As of the end of March 2018 the European Insurance and Occupational Pensions Authority (EIOPA) will apply the updated representative portfolios for the calculation of the volatility adjustment to risk-free interest rates as announced on 18 December 2017. Based on more up-to-date and granular data, the new portfolios enable more accurate reflection of the impact of market volatility under the Solvency II framework.
The application of the updated representative portfolios for the Danish krone and for the country portfolio of Denmark is provisionally scheduled for end of June 2018. EIOPA is currently reviewing the calculation of the volatility adjustment for the Danish krone in particular with regard to the impact of optionality on the yields. Any changes arising from the review will be implemented together with the application of the updated Danish representative portfolios.
The representative portfolios are derived in accordance with Article 49 of the European Commission's Delegated Regulation (EU) 2015/35. Representative portfolios exist for currencies and for countries.
The volatility adjustment is a measure to ensure the appropriate treatment of insurance products with long-term guarantees under Solvency II. (Re-)insurers are allowed to adjust the risk-free interest rates to mitigate the effect of short-term volatility of bond spreads on their solvency position. In that way, the volatility adjustment prevents pro-cyclical investment behaviour of (re-)insurers. The volatility adjustments are derived from spreads of representative portfolios of assets.