Category: Ifoa

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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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Houses as an investment asset

Tunaru writes (p.30):

… it can be argued that the buyer of a house is not the equivalent to an investor buying a house as an investment asset. For the majority of buyers, houses play the role of a consumption asset and not that of an investment asset. There is no evidence that rental yields are driving future house prices so the expected house prices at various future long horizons cannot be determined with growth models in the same way expected share prices may be determined with growth models linked to dividends.

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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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No perspective from which it makes sense

We are still poring over the infamous paper published by the Institute on Friday, and hope to be back on air by mid week. Meanwhile, our chum Andrew Smith, the internationally renowned actuary now teaching at UCD, popped something in the post.

He is equally perplexed by the paper’s argument that since only 20% of the market is rented, therefore the rental yield on the market as a whole is a fifth of the yield on rented properties.  ‘I can’t see any perspective from which this makes sense’. Quite.

Another of our friends was more blunt. ‘I hadn’t realised that the bank account that gives me 1% was actually only 0.001% because only 4000 people have that account’.

I am sure it will become clear in the end.

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Just out

The ABI-IFoA-Tunaru paper was published this morning. It is 90 pages and fairly mathematically complex and we will be commenting next week.

There is some rather strange stuff on p.33 that defies comprehension so far, hopefully the weekend will make a difference. Comments (via our contact page) gratefully received as ever.

Have a good weekend.

 

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The independent faculty

Recently published here, the first mention as far as I know of the amount paid to Radu Tunaru’s Centre for Quantitative Finance, namely £56,000 for ‘key research into determining appropriate methods for determining ERM cashflows and their value’.

As Kevin pointed out, we have already done that, as have the PRA.

Of course it is always a good thing to have more than one pair of eyes on the problem, and worth every penny, no doubt, but it does raise the question of independence. I have repeatedly been told by those connected with the Institute that the working party is just another working party, that any paper it produces is the working party’s paper, nothing to do with the Institute etc.

But that clearly isn’t true. Money has changed hands, and it appears – if the announcement by Kent University is correct – that it is not the working party’s money.

Who at the Institute authorised the grant? We should be told.

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Sold out

The presentation of the totally independent review committee on ERM valuation is sold out. The final research report (by Kent University) will be uploaded about a week beforehand (i.e. around Thursday 21 Febuary), so watch that space.

The launch event will bring together a multidisciplinary group of professionals to discuss Professor Tunaru’s findings. Due to the high profile nature of this research topic the launch event is expected to attract a high number of attendees and spark a topical debate, so early registration is advised.

By coincidence I noticed the 11 December presentation by the same committee is available on YouTube.

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Kingman

The Kingman report on the Financial Reporting Council is out this morning. Much to discuss, but the findings on the regulation of the Institute are telling.

Briefly:

The Memorandum of Understanding between the FRC and the Institute, set up in the aftermath of the Morris review, ‘is not in practice proving an altogether effective arrangement’, specifically the FRC ‘has no powers with which to enforce any meaningful oversight of the IFoA’ (my emphasis).

HMT and the Government Actuary told the Review that it wishes to see effective regulatory oversight of the actuarial profession.  If stakeholders wish to see effective independent oversight of regulation of the actuarial profession, suitable legal powers must be put in place to make this possible, and the review questions whether the FRC is the best body to do this.

The review recommends

  • The Government, working with the PRA and The Pensions Regulator (TPR), should review what powers are required effectively to oversee regulation of the actuarial profession.
  • Neither the FRC, nor its successor body, is best-placed to be the oversight body. The PRA (which employs around 80 actuaries) is a much larger repository of regulatory actuarial expertise than the FRC and would be best-placed to take on all the actuarial responsibilities currently vested in the FRC.