Last week’s Private Eye article questioned, as we have done, why it took the PRA so long to decide on how to value a series of simple European put options. Also, Kevin asked in the original Asleep at the Wheel report, there is also a bit of a mystery about the timing.
As Kevin reports, Solvency II came in on January 1st 2016 so it’s safe to assume the model approval process must have been complete by then, as confirmed by a letter dated November 6th 2015 by Andrew Bulley (now at Deloitte) and Chris Moulder (ex KPMG partner, now a non-exec at Ecclesiastical).
Yet strangely the letter goes on to say that the PRA intends “to undertake an industry-wide review during 2016 of ERM valuations and capital treatment. The outcome of that review may lead to a reassessment of the extent to which firms are complying with the Solvency II requirements in areas such as asset valuation and the prudent person principle.”
It seems odd to have completed the model approval process but simultaneously say that a reassessment was now needed. Kevin continues:
They also mention the “challenge” of “how to value embedded options and guarantees when assessing the appropriate value for the asset and the appropriate capital treatment.” But if the valuation of embedded options was still a challenge after the approval process was completed, then why did the PRA give approval for securitising them before the second approval process had been completed?
Even now, despite finding that firms are apparently not complying with the Solvency II requirements in areas such as asset (and guarantee) valuation, the PRA continues to have faith.
We continue to believe that restructured equity release mortgages are a suitable asset to back annuities as part of an appropriately diversified portfolio.
Restructuring: that is, splitting the portfolio into an equity tranche and senior tranche, both owned by the same firm.
It is all rather puzzling, as we say.