The chart above is constructed using data from the new government downloadable database https://coronavirus.data.gov.uk , showing cases versus admissions versus deaths in England, all on a daily basis.
More masks, fewer cushions?
InsuranceERM reports today on “Covid-19’s consequences for solvency, stress and scenario testing”.
Behind a paywall, but the gist is as follows.
Two for one
Not one but two articles on Matching Adjustment in mainstream media today.
The Times:
L&G ‘sitting on £10bn of bond losses’ Pressure grows on insurer to abandon dividend
Legal & General is sitting on estimated bond market losses of as much as £10 billion, according to a shareholder group which is urging the insurer to postpone its planned dividend. The UK Shareholders Association argues that the outlook for financial markets is much too uncertain to justify L&G making its £754 million payout promised for next month. Dean Buckner, its policy director and a former Prudential Regulation Authority official, said L&G would be sitting on huge paper losses because of the slide in many bond prices since the start of the year.
Slightly misquotes me. I actually said that mark to market losses could be high as £10bn, but without knowing the breakdown by rating and sector it would be difficult to say.
In the Financial Times:
Investors should beware the insurance magic money machine
Ford gives one of the best layperson explanations of the Matching adjustment that I have seen yet. He supposes a company with £100 of risk free assets and thus £100 of liabilities swaps them for £100 of higher yielding risky assets.
The matching adjustment kicks in when it shifts some of that money into higher-yielding assets. In theory this should change things: higher yields carry more investment risk. So to continue protecting the annuitants, the insurer needs more loss-bearing capital than its present zilch.
But here’s where our convention really earns its corn. Using matching adjustment, our insurer can discount its liabilities at a higher rate, reflecting the extra return it hopes to make from those higher-yielding assets. This reduces its liabilities to, say, £90. So without anyone contributing a penny, or the company retaining any earnings, hey presto, its equity “buffer” has risen from £0 to the more substantial level of £10.
No less helpful is what happens when market turmoil strikes and spreads balloon. Then our insurer gets to discount its liabilities at even higher rates, creating more artificial capital and thus compensating for falling asset prices.
Then we are back to masks versus cushions again.
A cushion not a mask
Chris Cundy asks (InsuranceERM today) whether the Solvency II matching adjustment (MA) provides an appropriate “benefit” to insurers in pandemic-hit markets.
Excess mortality – official
There has been endless debate in the, er, Trumpier bits of social media suggesting that the whole virus thing is a hoax, that dying with corona virus is different from dying from it or because of it. The chart above, showing deaths in New York, suggests that people are in fact dying from it. Of course you can’t prove anything, as one acquaintance suggested, but then outside of mathematics and logic you can’t prove anything anyway.
Our British actuarial colleagues found much the same as the New Yorkers, in a report published by the IFoA of all places. That settles it then.
Hong Kong suggests no need for total lockdown
From the FT:
Hong Kong effectively managed the first wave of coronavirus outbreak through border restrictions, quarantine, isolation and social distancing – without resorting to a total lockdown – according to a new study in The Lancet, the UK medical journal.
The research by the University of Hong Kong showed that border entry restrictions, testing, contract tracing and isolation and population behavioural changes were effective in reducing the transmission of Covid-19 in the territory in early February.
The report also suggested that there were much reduced influenza transmission in February, compared with times of school closures in the past. Therefore, the study concluded, other social distancing measures and avoidance behaviours had a substantial impact.
“By quickly implementing public health measures, Hong Kong has demonstrated that Covid-19 transmission can be effectively contained without resorting to the highly disruptive complete lockdown” adopted by mainland China, the US and western European countries, said Benjamin Cowling, a professor at HKU’s School of Public Health who led the research.
Phantom capital – no loss absorbing capacity
Out today by Tom Lemmon of Accountancy Age.
Coronavirus puts life insurers under threat due to ‘phantom capital’ exposure
Corporate defaults caused by the impacts of coronavirus could lead to a collapse of the life insurance market, as matching adjustment leaves many exposed.
Continue reading “Phantom capital – no loss absorbing capacity”
Letter from Sam Woods to insurers on distribution of profits
Here.
When UK insurers’ boards are considering any distributions to shareholders or making decisions on variable remuneration, we expect them to pay close attention to the need to protect policyholders and maintain safety and soundness, and in so doing to ensure that their firm can play its full part in supporting the real economy throughout the economic disruption arising from Covid-19.
[…]
In the current situation of high uncertainty, it is therefore critical that insurers manage their financial resources prudently in order both to ensure that they are able to meet the commitments they have made to policyholders in a way that is consistent with the expectations of the Financial Conduct Authority, and to enable them to continue to invest in the economy.
But that is odd though. The whole purpose of the Solvency II regime is to provide the necessary safety and soundness through model-based, PRA-approved capital management. A 100% coverage ratio corresponds to a 1 in 200 probability of default, and to my knowledge, no firm is allowed to operate under the soft limit of 130% capital coverage, which corresponds (by my mathematics) to a probability of lower than 1 in 2,000 years.
So why the worry, Sam?
UK Police Exceeding their Legal Authority
Kevin Dowd 31 March 2020
The political blog Guido Fawkes wrote yesterday: “Since the lockdown came into force last week, along with the emergency powers act being passed, it’s not gone unnoticed by the public that the police have gone ever so slightly maniacal with power.” Guido is right. He continued: a number of police forces are “allowing newly-received powers to go to their heads [and] going far beyond their legislated-for powers.”
Examples include:
- South Wales Police attempted to shame MP Stephen Kinnock for dropping off essential supplies for his parents on his father’s 78th birthday, before having a brief, socially-distanced chat, singing him Happy Birthday and then going off;
- Dyeing a beautiful local lake black to deter tourists;
- Dictating to shop owners what are the essential items they can sell;
- Telling off shop owners for chalking two-meter lines outside their shops to enforce customer social-distancing; and
- Claiming outdoor exercise is limited to one hour.
Continue reading “UK Police Exceeding their Legal Authority”
Coronavirus confusion curve
In an excellent article published last week in the FT, Jemima Kelly unravelled some of the claims and confusions, many of them coming from experts, supporting the idea that the corona virus is ‘simply a flu’ and that we should not taking it as seriously as European states (and most states in the East) are taking it.