5 Assumptions

5.1 Economic assumptions

The market consistent calibration of the economic scenarios is based on traded market instruments at the valuation date wherever possible. This includes nominal and real yield curves, interest rate volatility and equity volatilities. Where market data is not available or the market is not liquid enough, the model calibration is based on best estimate assumptions. This notably includes correlations, exchange rate volatilities and real estate volatilities.

5.1.1 Reference rates
The reference rates used for the calculation of the MCEV 2015 are based on the swap rates as at 31 December 2015 and include, where appropriate, a liquidity premium. Extrapolation of the interest curves and determination of liquidity premiums closely follow the QIS 5 framework.

The underlying liquidity premium is determined by applying the formula Maximum (0; 50%*(corporate credit spread over swap –40bp)), where the corporate spreads over swap are measured with appropriate market indices. For the corporate credit spread over swap rates for the three currencies euro, US dollar and British pound, we use the quotation from Markit©3 instead of using the twostep approach as described in the QIS 5 guidance. For Canadian dollar we use the quotation from BofA Merrill Lynch. For the spread over swap rates for Swiss franc we use a SIX Swiss Exchange Bond Index (SBI® Corporate) composed of investment grade, foreign and domestic corporate issues in Swiss francs.

We apply no liquidity premium to unit-linked, portfolio-linked and variable annuities business, 50% of the underlying liquidity premium to health insurance and assumed external reinsurance, and 75% to all participating and other businesses, including traditional annuities. Liquidity premiums are applied over a term of 10 years for Swiss franc, 15 years for euro and 30 years for US dollar, and phased out over the following five years.

As some of Swiss Life’s liabilities are running longer than asset durations are available on financial markets in sufficient depth and liquidity, an extrapolation of yields is applied to assess swap rates beyond this horizon. Swiss Life uses the approach for extrapolation prescribed by EIOPA for QIS 5.

The spread (over swap rates) applied for the valuation of the hybrid debt was updated based on a subordinated bond index and amounts to 319bp as at 31 December 2015. For the opening MCEV the spread amounted to 287bp.

The whole yield curve is shifted for the 100bp increase/decrease in reference rate sensitivity including the extrapolated part beyond terms where market data is used for calibration of the reference rates.

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5.1.1.1 Swap rates as at 31 December 2015

Economy1 year2 year5 year10 year15 year30 year
Switzerland-0.70%-0.64%-0.31%0.25%0.56%0.88%
Euro Zone-0.06%-0.03%0.33%1.00%1.40%1.61%
United States0.85%1.15%1.70%2.16%2.40%2.60%

 

5.1.1.2 Swap rates as at 31 December 2014

Economy1 year2 year5 year10 year15 year30 year
Switzerland-0.11%-0.13%0.06%0.52%0.79%1.16%
Euro Zone0.16%0.18%0.36%0.82%1.15%1.47%
United States0.44%0.89%1.75%2.27%2.49%2.69%

 

5.1.1.3 100% Liquidity premium, relative to swap rates, as at 31 December 2015 and 31 December 2014

Economy201512014
Switzerland24bp20bp
Euro Zone38bp24bp
United States84bp63bp

5.1.2 Volatility assumptions
Volatility assumptions for the year-end 2015 and 2014 calculations are derived from market data as at 31 December 2015 and 2014.

The interest rate volatilities are based on implied volatilities of at-the-money receiver swaptions. The tables below show rates for euro and US dollar with 20-year tenors and rates for Swiss franc with 10-year tenors.

5.1.2.1 Swaption implied volatilities as at 31 December 2015

Economy1 year option2 year option5 year
option
10 year
option
15 year
option
30 year
option
Switzerland144.0%120.1%89.7%76.0%74.7%1
Euro Zone42.4%40.5%36.0%34.5%35.5%38.6%
United States29.5%29.1%27.4%24.1%22.1%22.2%

 

5.1.2.2 Swaption implied volatilities as at 31 December 2014

Economy1 year
option
2 year
option
5 year
option
10 year
option
15 year
option
30 year
option
Switzerland65.7%61.8%59.4%49.7%43.1%49.0%
Euro Zone43.5%41.1%35.9%32.6%30.7%26.6%
United States27.6%27.4%26.1%23.4%20.8%21.3%

The equity implied volatilities are derived from the 10-year at-the-money equity put option prices.

5.1.2.3 Equity option implied volatilities as at 31 December 2015 and 31 December 2014

VolatilityVolatility
EconomyIndex20152014
SwitzerlandSMI18.1%18.5%
Euro ZoneEuroStoxx 5021.6%20.8%
United StatesS&P50026.8%25.9%

The property volatilities are based on best estimate assumptions considering historical data.

5.1.2.4 Property volatilities used for the calculation as at 31 December 2015 and 31 December 2014

VolatilityVolatility
Economy20152014
Switzerland8.0%8.0%
Euro Zone13.0%13.0%

5.1.3 Correlation assumptions
The correlation assumptions between different asset classes are based on historical market data. The correlations between returns on equities and on 10-year zero coupon bonds are assumed to be 15% for 2015 and for 2014.

5.1.4 Inflation assumptions
The inflation assumptions have been derived from inflation-linked bond prices, where inflationlinked bonds are traded. For the Swiss economy, the real interest rate model is calibrated on the inflation forecast by Consensus Economics, an international economic survey organisation.

5.1.4.1 Forward inflation rates used for the calculation as at 31 December 2015

Economy1 year2 year5 year10 year15 year30 year
Switzerland-0.1%-0.1%-0.2%0.6%0.8%0.7%
Euro Zone1.2%0.7%0.8%1.6%1.7%1.0%

 

5.1.4.2 Forward inflation rates used for the calculation as at 31 December 2014

Economy1 year2 year5 year10 year15 year30 year
Switzerland0.1%-0.1%-0.2%0.5%0.7%0.4%
Euro Zone0.1%0.3%0.9%1.6%1.6%0.9%

5.1.5 Real world assumptions
These assumptions are used for the step “expected existing business contribution in excess of reference rates”.

For fixed interest assets, the “real world” investment return assumptions are based on the gross redemption yield on the assets less a rating-dependent allowance for expected defaults derived from historical data.

Fixed risk premiums are used for other risky assets. Return assumptions for equity and property are derived from the 10-year swap rates, plus a risk premium; see table 5.1.5.1 below.

5.1.5.1 Equity and property assumptions for real world projection

Risk premiums by asset class20152014
Equity400bp400bp
Property (Switzerland and Europe)200bp200bp

5.2 Taxation and legislation

Tax assumptions for the projection of annual results have been set in line with the local tax regime. Tax losses carried forward are considered. Taxation rules are based on individual companies’ total results. Tax impact of future new business has not been allowed for. The following table 5.2.1 shows the corporate tax rates applied.

5.2.1 Tax assumptions

20152014
Switzerland21.1%21.1%
France34.4%34.4%1
Germany28.3%28.3%
Luxembourg20.0%22.0%
Liechtenstein12.5%12.5%
Singapore17.0%17.0%

5.3 Operating assumptions

Non-economic assumptions such as mortality, morbidity and lapse rates have been determined by the respective business units based on their best estimate as at the valuation date. Best estimate assumptions are set by considering past and current experience.

Expense assumptions are reconciled with past and current experience. They do not account for future cost reductions. Projected expenses are subject to inflation. All the expected expense overruns affecting the covered business, such as overhead expenses and development costs in new markets, have been allowed for in the calculations. Corporate costs are included in the expenses of market units by means of a “look-through” procedure (see section 4.6).

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