Solvency II Effective Value Test parameters

This page sets out the PRA’s parameters used in the Effective Value Test as set out in Supervisory Statement (SS) 3/17 ‘Solvency II: Matching adjustment - illiquid unrated assets and equity release mortgages’.

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This page is relevant to firms who have received PRA approval to use the matching adjustment and are matching their liabilities with restructured equity release mortgages.

What is the Effective Value Test?

We set out the Effective Value Test (EVT) in SS3/17. We expect that firms will use the EVT as a diagnostic tool to monitor compliance with Solvency II requirements relating to the calculation of the matching adjustment benefit where liabilities are matched by restructured equity release mortgages, recognising in particular the risks arising from the no negative equity guarantee feature.

What are the Effective Value Test parameters?

The EVT takes several inputs as set out in paragraph 3.20 of SS3/17. Two of these inputs are published by the PRA from time to time and make up the EVT parameters:

  • The minimum deferment rate parameter, which is an annual discount rate that applies to the current value of a property to give a price that would be agreed and settled today to take ownership of the property at some point in the future. 
  • The volatility parameter, which is used in modelling the extent to which property prices could vary in the future.

These parameters are used, alongside other inputs, to assess the risk arising from the no negative guarantee feature of equity release mortgages for the purposes of the EVT.

We set out in paragraph 3.21A of SS3/17 that we would ordinarily expect to review the:

  • minimum deferment rate parameter twice a year, end-March and end-September
  • volatility parameter once a year, by end-September

Firms should refer to Chapter 3 of SS3/17 for more information.

Calculation of the Effective Value Test prior to December 2021

Firms that have elected to use a minimum deferment rate of 0% to conduct the EVT prior to 31 December 2021 may continue to do so, notwithstanding the minimum deferment rate published below. When conducting the Effective Value Test, all firms should use the published volatility parameter below regardless of the minimum deferment rate they are using.

Current values of the Effective Value Test parameters

Review of Solvency II Effective Value Test parameters - applicable from 31 March 2025

These parameter values were published on 31 March 2025 and the rationale for them is set out in the PDF file above.

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This page was last updated 28 March 2025