Category: transcripts

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Definitely a cushion

More to follow but  see below for a partial transcript of the Treasury Committee hearing yesterday, with Harriett Baldwin quizzing Jon Cunliffe and others about the effect of Covid on life insurers.

Does Sir Jon agree with Sir John Vickers “when he says that, er, the Matching Adjustment is more of a  mask than a cushion“?

A lot of waffle from Sir Jon. He says that ‘market liquidity risks’ are not suffered if assets are held to maturity, which is correct, then says “if you were to price the assets that insurance companies hold on their balance sheets at market prices, you would be picking up how liquid the assets were, whether you could sell them in stress etc”,  which is clearly false, but at least confirms that he thinks it is a cushion.

Baldwin complains that she is out of time, and Stride (Chair) closes with the remark that he senses “a slight frustration there, and you might have valued a little more time to probe”

I think on that basis we might write to the panel after this session, and if we do if I can ask the members of the panel to respond very promptly to any letter we might send on the issue of insurance and stress testing.

Clearly more to follow. Stay tuned.

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Liquidity again

Sam Woods was questioned by the Treasury Committee on Wednesday. Transcript below, starting 16:50.

A few odd things. Woods says there have been defaults and downgrades, but soon after claims that ‘blowouts in bond spreads’ are driven by liquidity. He mentions the Matching Adjustment as the ‘piece of machinery that is operating quietly in the background’, and Baldwin asks whether without it there would be actual insolvencies. Woods first says that there wouldn’t, or he thinks there wouldn’t, then says that without it there would be ‘a major problem’.

Why don’t they just state the accounting numbers as they are, i.e. some firms with no net assets at all, or negative assets, adding that this doesn’t make the firms insolvent, because it’s merely a liquidity effect and the spreads will narrow back again? Why falsify the accounting?

More later, I expect.

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The High Court judgment

The transcript is here. Some points to consider.

  • The independent expert, Nick Dumbreck (Milliman), calculated that ‘in the case of Rothesay, an SCR coverage ratio of 100% equates to a likelihood of its assets being sufficient to cover its Technical Provisions in one year’s time of 99.5%; an SCR coverage ratio of 130% would equate to a likelihood of its assets being sufficient to cover its Technical Provisions in one year’s time of 99.96%; and an SCR coverage ratio of 150% would equate to a likelihood of its assets being sufficient to cover its Technical Provisions in one year’s time of 99.994%’.
  • The probability of default is thus lower than the probability calculated by the HBOS advanced IRB model at the beginning of 2008. Policyholders can rest assured, then.
  • Matching Adjustment was not discussed at all, so presumably not deemed relevant to policyholder interests. Question: if MA were taken away, would that change the probabilities referred to above?
  • ‘As at 31 December 2018, for Solvency II purposes, Rothesay had total assets of about £36 billion, Technical Provisions of about £32 billion, Own Funds of £3.89 billion and a SCR of £2.16 billion. Its SCR coverage ratio was thus 180%.’
  • Dumbreck argued that while Prudential has a greater absolute capital surplus than Rothesay, ‘the levels of surplus relative to the amount of its technical provisions are of the same order of magnitude for both companies. He expressed the view that it is this relative cover for liabilities that is material, rather than the absolute surplus’.

More later.

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The return of Eumaeus

Actually it should be the return of Ulysses, but never mind.

We are still working on the now very comprehensive report on equity release and the valuation of the NNEG, but the blog is back in business.

Quite a few things happened in our absence, including the publication of the Smith and Jeffery report to the Irish actuaries. We will comment on that later.

Meanwhile, fresh off the press, is the transcript of this speech by David Rule. We will comment on that too, when we have worked out what is going on.

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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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A very arcane Rule

I just discovered the fabulous Commons TV feature that allows you to link directly to the time you wanted, rather than fumble about with the cursor all night.

So here is Nicky Morgan giving a light grilling, and tbh it’s very light, to David Rule, director of insurance at the PRA.  In which David coins a new verb ‘to dividend’.

My transcript below for those who lack the patience to watch it through.

[EDIT] Full transcript is now here.

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I would refer you back to the Equitable

Transcript of the Treasury Select Committee hearing, 11 July 2018, on Equity Release, 15:19:50.

Witnesses: Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the Prudential Regulation Authority , Sarah Breeden, Executive Director, International Banks Supervision, Bank of England, and David Belsham, External member of the Prudential Regulation Committee.

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