curve maturity dependent. BRUXELLES 2002 - P. De Angelis 8

Is a yield curve used to evaluate insurance liabilities…? …NO v Austria a yield curve is in preparation. v Finland a constant interest rate is used. v Hungary not generally used, except for ALM studies. v Norway a constant interest rate is used. BRUXELLES 2002 - P. De Angelis 9

Is a yield curve adopted in a deterministic or in stochastic way…? v France a deterministic curve of zerocoupon rate having different maturities, only for ALM studies. v U. K. a deterministic curve of zerocoupon rate. v Italy both determininistic and stochastic curves, depending on the kind of evaluations. BRUXELLES 2002 - P. De Angelis 10

Is a yield curve adopted in a deterministic or in stochastic way…? v Austria first step is to create a deterministic curve. v Hungary in ALM studies stochastic simulation models are used. BRUXELLES 2002 - P. De Angelis 11

What is the term structure’s definition…. ? v France a curve of zero-coupon bonds, calculated on the basis of Government bonds prices. v Hungary a curve of zero-coupon bonds; occasionally a curve of IRR. v U. K. a curve of IRR, calculated on the basis of a Government bonds yield to maturity average. v Italy a curve of zero-coupon bonds, calculated from IRS curve. BRUXELLES 2002 - P. De Angelis 12

What statistical tools are used to calculate a deterministic yield curve …. ? v France the smoothing method of Wasicek and Fong applied to market data. v Hungary the spline methods applied to market data. v Italy the regression methods, using the yield to maturity (to duration) of bullet bonds or calculating it from IRS curve. BRUXELLES 2002 - P. De Angelis 13

What models are used to calculate a stochastic yield curve …. ? v Italy CIR model and Vasicek term structure model, with parameters estimated on market data. BRUXELLES 2002 - P. De Angelis 14

Is there a yield curve published by an actuarial association …. . ? v France an official yield curve of zerocoupon bonds is calculated and published for the purpose of the evaluation required by the Supervisory. v U. K. Actuaries indices are published by the Financial Times in conjunction with the Actuarial Profession. BRUXELLES 2002 - P. De Angelis 15

Final Remarks Ø The low number of answers does not provide an exhaustive viewpoint in using yield curves for evaluating insurance liabilities. Ø It will be necessary to repeat the Survey, to extend the analisys to all financial institutions, operating on the local market. Ø It is obvious the importance of a yield curve in calculating assets and liabilities with reference to their Fair Value. ü The Fair Value has to be based on an estimate discounted cash flows RISK-ADJUSTED. BRUXELLES 2002 - P. De Angelis 16

An example – endowment form (age= 35; dur= 10 years; Cap. =1 euro) BRUXELLES 2002 - P. De Angelis 17