Out today by Tom Lemmon of Accountancy Age.
Coronavirus puts life insurers under threat due to ‘phantom capital’ exposure
Corporate defaults caused by the impacts of coronavirus could lead to a collapse of the life insurance market, as matching adjustment leaves many exposed.
It continues
The fall-out from coronavirus could leave the life insurance sector uniquely exposed due to life insurance firms’ reliance on matching adjustment which critics say creates “phantom capital”.
The matching adjustment allows life insurance companies to discount their pension liabilities by more than the risk-free rate, which in effect creates artificial capital, according to professor of economics Kevin Dowd from Durham University.
The risk-free rate is any interest rate on an asset that has little or no risk of default attached. It usually refers to gilts or sovereign bonds of high quality.
As the pandemic continues to hit markets, corporate collapses could see firms unable to pay their pension obligations – putting life insurance companies at risk, says Dean Buckner, formerly a technical specialist at the regulatory body, the Prudential Regulation Authority (PRA).
Seems as though the Treasury Committee has taken an interest.
Steve Baker MP, who sat on the Treasury Select Committee during the previous parliament, believes the PRA must elaborate on the matching adjustment and explain to the Treasury Select Committee why the matching adjustment is permitted.
“As someone looking forward to returning to the Treasury Select Committee, I know we have much to do. I’m really looking forward to seeing the PRA and grilling them on this crucial issue of the matching adjustment. If Kevin Dowd is right, it could well be that this judgement-led facility to use matching adjustment is propping up firms which might be otherwise insolvent. We really need to get to the bottom of this alarming problem. If Dowd is right, we’ve got a serious issue on our hands,” Baker says.
Dowd comments “Because it [phantom capital] doesn’t exist, it has no loss-absorbing capacity”.
How existential.