Craig Turnbull has just posted his latest ERM article on Linked In here.
Bottom line: using the published results of Just Group and L&G, Craig finds that both firms’ valuation methodologies are sensitive to house price growth (which Eumaeus and the PRA think is incorrect).
But this approach (he says) produces ERM values with materially less sensitivity to key risk factors such as house price falls, and would therefore produce ‘a materially lower SCR than that produced by the calibration suggested in [Craig’s] 13th June article’ (link).
These current valuation approaches imply that the vast majority of the spread earned by an ERM is an illiquidity premium rather than a spread to compensate for NNEG risk. The ERM credit spread implied by the Just Group calibration is much smaller than the ERM credit spread implied by the 13th June article calibration.
Oops. Has anyone told the PRA? We heard they are responsible for capital requirements.