UIR(ultimate interest rate) of LICAT

[jwyjang]

Hi, I am recently studying about discount rate of Canada and found that there are huge differences b.w UIR of LICAT(Life Insurance Capital Adequacy Test) of Canada and UFR of Solvency2 of EIOPA.

Among the differences, what I am most wondering is that LICAT adopted spot rate as the ultimate rate but Solvency 2 adopted forward rate as the ultimate rate.

According to UIR of Canada, as OSFI adopted 4.5% spot rate, forward rate is significantly higher than UFR of Sol2 (3.5% forward rate). In addition, LICAT adopted 80bp of ultimate spread. It seems too high..

Is there anyone who knows the reason why OSFI decided to apply this high ultimate spot rate? Unlike the case of Sol2, I can't find any of documents why the rates has been decided so.

[snikelfritz]

The 80 bps spread is consistent with C-IFRS valuation actuarial standards http://www.cia-ica.ca/docs/default-s...14/214046e.pdf

The 4.5% looks like it's somewhere between C-IFRS Ultimate Reinvestment Rate low and median.

The stress scenario pulls 40 bps off the UIR.

[jwyjang]

snikelfrit.

Thanks to your comment and attached documents, I was able to understand brief concepts of methodologies.
But I still wonder why LICAT applied Spot rate instead of Forward rate.

The methods of calibration the rates between Sol2 and LICAT are very similar but the usage of the rates are different.
(Sol 2 > Ultimate forward rate, LICAT > Ultimate spot rate)

Anyone can help me??

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FYI,

Both are from macro economic point of view.

LICAT Calibration :

Historical Nominal Yield (Historical Real Yield + Historical Inflation) + Adjustment

Solvency 2 Calibration :

Real rate + expected inflation + Adjustment