More sirens

This  (the Siren Call of illiquidity) refers. “Illiquidity is not costless”. But now see this teaser from Moody’s analytics.

“Constructing discount curves for IFRS 17 presents insurers with a number of challenges,” said Christophe Burckbuchler, Managing Director at Moody’s Analytics. “These include the selection of an appropriate methodology that provides stable and robust valuations of liabilities, and production of curves and necessary documentation to meet reporting timelines. Our new service addresses these challenges and enables insurers to accelerate their IFRS 17 project and production timelines.”

It’s difficult to comment without sight of the product, but it looks like a way of using the IFRS 17 provision for a matching adjustment-like illiquidity discount. Moody’s is well-placed to offer such a service with their copious data on default rates. With a suitably chosen historical period, the realised default rate will be lower, perhaps much lower, than the spread-implied default rate. So the difference between the two rates ‘must’ correspond to an illiquidity premium!

It will either end well, or it will not.