1. EUROPEAN ACTUARIAL CONSULTATIVE GROUP INVESTMENT AND FINANCIAL RISK COMMITTEE YIELD CURVE SURVEY: FIRST RESULTS Paolo De Angelis BRUXELLES, 9 th APRIL 2002

2. BRUXELLES 2002 - P. De Angelis2 Communication plan The questionnaire scheme and its structure The correspondent and answer list The main viewpoints of interviewed Final remarks

3. BRUXELLES 2002 - P. De Angelis3 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 curve’s 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.

4. BRUXELLES 2002 - P. De Angelis4 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.

5. BRUXELLES 2002 - P. De Angelis5 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.

6. BRUXELLES 2002 - P. De Angelis6 Correspondent list  The questionnaire has been sent to all Actuarial Association members of the Investment and Financial Risk Committee: AustriaHungarySlovenian BelgiumIrelandSpain CyprusItalySwitzerland DenmarkGreeceNorway EstonianU.K.Finland SwedenLithuanianFrance GermanyPortugal

7. BRUXELLES 2002 - P. De Angelis7 Answer list  AUSTRIA  FINLAND  FRANCE  HUNGARY  ITALY  NORWAY  UNITED KINGDOM

8. BRUXELLES 2002 - P. De Angelis8 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.

9. BRUXELLES 2002 - P. De Angelis9 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.

10. BRUXELLES 2002 - P. De Angelis10 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.

11. BRUXELLES 2002 - P. De Angelis11 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.

12. BRUXELLES 2002 - P. De Angelis12 What is the term structure’s 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.

13. BRUXELLES 2002 - P. De Angelis13 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.

14. BRUXELLES 2002 - P. De Angelis14 What models are used to calculate a stochastic yield curve …. ?  Italy CIR model and Vasicek term structure model, with parameters estimated on market data.

15. BRUXELLES 2002 - P. De Angelis15 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.

16. BRUXELLES 2002 - P. De Angelis16 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.

17. BRUXELLES 2002 - P. De Angelis17 An example – endowment form ( age= 35; dur= 10 years;Cap.=1 euro)