I have just found two other actuarial replies to the Solvency II review. Andrew Smith’s is at LinkedIn here, and Paul Teggin’s at LinkedIn here.
Smith’s submission is very strongly worded.
For example:
There is now a large volume in issue of synthetic assets restructured to meet MA requirements. No other European regulator has been so accommodating of structures apparently designed to arbitrage the matching adjustment rules, so HMT should take this opportunity to review those decisions and ensure continued alignment with the FSA’s statutory objectives. HMT may want to consider:
*Whether insurance policyholders are better protected (for example by a restructuring that reduces policyholder exposure to junior tranches)
*Whether insurance policyholders are less well protected (because of the high MA claimed).
*Who has borne the restructuring costs from the more elaborate arrangements?
*The PRA’s appetite to perpetuate the cat-and-mouse game where firms exploit loopholes to arbitrage complex matching adjustment rules and a regulator must divert resources to thwart possible abuse.There will be a trade-off between the strictness of eligibility criteria and the calculation of available MA. If strict eligibility criteria apply but the MA is generous on a restricted asset universe, then a great deal of ingenuity would be applied to nudge structures just over the line to gain the benefit. A more liberal definition of eligibility combined with a prudent MA calculation would be preferable, avoiding that cliff-edge.
Don’t hold back, Andrew!
Teggin’s is more restrained, but if I understand him correctly, he advocates giving the benefit of MA on the capital requirement side, i.e. lower the capital requirement to reflect that the observed spread on the asset may not reflect the true probability of default (whatever ‘true’ means here), but do not lower the valuation by use of the artificial discount rate.
There is some sense to that. With assets and liabilities correctly valued, and assuming the statutory values are market values, shareholders are not deceived. There would then be some market discipline: that some firms are making undue use of MA would immediately become clear through their reported book value. Not mentioning any names, of course.