Using the right volatility quote in times of low interest rates for Solvency II risk factor modelling

Typically many insurance companies have been using the Black model as a benchmark pricing model to derive the implied volatility quote, often referred to as Black volatility. The interest rate movements for the euro in the past six to nine months, however, have unveiled a major drawback of the Black volatility quote, which can affect current best practice approaches of insured companies’ risk and valuation models in a significant way. Milliman consultants provide perspective in this research report.