InsuranceERM reports today on “Covid-19’s consequences for solvency, stress and scenario testing”.
Behind a paywall, but the gist is as follows.
Covid-19 “has created significant solvency risks for insurers and is set to have repercussions on the way insurers manage solvency risks, how insurers are supervised, and on the future shape of solvency regulations”, according to PwC partner Carlos Montalvo, BCG partner Thomas Seidl and David Walker from Insurance Risk Data.
Montalvo stressed the importance of ensuring that insurers are not hindered from providing long-term funding to the European economy, and expected “no change in the last liquid point or the ultimate forward rate, but [he expected that] the matching adjustment would be made more flexible so it can be used in more markets.”
That is his expectation, of course, but did anyone ask whether it made any sense? How would more false accounting help insurers in any way, in the event that markets dived any further, and in the event that falls in bond prices did not reflect illiquidity, but anticipation of default? The market is down today on worries of a second wave of the virus, and the issuers affected are precisely in the sectors you would rationally expect suffer problems if the wave is serious. I.e. tourism, airlines, aviation manufacturers etc.
By what means does Montalvo ascertain that these falls are down to illiquidity and not anticipated default?
Yet more astrology?