I discussed the mathematics of the PRA proposal to tie the deferment rate to the real risk free interest rate here, linking to two earlier posts by Kevin with the detailed mathematics. But we can express our result without much of the detailed mathematics, as follows.
PRA maths doesn’t add up
Well we said we would be back. Here is the newly released PRA Policy Statement 19/19, and there is some really weird stuff in there. We start with section A, ‘Reviewing and updating the minimum deferment rate,’ and in particular the part which starts at paragraph 2.6, ‘The PRA considers that the approach of linking changes in the minimum deferment rate to changes in real interest rates is economically sound and appropriate for the intended purpose of a diagnostic test.’
They write:
The PRA considered net rental yields in paragraph 2.59 of PS31/18 and agrees that net rental yields could be a reasonable starting point for determining deferment rates over short terms, as they are a measure of the income foregone by an ERM investor as compared to a direct owner of a property. However, a net rental yield is a short-term measure of deferment.
Which is very strange indeed.
PRA – equity release part X
They say ‘part 2’ but I lost count. Anyway, the links are all here, we will comment in due course.
The spirit is willing, and also the letter
Kevin’s piece earlier this week raised the issue of the Institute of Actuaries ‘putting things right’.
In that spirit, we publish our letter to the Institute sent in August, concerning the governance over the voodoo ERM valuation project that it sponsored with the ABI.
The whole point is that the IFoA/ARC must demonstrate its quality assurance, as opposed to asking that interested outside parties take their word for it when they tell us that the assurance process was done correctly but won’t give out any concrete details. After all, if the quality assurance is good, then there is no good reason to withhold the evidence that leads to that conclusion. Otherwise, the IFoA/ARC leave themselves open to the criticism that there is no actual assurance, no transparency and no accountability.
We are not holding our breath.
A sure way to make money
Kevin just spotted an excellent piece by our friend David Miles (ex MPC at the Bank) on the valuation of pension liabilities.
FRC to review ERM accounting
As InsuranceERM announced yesterday, the Financial Reporting Council has begun a review into equity-release mortgage accounting.
The UK’s accounting watchdog has initiated a review into the statutory accounting of equity-release mortgages (ERMs), a move which may result in changes to life insurers’ profits.
Just Group interim part 2
This webcast (4 September 2019) by David Richardson (Just interim CEO) casts some light on how the proposed NNEG hedge will work, but also casts significant amounts of darkness. Richardson states (my transcript)
Just Group interim
The Just Group 2019 interim statement is out today. It has already received coverage in mainstream financial media, and we don’t normally repeat what is already said.
What caught our eye, however, was the mention on p.50 of the put option on property index, the NNEG hedge we discussed earlier. We speculated whether the firm has put the hedge in place, or whether they are still waiting to establish ‘appropriate regulatory treatment’ with PRA. Turns out (and we should have spotted this from the 2018 financial statement – 2018 p.72, section 25 ) that it was already in place by 2018, so it is merely the regulatory treatment they are waiting for .
But here’s the interesting thing.
Just one in the Eye for Age UK?
A curious piece in the Eye yesterday claimed that a mystery shopper contacted Hub financial via the Age UK website, enquiring about an equity release mortgage.
Get a copy yourself and support good investigative journalism, but briefly, the shopper was quoted 5.35% from Just Group, a provider on the Hub ‘panel’ of lenders, as being the best value.
When the same shopper contacted L&G, also supposedly on the panel, he was quoted only 5%. He complained to Sir Brian Pomeroy (Age UK chairman of trustees) saying he might publish something about the problem, but instead got ‘a stiff letter from Julian Pike of expensive “reputation management” solicitors Farrer and Co’, suggesting firmly that he should not publish.
Just fancy that.
The High Court judgment
The transcript is here. Some points to consider.
- The independent expert, Nick Dumbreck (Milliman), calculated that ‘in the case of Rothesay, an SCR coverage ratio of 100% equates to a likelihood of its assets being sufficient to cover its Technical Provisions in one year’s time of 99.5%; an SCR coverage ratio of 130% would equate to a likelihood of its assets being sufficient to cover its Technical Provisions in one year’s time of 99.96%; and an SCR coverage ratio of 150% would equate to a likelihood of its assets being sufficient to cover its Technical Provisions in one year’s time of 99.994%’.
- The probability of default is thus lower than the probability calculated by the HBOS advanced IRB model at the beginning of 2008. Policyholders can rest assured, then.
- Matching Adjustment was not discussed at all, so presumably not deemed relevant to policyholder interests. Question: if MA were taken away, would that change the probabilities referred to above?
- ‘As at 31 December 2018, for Solvency II purposes, Rothesay had total assets of about £36 billion, Technical Provisions of about £32 billion, Own Funds of £3.89 billion and a SCR of £2.16 billion. Its SCR coverage ratio was thus 180%.’
- Dumbreck argued that while Prudential has a greater absolute capital surplus than Rothesay, ‘the levels of surplus relative to the amount of its technical provisions are of the same order of magnitude for both companies. He expressed the view that it is this relative cover for liabilities that is material, rather than the absolute surplus’.
More later.