Just out in the Financial Times this morning. Jonathan Ford writes about a trick which allows insurance companies to conjure capital out of fresh air.
From the postbag
‘Concerned Observer’, writes in to query my recent post on the buyout model. He or she makes two points. First:
… the buy-in premium tends to be lower than the present value of the liabilities using a gilts-based discount rate. So there will be some schemes that are not sufficiently well funded to be able to invest in gilts and still meet the liabilities as they fall due, but which can afford a buy-in.
Libor flat
I mentioned David Land’s bemused question to the Equity Release working party yesterday. If the working party hasn’t yet fixed the right method of calculating the forward, isn’t that a pretty major source of possible error?
No coherent answer emerged, but Land raised an interesting point. If we can’t lower the value of the no negative equity guarantee by putting in an optimistic growth forecast, perhaps we can tweak the funding rate instead? He drops a hint when he suggests that there’s a large range of possible funding rates that you could think about, and that ‘The PRA thinks that you could possibly fund a house at Libor flat, which seems remarkably difficult’.
Nice try, but there is a problem with that idea too.
Discounting by risk free
http://batmanytb.com/Actuary%20(Comics)
As I commented the other day, life insurers have for a long time used arbitrary methods of discounting insurance obligations. The idea permeates actuarial culture and most actuaries, including even the younger actuaries who qualified under the new actuarial syllabus designed to drag actuarial valuation into the 1950s, show surprise when you suggest that this is completely wrong.
Continue reading “Discounting by risk free”
Insurance fundamentally different?
In a piece last week, Oliver Ralph of the FT says
Many insurers privately argue that the rules will fail to make accounts more comparable because insurance markets worldwide are fundamentally different. They say that the new standard simply imposes a huge burden on the industry in time, effort and expense, for little benefit.
I am sure they would privately argue that, but this is completely false.