Prudential Regulation Authority Rulebook

2.1

In meeting the requirements set out in Transitional Measures 10.2(1) and 10.2(2), the PRA expects firms to determine the single interest rate in 10.2(1) in such a manner that the comparison with the annual effective rate in 10.2(2) is meaningful. For example, firms could compute the annual effective rate that, when applied to the cash flows of the admissible insurance and reinsurance obligations, results in a present value that is equal to the value of the admissible insurance obligations calculated in accordance with Chapter 1 of the Prudential Sourcebook for Insurers (INSPRU 1) as at 31 December 2015. In their applications, firms are expected to explain and justify the method used.

2.2

Where a firm includes a volatility adjustment within the Solvency II relevant risk-free interest rate, but also intends to use the transitional measure on the risk-free rate, the annual effective rate calculated in Transitional Measures 10.2(2) should reflect the effect of the volatility adjustment. The admissible insurance and reinsurance obligations should then be discounted at a rate equal to the basic risk-free rate plus the transitional adjustment to the risk-free rate. A volatility adjustment should not be added on top of this, as that would result in double counting the effect of the volatility adjustment (which was already reflected when determining the transitional adjustment).^[5]