Prudential Regulation Authority Rulebook

8.1

A firm must not apply a volatility adjustment to the relevant risk-free interest rate term structure to calculate the best estimate of its insurance or reinsurance obligations unless:

1. (1) it has been granted a volatility adjustment approval; and
2. (2) the volatility adjustment has been set out in Solvency II Regulations or published by the PRA under regulation 4B of the Solvency 2 Regulations.

8.2

The volatility adjustment must not be applied to the risk-free interest rates of the relevant risk-free interest rate term structure that are derived by means of extrapolation in accordance with 5.

8.3

Where a firm applies a volatility adjustment in accordance with 8, the extrapolation of the relevant risk-free interest rate term structure referred to in 5 shall be based on the risk-free interest rates adjusted with the volatility adjustment.

8.4

A firm must only apply a volatility adjustment that includes a relevant country increase referred to in regulation 4B(6) of the Solvency 2 Regulations to calculate the best estimate of its insurance or reinsurance obligations of products sold in the insurance market of that country, respectively.

8.5

The volatility adjustment shall not be applied with respect to insurance or reinsurance obligations where the relevant risk-free interest rate term structure to calculate the best estimate for those obligations includes a matching adjustment.

[Note: Art. 77d and Art. 77e(3) of the Solvency II Directive]