Keeping an eye on things
I just discovered the fabulous Commons TV feature that allows you to link directly to the time you wanted, rather than fumble about with the cursor all night.
So here is Nicky Morgan giving a light grilling, and tbh it’s very light, to David Rule, director of insurance at the PRA. In which David coins a new verb ‘to dividend’.
My transcript below for those who lack the patience to watch it through.
[EDIT] Full transcript is now here.
The NoCA talk scheduled for tomorrow has already been uploaded here. I will be talking through the slides for about 40 minutes, but there will be plenty of time for questions afterwards.
For those who like spreadsheets, our work in progress is here, which values an ERM using the Cairns-Blake-Dowd model. There are 6 stress tests given on slide 12 which are consistent with the spreadsheet. Please report any errors, questions etc. through the contact form.
Looking forward to discussing tomorrow.
I am currently staring at a bizarre letter from the Financial Reporting Council, saying that the issues I have raised about misvaluation of guarantees do not fall within the purview of the FRC, for the FRC is limited in its oversight role of the Institute of Actuaries, ‘as per recommendations made in the Morris Review‘.
As part of my work with the Leasehold Knowledge Partnership I am looking at how the deferment rate used in leasehold tribunal decisions can be estimated using market data.
It already seems, see my previous post on this, that the rental-implied deferment rate changes through time, to my initial surprise. But it is equally surprising that there are considerable regional variations.
1. As advertised earlier, I will be presenting ‘The Valuation of Equity Release Mortgages’, to the Network of Consulting Actuaries. All welcome.
2. On Friday 8 February I will be presenting ‘Routing around malfunction: can the financial system ever be open?’ Booking form here.
Jimmy Wales (founder of Wikipedia and campaigner for an open knowledge society) once claimed that “The internet interprets any type of centralized planning as a malfunction and routes around it. The command-and-control model is doomed to failure here by the very nature of the network. This is inevitable”. Many of the pioneers of open data, such as Tim Berners-Lee and Richard Stallman, have shared this vision.
Yet the world of finance is still predicated on the command-and-control model. A small number of giant banks control the market in commercial and retail lending, the insurance world is dominated by a handful of large players, who alone have access to the corridors of central banks and regulators.
Dean Buckner, a retired specialist at the Bank of England, explains how the secretive nature of regulation threatens, rather than supports, the stability of the financial system.
3. I will be speaking at the InsuranceERM conference on 27 February. Details here.
Elephant in the room: IFRS 17 and the matching adjustment
Solvency II was originally a market consistent regime for the regulatory balance sheet, and much of its original wording followed IFRS standards. This was since watered down by an addendum to Article 77 of the Solvency II directive, known as ‘Matching Adjustment’. IFRS 17 has a similar provision to Article 77, but has much stronger standards on market consistency. Will this lead to a divergence between regulatory and statutory balance sheets? Could there be a serious impact on UK insurers? The presentation will cover
- History of Solvency II and Matching Adjustment
- Corresponding provisions in IFRS 17
- Potential divergence of regulatory and statutory reporting
- Scenarios for reported solvency of UK insurers
Last week’s Private Eye article questioned, as we have done, why it took the PRA so long to decide on how to value a series of simple European put options. Also, Kevin asked in the original Asleep at the Wheel report, there is also a bit of a mystery about the timing.
The letter I sent to Hans Hoogervorst in October last year remains unanswered, but it turns out it was never received, or lost.
Geeks only. The chart above shows (blue line) UK house price index from 1969 to date, January 1969 = 100, (red line) UK nominal rentals also indexed from 1969, and (green line) the deferment rate implied by these numbers, with base case an assumed net rental yield of 2.6% in 2018, using data sourced from Zoopla, assumptions about management and maintenance costs etc., and a formula derived from Gordon’s dividend discount model.
This shows that the deferment rate – the rate that drives both the cost of leasehold enfranchisement and the cost of the No Negative Equity Guarantee embedded in Equity Release Mortgages, changes through time, rather than staying roughly constant.
This has significant policy implications.
This will apply to a limited number of our readers, but here it is anyway. Just Group are having a general meeting on Wednesday 16 March, to seek authority from its members to issue restricted tier 1 bonds convertible into ordinary shares on the occurrence of ‘trigger events’.
The first resolution is to provide the directors with power to allot up to £42m or about 45% of the nominal value of existing share capital in connection with the issue. Remember the nominal value relates to 10p shares whose market value (last time I looked) is is about 95p, so this amounts to a considerable dilution. The second is that the new shares will not be offered to existing shareholders.
Now convertible bonds are nothing new, the interesting factor is the trigger event upon which conversion occurs.
A fine piece in Private Eye yesterday about Just Group and guarantee valuation.