When is a hedge not a hedge? ALM under Solvency II

Solvency II increases the focus on the sourcing and calibration of accurate and representative discount curves. Alterations to discount curves may change optimal hedges and necessitate re-hedging.

Here we use a simple educational example to demonstrate this with UBS Delta, using both a UK Solvency I approach for an annuity provider and a Solvency II (QIS 5) liquidity premium approach. We also illustrate the volatility of the relative asset liability mismatch under the different approaches using our historic value-at-risk (VaR) model, which applies historic simulations to revalue the asset and liability values.