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 has not been available or the market has not been liquid enough, the model calibration has been based on best estimate assumptions. This notably includes correlations, exchange rate volatilities and real estate volatility.

5.1.1 Reference rates — The reference rates used for the calculation of the MCEV 2010 are based on the swap rates as at 31 December 2010.

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 2010 and 2009.

5.1.1.1 Swap rates as at 31 December 2010
 
Economy   1 year 2 year 5 year 10 year 15 year 30 year
Switzerland
  0.18% 0.52% 1.40% 2.16% 2.41% 2.19%
Euro Zone
  1.33% 1.56% 2.48% 3.31% 3.64% 3.50%
United States
  0.44% 0.80% 2.15% 3.36% 3.83% 4.10%


5.1.1.2 Swap rates as at 31 December 2009
 
Economy   1 year 2 year 5 year 10 year 15 year 30 year
Switzerland
  0.49% 0.87% 1.71% 2.50% 2.85% 2.83%
Euro Zone
  1.31% 1.88% 2.81% 3.59% 3.96% 3.94%
United States
  0.66% 1.43% 2.98% 3.97% 4.36% 4.53%


5.1.2 Volatility assumptions — Volatility assumptions for the year-end 2010 and 2009 calculations are derived from market data as at 31 December 2010 and 2009.

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 2010
 
Economy   1 year option 2 year option 5 year option 10 year option 15 year option 30 year option
Switzerland
  30.0% 27.8% 26.2% 31.0% n/a1 n/a1
Euro Zone
  24.1% 22.0% 18.7% 18.2% 20.5% 20.5%
United States
  25.1% 23.4% 20.2% 16.3% 15.2% 14.4%
1 n/a: not available


5.1.2.2 SWAPTION IMPLIED VOLATILITIES AS AT 31 December 2009
 
Economy   1 year option 2 year option 5 year option 10 year option 15 year option 30 year option
Switzerland
  27.4% 25.1% 21.7% 19.9% n/a1 n/a1
Euro Zone
  21.0% 20.5% 17.4% 15.6% 16.2% 16.5%
United States
  25.9% 24.7% 20.6% 16.3% 14.3% 12.5%
1 n/a: not available


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 2010 AND 31 December 2009
 
  Volatility Volatility
Economy   Index 2010 2009
Switzerland
  SMI 21.0% 23.7%
Euro Zone
  EuroStoxx 50 27.3% 28.6%
United States
  S&P 500 27.4% 29.0%


For 31 December 2010 Swiss Life reassessed the property volatilities considering historical data.

5.1.2.4 Property volatilities used for the calculation as at 31 December 2010 and 31 December 2009
 
  Volatility Volatility
Economy   2010 2009
Switzerland
  8.0% 10.0%
Euro Zone
  13.0% 15.0%


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 2010 and 2009.

5.1.4 Inflation assumptions — The inflation assumptions 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 2010
 
Economy   1 year 2 year 5 year 10 year 15 year 30 year
Switzerland
  0.6% 0.6% 1.2% 1.8% 1.4% 1.2%
Euro Zone
  2.1% 1.5% 1.7% 2.4% 2.6% 1.9%


5.1.4.2 forward inflation rates used for the calculation as at 31 December 2009
 
Economy   1 year 2 year 5 year 10 year 15 year 30 year
Switzerland
  0.6% 0.6% 1.0% 1.9% 2.2% 1.6%
Euro Zone
  1.7% 2.0% 2.1% 2.8% 3.2% 2.5%


5.1.5 REAL WORLD ASSUMPTIONS — These assumptions are used for the step “expected business contribution in excess of reference rates” introduced in 2010.

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 historic data.

Fixed risk premiums are used for other risky assets. Return assumptions for equity and property are derived from the 10-year reference 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 class   2010 2009
Equity
  400 bp n/a1
Property (Switzerland and Europe)
  200 bp n/a1
1 n/a: not applicable


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
 
  2010 2009
Switzerland
  22.3% 22.3%
France
  34.4% 34.4%
Germany
  32.6% 32.6%
Luxembourg
  22.0% 22.0%
Liechtenstein
  13.0% 13.0%
Singapore
  18.0% n/a1
1 n/a: not applicable


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).