EUROPEAN ACTUARIAL CONSULTATIVE GROUP INVESTMENT AND FINANCIAL RISK COMMITTEE

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EUROPEAN ACTUARIAL CONSULTATIVE GROUPINVESTMENT
AND FINANCIAL RISK COMMITTEE

• YIELD CURVE SURVEY FIRST RESULTS
• Paolo De Angelis
• BRUXELLES, 9th APRIL 2002

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Communication plan

• The questionnaire scheme and its structure
• The correspondent and answer list
• The main viewpoints of interviewed
• Final remarks

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Questionnaire scheme

• SURVEY AIMS
• 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.
• To know the yield curves definition in the
  practice of different european insurance and
  financial markets.
• To qualify methods and criteria of calculating
  the yield curve, specifying deterministic or
  stochastic approach.

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Questionnaire scheme

• SURVEY AIMS
• To check the need of an official yield curve,
  verifying
• the presence on a local market of a published
  official yield curve.
• the future aim to provide an official yield
  curve.
• the future aim to publish an official yield curve
  in euro on behalf of the European Actuarial
  Associations.

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Questionnaire structure

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

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Correspondent list

• The questionnaire has been sent to all
  Actuarial Association members of the Investment
  and Financial Risk Committee
• Austria Hungary Slovenian
• Belgium Ireland Spain
• Cyprus Italy Switzerland
• Denmark Greece Norway
• Estonian U.K. Finland
• Sweden Lithuanian France
• Germany Portugal

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Answer list

• AUSTRIA
• FINLAND
• FRANCE
• HUNGARY
• ITALY
• NORWAY
• UNITED KINGDOM

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Is a yield curve used to evaluate insurance
liabilities?..YES

• France a flat yield curve
  to evaluate liabilities yield
  curve maturity dependent for ALM
  studies.
• U.K. a flat yield curve.
• Italy a yield curve maturity
  dependent.

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Is a yield curve used to evaluate insurance
liabilities?NO

• Austria a yield curve is in
  preparation.
• Finland a constant interest
  rate is used.
• Hungary not generally used,except
  for ALM studies.
• Norway a constant interest rate
  is used.

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Is a yield curve adopted in a deterministic or in
stochastic way?

• France a deterministic
  curve of zero- coupon rate having
  different maturities, only for ALM
  studies.
• U.K. a deterministic curve of
  zero- coupon rate.
• Italy both determininistic and
  stochastic curves, depending on the
  kind of evaluations.

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Is a yield curve adopted in a deterministic or in
stochastic way?

• Austria first step is to
  create a deterministic curve.
• Hungary in ALM studies
  stochastic simulation models are
  used.

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What is the term structures definition. ?

• France a curve of zero-coupon
  bonds, calculated on the basis of
  Government bonds prices.
• Hungary a curve of zero-coupon bonds
  occasionally a curve of IRR.
• U.K. a curve of IRR, calculated on
  the basis of a Government bonds yield
  to maturity average.
• Italy a curve of zero-coupon bonds,
  calculated from IRS curve.

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What statistical tools are used to calculate a
deterministic yield curve . ?

• France the smoothing method of
  Wasicek and Fong applied to market data.
• Hungary the spline methods applied to
  market data.
• Italy the regression methods, using the
  yield to maturity (to duration) of bullet
  bonds or calculating it from IRS curve.

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What models are used to calculate a stochastic
yield curve . ?

• Italy CIR model and Vasicek term
  structure model, with
  parameters estimated on market data.
  

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Is there a yield curve published by an actuarial
association .. ?

• France an official yield curve of
  zero- coupon bonds is calculated and
  published for the purpose of the
  evaluation required by the Supervisory.
• U.K. Actuaries indices are published by
  the Financial Times in conjunction with
  the Actuarial Profession.

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Final Remarks

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

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An example endowment form(age 35 dur 10
yearsCap.1 euro)