5 Assumptions
5.1 Economic Assumptions
The market-consistent calibration of the economic scenarios is provided by Barrie & Hibbert and 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 has not been available or the market has not been liquid enough, the model calibration has been based on best estimate assumptions. This includes notably correlations, exchange rate volatilities and real estate volatility.
5.1.1 Reference rates — The reference rates used for the calculation of the MCEV 2009 are based on the swap rates as at 31 December 2009.
The MCEV principles permit the use of liquidity premiums. Given the continued development of a suitable methodology to quantify liquidity premiums, Swiss Life decided to set liquidity premiums at zero for the calculation of the MCEV 2009.
5.1.1.1 Swap rates as at 31 December 2009
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Switzerland | |
| 0.49% | | 0.87% | | 1.71% | | 2.50% | | 2.85% | | 2.83% | |
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Euro Zone | |
| 1.31% | | 1.88% | | 2.81% | | 3.59% | | 3.96% | | 3.94% | |
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United States | |
| 0.66% | | 1.43% | | 2.98% | | 3.97% | | 4.36% | | 4.53% | |
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The reference rates used for the calculation of the MCEV 2008 include an additional liquidity premium of 65 basis points for Switzerland, and 50 basis points for France, Germany and Luxembourg. Swiss Life has considered that the spreads on debt securities for liquidity risks cannot be ignored in the disorderly market conditions observed at the end of 2008.
5.1.1.2 Swap rates as at 31 December 2008
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Switzerland | |
| 0.80% | | 1.11% | | 1.96% | | 2.61% | | 2.79% | | 2.44% | |
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Euro Zone | |
| 2.55% | | 2.76% | | 3.24% | | 3.74% | | 3.90% | | 3.54% | |
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United States | |
| 1.29% | | 1.45% | | 2.16% | | 2.57% | | 2.81% | | 2.72% | |
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5.1.2 Volatility assumptions — Volatility assumptions for the year-end 2009 calculations are derived from market data as at 31 December 2009. In the absence of deep and liquid markets as at 31 December 2008, the volatility assumptions for interest rates and equities, used for the calculation of the MCEV 2008, are based on averages of implied volatilities observed during the year 2008 at the end of each quarter.
The interest rate volatilities are based on implied volatilities of at-the-money receiver swaptions. The tenors are 20 years for the euro and the US dollar and 10 years for the Swiss franc.
5.1.2.1 SWAPTION implied volatilities as at 31 December 2009
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Switzerland | |
| 27.4% | | 25.1% | | 21.7% | | 19.9% | | n/a1 | | n/a1 | |
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Euro Zone | |
| 21.0% | | 20.5% | | 17.4% | | 15.6% | | 16.2% | | 16.5% | |
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United States | |
| 25.9% | | 24.7% | | 20.6% | | 16.3% | | 14.3% | | 12.5% | |
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5.1.2.2 interest rate volatilities used for the calculation as at 31 December 2008
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Switzerland | |
| 19.4% | | 17.8% | | 15.6% | | 15.0% | | 14.7% | | 10.4% | |
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Euro Zone | |
| 17.0% | | 15.6% | | 13.9% | | 13.3% | | 13.4% | | 12.3% | |
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United States | |
| 26.6% | | 23.9% | | 20.0% | | 16.0% | | 14.9% | | 13.4% | |
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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 used for the calculation as at 31 December 2008 and 31 December 2009
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Switzerland | |
| SMI | | 23.7% | | 27.6% | |
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Euro Zone | |
| Eurostoxx | | 28.6% | | 29.5% | |
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United States | |
| S&P 500 | | 29.0% | | 29.6% | |
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The property volatilities are based on best estimate assumptions.
5.1.2.4 Property volatilities used for the calculation as at 31 December 2008 and 31 December 2009
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Switzerland | |
| 10.0% | | 10.0% | |
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Euro Zone | |
| 15.0% | | 15.0% | |
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5.1.3 Correlation assumptions — The correlation assump tions 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 2009.
5.1.4 Inflation assumptions —The inflation assump tions have been derived from inflation-linked bond prices, where inflation-linked 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 2009
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Switzerland | |
| 0.6% | | 0.6% | | 1.0% | | 1.9% | | 2.2% | | 1.6% | |
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Euro Zone | |
| 1.7% | | 2.0% | | 2.1% | | 2.8% | | 3.2% | | 2.5% | |
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5.1.4.2 forward inflation rates used for the calculation as at 31 December 2008
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Switzerland | |
| 0.9% | | 1.8% | | 3.6% | | 4.1% | | 3.5% | | 1.9% | |
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Euro Zone | |
| 0.8% | | 0.7% | | 1.0% | | 2.2% | | 2.5% | | 2.0% | |
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5.2 Taxation and Legislation
Tax assumptions have been set in line with the local tax regime. Tax losses carried forward are considered in the projections. 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
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Switzerland | |
| 22.3% | | 22.3% | |
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France | |
| 34.4% | | 34.4% | |
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Germany | |
| 32.6% | | 32.6% | |
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Luxembourg | |
| 22.0% | | 22.0% | |
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Liechtenstein | |
| 13.0% | | 13.0% | |
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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. 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).
