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 — Following market practice, the reference rates used for the calculation of the MCEV 2011 are based on the swap rates as at 31 December 2011 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 –40 bp)), where the corporate spreads over swap are measured with appropriate market indices. For the corporate credit spread over swap rates for the two currencies euro and US dollar, we use the quotation from Markit©3 instead of using the two step approach as described in the QIS 5 guidance. For the spread over swap rates for Swiss franc we use a SIX Swiss Exchange Bond Index (SBI® Corporate, introduced in 2011) composed of investment grade, foreign and domestic corporate issues in Swiss franc.

In line with QIS 5 guidance and market practice, we apply no liquidity premium to PPLI, unit-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. Also according to QIS 5 guidance, 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 needed to assess swap maturities beyond this horizon. In 2011, Swiss Life used the approach for extrapolation prescribed by EIOPA for QIS 5.

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

The spread (on swap rates) applied for valuation of the hybrid debt as at 31 December 2011 is 363 bp. For the opening MCEV no spread was assumed.

5.1.1.1 Swap rates as at 31 December 2011
 
Economy   1 year 2 year 5 year 10 year 15 year 30 year
Switzerland
  0.03% 0.09% 0.58% 1.24% 1.48% 1.47%
Euro Zone
  1.42% 1.32% 1.73% 2.37% 2.67% 2.56%
United States
  0.67% 0.72% 1.22% 2.02% 2.37% 2.59%


5.1.1.2 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%


The 100% liquidity premiums, relative to swaps rates as of 31 December 2011 amount to 62 bp for Swiss franc, 107 bp for euro and 108 bp for US dollar. For the calculation of the MCEV 2010 Swiss Life had decided to set the liquidity premiums to zero.

5.1.2 Volatility assumptions — Volatility assumptions for the year-end 2011 and 2010 calculations are derived from market data as at 31 December 2011 and 2010.

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 2011
 
Economy   1 year option 2 year option 5 year option 10 year option 15 year option 30 year option
Switzerland
  53.3% 47.3% 39.5% 45.3% 45.2% 31.4%
Euro Zone
  38.5% 35.3% 30.3% 28.7% 29.3% 23.3%
United States
  40.2% 36.9% 32.2% 28.4% 27.4% 32.8%


5.1.2.2 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


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 2011 AND 31 December 2010
 
  Volatility Volatility
Economy   Index 2011 2010
Switzerland
  SMI 22.2% 21.0%
Euro Zone
  EuroStoxx 50 27.2% 27.3%
United States
  S&P 500 30.7% 27.4%


For 31 December 2011 Swiss Life reassessed the property volatilities considering historical data.

5.1.2.4 Property volatilities used for the calculation as at 31 December 2011 and 31 December 2010
 
  Volatility Volatility
Economy   2011 2010
Switzerland
  8.0% 8.0%
Euro Zone
  13.0% 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 13% for 2011 and 16% for 2010.

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 2011
 
Economy   1 year 2 year 5 year 10 year 15 year 30 year
Switzerland
  0.0% 0.0% 0.8% 1.5% 1.3% 1.2%
Euro Zone
  1.6% 0.6% 0.7% 1.6% 1.9% 2.5%


5.1.4.2 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%


5.1.5 REAL WORLD ASSUMPTIONS — These assumptions are used for the step “expected business contribution in excess of reference rates” introduced in 2011.

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 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   2011 2010
Equity
  400 bp 400 bp
Property (Switzerland and Europe)
  200 bp 200 bp


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
 
  2011 2010
Switzerland
  21.1% 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% 18.0%


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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