French Insurance Code
In forceI.- Insurance and reinsurance undertakings may apply a volatility adjustment to the relevant risk-free interest rate curve to be used in calculating the best estimate referred to in Article R. 351-2.
For each currency concerned, the adjustment for volatility of the relevant risk-free interest rate curve is a function of the difference between the interest rate that it would be possible to withdraw from the assets included in a reference portfolio in that currency and the rates of the corresponding relevant risk-free interest rate curve in that currency.
The reference portfolio in a currency is representative of the assets which are denominated in that currency and in which insurance and reinsurance undertakings have invested to cover the best estimate of insurance and reinsurance liabilities denominated in that currency.
II - The amount of the adjustment for risk-free interest rate volatility corresponds to 65% of the adjusted risk "currency" spread.
The "currency" spread of the adjusted risk is equal to the difference between the spread mentioned in the second paragraph of I and the portion of this spread attributable to a realistic assessment of the expected losses on the assets and the unforeseen credit risk or any other risk weighing on these assets.
The volatility adjustment is applicable only to risk-free interest rates of the relevant curve which are not calculated by means of extrapolation pursuant to Article R. 351-3.
Where the insurance or reinsurance undertaking applies a volatility adjustment, the extrapolation of the relevant risk-free interest rate curve is based on the risk-free interest rates thus adjusted.
III - For each country concerned, the volatility adjustment of the risk-free interest rates in the currency of that country, referred to in II, is, before application of the 65% factor, increased by the difference between the "country" spread of the adjusted risk and twice the "currency" spread of the same adjusted risk, where this difference is positive and the "country" spread of the adjusted risk is greater than 85 basis points. The increase in the volatility adjustment applies to the calculation of the best estimate for insurance and reinsurance commitments for products sold on the market in that country. The "country" spread of the adjusted risk is calculated in the same way as the "currency" spread of the adjusted risk of that country, but on the basis of a reference portfolio which is representative of the portfolio of assets in which insurance and reinsurance undertakings have invested to cover the best estimate of insurance and reinsurance commitments for products sold on the insurance market of that country and denominated in the currency of that country.
The volatility adjustment does not apply to insurance liabilities if the relevant risk-free interest rate curve to be used to calculate the best estimate of these liabilities includes the equalisation adjustment provided for in Article R. 351-4.
Notwithstanding Article R. 352-2, the Solvency Capital Requirement does not cover the risk of loss of original own funds arising from a change in the volatility adjustment.
