The transitional mechanism for the alternative extrapolation

In September 2021, the European Commission published its highly anticipated amendment to the Solvency II Directive. One of the most impactful changes will be a new extrapolation method of the liability discount curve. To avoid disruption of the insurance business, the amendment introduces a phase-in of the new extrapolation method through the end of 2031. This transitional mechanism may introduce additional curve dynamics and pose new risk management challenges. In this paper, we summarise the amendments to the extrapolation methodology and discuss the potential implications these may have for insurers.