Author: db

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Single point of failure

Wikipedia: “A single point of failure is a part of a system that, if it fails, will stop the entire system from working”. Right. You try to avoid this in any decent system, building in redundancy at every critical point. The classic example is a chain, where any single link is a single point of failure. You can build in redundancy by, e.g., adding a second chain. So long as each chain on its own can support the weight, nothing bad will happen if one chain breaks (bad luck if both break, though).

Something like that principle of redundancy was meant to be part of the life insurance Part VII regime. You have the PRA which approves the default model of the insurer. The FCA is meant to look at the same thing from the point of view of the policyholder (the PRA being a prudential regulator, as I pointed out to the court here, see page 5). The Independent Expert provides further assurance with his/her ‘independent’ report.  Finally, the court itself forms a judgment.

However, that principle seems to have been disastrously weakened in the light of the recent judgment by Justice Zacaroli.

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In the matter of matching adjustment

Here is an edited version of the transcript from the hearings on 22 and 25 November 2019, relating to the oral submissions by Martin Moore QC, Tom Weitzman, and myself (‘Dr Buckner’).

I have lightly edited my submission only, to remove repetitions and to make minor corrections. I also added the diagrams which the judge and I would have seen while I was referring to them, but not the rest of the Court (although the applicants had copies for their own reference).

I will comment next week.

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Specious speech

Since the Court hearing last Monday I have learned a new collective noun: a chamber of barristers. We had Theodor van Sante representing the FCA, and Tom Weitzman representing the PRA, both of 3VB. Representing the applicants (Equitable Life and Utmost Life) was Martin Moore of Erskine Chambers. Each was supported by a whole team of assistants, passing post-it stickers up and down as the proceedings proceeded.

Considering the numbers of lawyers involved, and considering they all had three weeks from the date of my original submission on 1 November, I was surprised by their difficulty in getting even the non-technical facts right. For example:

Martin Moore QC: The various extracts that Dr Buckner has produced are not properly evidence. They’re simply extracts from speeches that have been given. They are not experts in the sense that the court would understand expert evidence to be.

There are several layers of confusion and wrongness here. First, only one quotation in my original submission was definitely from a speech.1 The speech was by Don Kohn, who said

While economists are famous for disagreeing with each other on virtually every other conceivable issue, when it comes to this one there is no professional disagreement: The only appropriate way to calculate the value of a very low-risk liability is to use a very low-risk discount rate.

If a recognised authority like Kohn (senior fellow in the Economic Studies Program at the Brookings Institution, former vice chairman of the Federal Reserve etc) states something like that in a speech, presumably there is an important reason for doing so: presumably he thought he was stating an important fact that everyone should recognise. Why is his statement ‘not properly evidence’? Is there any phenomenon that makes a statement in a speech false, and the same statement true when presented in person to the Court? Surely not. And why is Kohn not an expert ‘in the sense that the court would understand expert evidence [sic] to be’? What a mess.

But it gets worse.

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From the postbag – short term volatility

I was in Amsterdam last week, inspecting volatility of canal prices (more later) but volatility was all over the place last week. On Monday, the PRA strenuously defended matching adjustment in Court with the idea that price movements are simply ‘short term’.

It may also assist the Court to know that the PRA is supportive of the principles underlying the MA, not only because (properly implemented) it more appropriately reflects the risks to which annuity providers are exposed but also because it enables firms to “look through” short term volatility in the market price of credit risk to which they (as buy-to-hold investors) are not exposed.

At the same time, our old friend golden.labrador@dogs.k9.gov mailed us to point out that if a firm had sold its bond portfolio at the height of the crisis (see chart above) when spreads had exploded, it would have been considerably worse off than if it had stuck to a buy and hold strategy, as matching adjustment allows you to do.

But where does this take us?

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Matching adjustment on trial

This Friday I will be attending the Second Court Hearing on the Part VII proposal to transfer the long-term business of Equitable Life of Equitable Life Assurance Society, of which I am a policyholder, to Utmost Life and Pensions Limited.

I will be arguing that the Part VII transfer be blocked on the grounds that Utmost is financially much weaker than ELAS, because ULP’s balance sheet is propped up by £97m in non-existent capital created by an unsound practice called Matching adjustment.

If you are a regular reader you will be familiar with many of the arguments I will give, but the hearing is public so you may be interested in hearing them afresh, and seeing how the Court deals with them.

The hearing is on Friday 22 November 2019 at the Royal Courts of Justice, 7 Rolls Buildings, Fetter Lane, London, EC4A 1NL. Anyone is entitled to attend. The room location will be published on Thursday 21st.