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5 Assumptions

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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.

For the valuation of year-end 2016, the interest rate model was changed in order to allow for negative interest rates, including the calibration on absolute instead of relative swaption implied volatilities. Furthermore, the yield curve derivation was altered from the QIS5 approach to the current Solvency II principles and specifications.

5.1.1 Reference rates

The reference rates used for the calculation of the MCEV 2016 are based on the swap rates as at 31 December 2016 and include, where appropriate, a credit risk adjustment (CRA) and a volatility adjustment (VA). 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. Extrapolation of the yield curves, including ultimate forward rate and last liquid point, and determination of CRA and VA follow the Solvency II principles. EIOPA’s technical specifications are applied, with refinements for Swiss franc regarding the last liquid point and the volatility adjustment.

The last liquid point for Swiss franc is set to 15 years based on an assessment of the depth, liquidity and transparency of the corresponding financial markets. The volatility adjustment for Swiss franc applies EIOPA’s methodology with the refinement that the Swiss Life Switzerland asset portfolio is used instead of the reference portfolio provided by EIOPA. All other parameters, including those for the extrapolation of the yield curve, e.g. the ultimate forward rate, are used as specified by EIOPA for Solvency II.

The spread (over swap rates) applied for the valuation of the hybrid debt was updated based on a subordinated bond index and amounts to 318bp as at 31 December 2016. For the opening MCEV the spread amounted to 319bp.

The entire 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.

5.1.1.1 Swap rates as at 31 December 2016

Economy1 year2 year5 year10 year15 year30 year
Switzerland–0.67%–0.60%–0.32%0.15%0.43%0.63%
Euro Zone–0.20%–0.16%0.08%0.66%1.03%1.23%
United States1.18%1.44%1.95%2.31%2.48%2.57%

5.1.1.2 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%

5.1.1.3 Volatility adjustment as at 31 December 2016 and 100% liquidity premium as at 31 December 2015

Economy20162015
Switzerland10bp24bp
Euro Zone13bp38bp
United States50bp84bp

5.1.1.4 Credit risk adjustment as at 31 December 2016

Economy201620151
Switzerland10bp
Euro Zone10bp
United States15bp

5.1.2 Volatility assumptions

Volatility assumptions for the year-end 2016 and 2015 calculations are derived from market data as at 31 December 2016 and 2015.

For year-end 2016, the interest rate volatilities are based on absolute swaption implied volatilities. For year-end 2015, the interest rate volatilities are based on relative implied volatilities of at-themoney 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 Absolute swaption implied volatilities as at 31 December 2016

Economy1 year option2 year option5 year option10 year option15 year option30 year option
Switzerland0.53%0.63%0.77%0.78%0.72%0.60%
Euro Zone0.72%0.72%0.71%0.66%0.60%0.47%
United States0.87%0.86%0.80%0.68%0.62%0.56%

5.1.2.2 Relative swaption implied volatilities as at 31 December 2015

Economy1 year option2 year option5 year option10 year option15 year option30 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%

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 2016 and 31 December 2015

EconomyIndexVolatility
2016
Volatility
2015
SwitzerlandSMI18.6%18.1%
Euro ZoneEuroStoxx 5022.8%21.6%
United StatesS&P 50027.0%26.8%

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 2016 and 31 December 2015

EconomyVolatility
2016
Volatility
2015
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 16% for 2016 and 15% for 2015.

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 of the Swiss National Bank.

5.1.4.1 Forward inflation rates used for the calculation as at 31 December 2016

Economy1 year2 year5 year10 year15 year30 year
Switzerland0.1%0.5%1.3%1.5%1.6%1.8%
Euro Zone1.3%1.0%0.9%1.7%1.9%1.5%

5.1.4.2 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%

5.1.5 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 class20162015
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

 20162015
Switzerland21.1%21.1%
France28.9%134.4%
Germany28.3%28.3%
Luxembourg24.5%20.0%
Liechtenstein12.5%12.5%
Singapore10.0%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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