Category: valuation

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Happy New Year and Some News

1 January 2024

Happy New Year to everyone!

We trust you all had a nice Christmas break and raring to go in 2024.

A couple of bits of news from us.

First, our article “Arbitrage Problems with Reflected Geometric Brownian Motion” has just been published. The full reference and the Open Access link is given here:

“Arbitrage Problems with Reflected Geometric Brownian Motion.” (D.E. Buckner, K. Dowd and H. Hulley) Finance and Stochastics (2023) 28: 1-26.

We will have more to say on reflected GBM processes soon, as Annals of Actuarial Statistics, the journal that published Guy Thomas’s devastatingly flawed articles on the subject, seems to think it is OK to published flawed models that could bankrupt a company that uses them, without allowing anyone (i.e. us) to make any comment to that effect in its hallowed pages. This is like a maths journal that publishes an article saying that 2 plus 2 equals 5, and that’s OK because 2 plus 2 equals 4 is merely an opinion and other actuaries might have a different opinion.

We will how well that opinion holds up in due course. We have a cunning plan to address this issue.

Second, my new book on free banking is out. The link is:

The Experience of Free Banking, second edition.

There is a blog on it here, which also explains what free banking actually is.

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Actuaries and equity release mortgages

The Institute of Actuaries’ “Review Team” has launched an Equity Release Mortgages thematic review, “which will consider the work carried out by actuaries in this area – in particular their role in propositions and pricing activity. The market for equity release mortgages continues to grow, and actuaries have an important role to play in this broad and complex area.”

The review includes a questionnnaire for lenders and a questionnaire for consultants. (Academic researchers apparently are not included).

The questionnaires are focused on the governance of ERM work. Example: “In addition to providing documentation, please describe what examples of documentation are subject to APS and/or TAS assessment (in either valuation/capital functions or propositions/pricing functions) at your organisation.”

Which reminds me, if the TAS (Technical and Actuarial Standards) were any use at all, they would have picked up the massively incorrect valuation method used by most (if not all) firms. This suggests they are not any use at all.

Just saying.

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More nonsense

I reported earlier on the official list of priorities for the UK Endorsement Board to consider. They have now published the paper that the Board will consider on 20 July next week.

Warning: the paper is truly awful, and was the main reason I stepped down from the Technical Advisory Group in February. Note the inconsistency between the Priority List, which eerily reflects the concerns I raised while on the Group, and the relaxed and unconcerned nature of the paper itself. Left hand meet right hand etc.

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Does IFRS 17 require the use of discount rates that are too high?

Well obviously, but interesting that the question is now on the official list of priorities for the UK Endorsement Board to consider.

Their summary is interesting.

  • Some stakeholders have raised concerns that the requirements in IFRS 17 regarding the determination of discount rates will lead to excessive subjectivity (whether in respect of illiquidity premiums or the elimination of market and credit risk). Further, does IFRS 17 require the use of discount rates that are too high because they are in excess of risk-free rates?
  • This is a pervasive aspect of IFRS 17, often with a material impact on the accounts
  • An area of significant entity-level judgement
  • Requirements have attracted controversy and are a primary focus for certain stakeholders
  • Use of rates in excess of risk-free has (indirectly) been referred to in parliamentary debate
  • Users of accounts consider this an area of potential concern due to the subjectivity and the scope for variety in rates applied

My emphasis. I discussed the ‘parliamentary debate’ issue here.

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The Market Consistent Approach, Updated

Dean and I have updated our work on the MC approach and have just issued a new Discussion Paper on the subject, ‘A Market Consistent Approach to the Valuation of No Negative Equity Guarantees and Equity Release Mortgages’.

To quote the abstract:

This paper provides a new market consistent approach to the valuation of No Negative Equity Guarantees and Equity Release Mortgages. The paper innovates in two respects. First, it provides a new treatment of net rental yields and deferment rates and a proof that the two are equal. Second, the paper provides a new approach to the estimation of the volatility inputs. The proposed approach to volatility produces a volatility term structure that is dependent on the age and gender of the borrower. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5 Cairns-Blake-Dowd (CBD) mortality model. Results have interesting ramifications for industry practice and prudential regulation.

The word ‘interesting’ does a lot of the heavy lifting here.

We will be presenting the paper to David Blake’s Sixteenth International Longevity Risk and Capital Markets Solutions conference in Copenhagen in August.

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In Praise of the PRA’s Principles

Dean and I have had a fair bit of behind the scenes back and forth on equity release valuation, and especially on the PRA’s Equity Release Valuation Principles, which continue to be as misunderstood as ever. As someone once said, it can be extremely difficult to persuade people of something that they do not wish to be true, and especially so where their living depends on their not understanding it.

Here is the link to our new Discussion Paper on the subject.