Several issues were identified that led to under-estimation of the interest rate risk under the SII standard formula approach. These included, inter alia, actual interest rate movements being stronger than those assumed by stresses in the regulation already in place, negative interest rates not being stressed and deviation in the measurement of interest rate risk by internal model users. The concluding remarks of the impact assessment, in the SII 2020 review, state that the capital requirements are not sufficient for this material risk.
Thus, the EIOPA recommended a method that introduces new parameters to assess interest rate risk within the standard formula, along with a new formula for calculating the stressed rates. The previous formula had solely a relative shock component. The new formula includes an additive shock in addition to a relative shock, with a new set of parameters which has been calibrated to the last liquid point (LLP) of 20 years and the additive shock component. The EC has not yet provided details of the formula as these are covered by Level 2 texts. The formulas for the stressed interest rates for the calculation of interest rate risk are provided in the appendix.
Additionally, the recommended formula ensures that the minimum shock of 1% is removed in the rising interest rate scenario and that negative interest rates are stressed in the falling rate scenario. The below graphs show a comparison of the base, current stressed and proposed stressed curves in the up and down interest rate scenario (as at Year End (YE) 2022).