Volatility vs Matching Adjustment

Published by Scott Eason on

Our expert

  • Scott Eason

    Scott Eason

    Partner and Head of Insurance Consulting

  • Several new documents have been released that give some further information for those still weighing up the benefits of Volatility Adjustment (VA) vs Matching Adjustment (MA) for annuity business.

    Firstly, EIOPA has produced risk-free-interest-rate curves, fundamental spreads for MA and country specific VA figures as at year end 2014, January and February. Key points are:

    • The fundamental spreads were higher than many expected, potentially slightly reducing the benefit of the MA (we have not done any detailed analysis but the impact may be as high as 20-30 bps)
    • VA figures have been released by EIOPA for the last three month ends.  YE14 was 22bps, January 19bps, February 17bps.

    There appears to still be a significant discount rate benefit (c60-80bps) to using the MA over VA as well as the credit spread capital relief from being allowed to re-calculate the MA under the stress scenario.

    Secondly, the PRA has released another Director’s letter on the Matching Adjustment.  Of most interest is the three 'matching test thresholds' that companies are required to meet to demonstrate adequate matching.  These will need to be monitored quarterly, with the exception of (the revised) Test 1 which will need to be performed monthly for portfolios open to new business.

    Finally, the UK Government has produced draft legislation confirming their intention to use a VA application process.  The Government state that they are being as light touch as possible but information to be submitted will include (at least) a liquidity plan, ORSA and quantitative impact of applying the VA. 

    No requirements on business/policy type or asset holdings are set out in the legislation nor do we have any information on on-going requirements.  PRA are expected to announce further details in the near future, not least because the VA application process is expected to be open from April 2015. 

    Standalone VA application decisions will take up to six weeks.  However, concurrent applications (with MA or internal model) will be allowed but will take up to six months to review. 

    The documents can be found at the following external sites:




    Key points:

    • appears to still be a significant benefit to using the MA
    • some of the on-going matching requirement hurdles for MA have been clarified
    • a VA approval process will be implemented in the UK from April 2015, however, details of any restrictions have not yet been communicated