Our anonymous friend sent us a link to this little known presentation from 2009.
Final slide “If NNEG on a market consistent basis, unlikely to be profits”!
Less anonymous
Our anonymous friend at the Institute told us about this page published over the weekend, listing the members of the joint review Board for the Equity Release project. Kudos to the Institute for actually publishing this.
A for Anonymous
We received an email from Anonymous@hotmail.com (which doesn’t exist, of course) suggesting we look at slide 4 on page 2 of this presentation given at the Life Conference in November 2017. The presentation was given by Tom Kenny (of Just Group), and Gina Craske of KPMG (auditor of Just Group). The other members of the Party including a representative from each of the other three big accountancy firms, two members representing ERM providers, and only one academic that I could make out.
Many thanks, Anonymous, but we already knew this. See also this response to CP 13/18 by the Institute which identifies the other two Institutional bodies involved in replying to the PRA, namely the Life Standards and Consultations sub Committee, whose members are listed here, and the Life Insurance Board, whose members are listed here.
Jam tomorrow
There certainly was a ‘lively debate’ at the LSE on Monday evening. The house was packed, with guests including our friends at the Treasury, the PRA, and a number of analysts. Kevin will be writing some more about this, meanwhile here are the slides. Note that we covered them in a slightly different order. I discussed slides 16-19 (and mostly slide 16) on the ‘upper bound principle’ after Kevin’s main presentation.
The upper bound continues to be misunderstood, as I commented in our reply to the Institute yesterday. It does not depend in any way on arbitrage arguments, complete markets, geometric Brownian motion or any of that stuff.
Simply, jam today worth more than jam tomorrow, and should be valued as such by accountants such as KPMG. Yes?
Asleep at the Institute
Some extraordinary developments this week including the resignation of Simon Thomas as Chief Financial Officer of Just Group, and the somewhat stormy presentation by Kevin Dowd and myself at the LSE. I shall comment on the latter tomorrow, today I shall discuss the Institute of Actuaries’ response to CP 13/18.
Not the new ideas
Keynes, somewhere: ‘the difficulty lies, not in the new ideas, but in escaping the old ones’.
Very true, and while I don’t want to blame actuaries too much, they have to take the blame for much of the present crisis. Their profession has grown up around the practice of forecasting future events over which we have little control in the present, indeed the whole point of insurance is to compensate for bad but unpreventable things happening. We don’t insure against stubbing our toe, for example. So actuaries are taught to assess the future value of health treatment, mortality, windstorms etc then discount at risk free, which is perfectly correct.
But it is perfectly false when the forecast tries to compete with what other people are forecasting. Can an actuary accurately predict the value of the FTSE at the end of 2025? No. The value of the FTSE at that date is itself a market forecast of the present value of future dividends in perpetuity. On what basis or evidence is the actuary forecasting this, and why are other rational people apparently ignoring this basis or evidence?
Complete nonsense
Thank you to all our friends who mailed us pointing out this strange request in the Institute’s call for tender.
4.2.5 Confidentiality
You agree to keep confidential this Request and all information provided therein. The information provided may be made available to your employees and professional advisers directly involved in tendering to the IFoA and ABI (who must also be made aware of the obligation of confidentiality) but shall not be copied, reproduced, distributed or otherwise made available to any other party in any circumstances without the prior written consent of the IFoA and ABI, nor may it be used for any other purpose other than that for which it is intended.
Interesting philosophical issue: how can I agree to keep confidential any information that the body insisting on confidentiality itself puts on the internet? Kevin and I scratched our noses for a while then Kevin thought perhaps it meant this
We might just feel the need to provide you with further information that we would prefer did not become public because we have already endorsed enough nonsense as it is and we would not wish to become a laughing stock.
No we wouldn’t want that. Way to go, Institute of Actuaries!
A Tender Issue
Kevin Dowd 20 August 2018
Earlier this week the Association of British Insurers and the Institute and Faculty of Actuaries issued a tender call for research on the valuation of the No-Negative Equity Guarantees (NNEGs) in Equity Release Mortgages (ERMs). Their timing is perfect, coming as it does a week after my report on NNEG valuation, Asleep at the Wheel: The Prudential Regulation Authority and the Equity Release Sector, and a few weeks after the PRA’s most recent Consultation Paper on the subject, CP 13/18, “Solvency II: Equity Release Mortgages.” One thing is for sure: the current manual used by practising actuaries for the valuation of NNEGs is not so much out of date as flat out wrong.