Author: eumaeus

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It’ll Never Happen Here

By DB and KD

Our friends Tony Jeffery and Andrew Smith have some wise advice that the PRA should consider in their new insurance stress tests. Our advice was not to bother, but assuming the PRA chooses for once not to follow our advice, they might look at the following passage from Andrew and Tony’s recent Society of Actuaries in Ireland (SoAI) report on NNEG valuation:

In 1995 a SoAI paper (Demographic Margins for Prudence – Jeffery & Quinn, 1995) suggested that a valid approach to setting margins was to consider how it would look to a public with the benefit of hindsight if it has gone wrong, noting that with the clarity that hindsight brings can be harsh.

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The PRA’s Unfailable ‘Stress’ Tests

By DB and KD

Late in April, the PRA announced that it was planning a new life insurance stress test for 2019. At first sight, the test looks plausible: to stress AAA bond holdings by 150bp, going up to 400bp for unrated. However, the spread is divided into the Matching Adjustment, which is the spread deemed to represent illiquidity and which is therefore considered risk free, and the ‘fundamental spread’ (FS), which represents the true credit risk, as it were.

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Now there are three

Dean Buckner and Kevin Dowd, 1 March 2019

Professor Tunaru opens his NNEG report with an oft-cited quote from George Box: “All models are wrong but some are useful.” The Box aphorism is an apt one, but Professor Box went on to state

Since all models are wrong the scientist must be alert to what is importantly wrong. It is inappropriate to be concerned about mice when there are tigers abroad. (Box, 1976, p. 792)

For us the most interesting of the terms of reference in the ABI-IFoA aka astrology project on NNEG valuation was (to quote the project’s request for tender) to “consider whether there are any “halfway house” solutions between real world and risk-neutral approaches … .”

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Questions for tonight

As most of our readers already known there is an event tonight at Staple Inn Hall to deliver the results of Professor Tunaru’s research project on Equity Release Mortgages.

Kevin and Dean won’t be able to attend. However we have published Part I and Part II of our own commentary on the research paper. In addition, for anyone attending who would like to ask, here are the questions we would like to have asked, if we had been able to attend.

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