Keeping an eye on things
“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
According to Wikipedia, the Red Queen effect, i.e. the need to run in order to stand still, has been used to explain all sorts of scientific and philosophical ideas. No one, as far as I know, has used it to explain equity release mortgage valuation.
The Institute has turned down our request to speak on the subject of equity release mortgage valuation. However I will be speaking in January on the same subject at the network of consulting actuaries. See below.
Date: Fri 25th January 2019, 12:00 pm
‘The Valuation of Equity Release Mortgages’, Dean Buckner (The Eumaeus Project)
Anyone can join and dial into the network’s events for free, if they are interested. Their membership is mostly qualified actuaries as they get 1 hour of CPD. To register, follow the link below.
Network of Consulting Actuaries
I have so far dwelt on the positive aspects of PS 31/18. It is a landmark paper by the PRA in that for the first time it settles, with great authority and a wealth of cogent reasoning, how life insurers should correctly value a portfolio of simple European put options. Other non-insurance institutions have valued them correctly for a long time, but never mind that, it is an important breakthrough notwithstanding. In his letter of 10 December, David Rule stresses the importance of not valuing options in a way that assumes future house price growth (and by implication any asset growth) in excess of the risk-free rate.
But all is not well.
I was at a reception last night with our friends from International Accounting Standards present, when someone brought up the subject of ‘prudence’ in accounting. As usual, battle lines formed straight away, although luckily no one was hurt.
Kevin Dowd and Dean Buckner, 29 November 2018
Our new report, “Equity Release: Another Equitable in the Making” has just been released in the Studies in Applied Economics series edited by Steve Hanke. Steve is professor of applied economics and co-director of the prestigious Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore, Maryland. We are very grateful to Steve for publishing it.
Continue reading “Is Equity Release Another Equitable in the Making?”
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”
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.
Most people with even the slightest familiarity with option pricing will know of time decay, or the tendency of the option value to decrease through time independent of any interest rate effect. The chart above shows the price of call option through 40 years, struck at 100 with the underlying price also constantly at 100, and with interest rate set to zero to remove the effect of interest carry. I.e. the only change to the model is the time to expiry. The effect of time decay or theta is apparent.
Now I have discussed in several posts, such as here, how a real option can be replicated by means of a synthetic option – a series of linear positions in the underlying market adjusted frequently to match the delta or sensitivity of the real option.
According to some history books, the dreaded mob went into riot mode after it was proposed in February 1751 that Great Britain adopt the Gregorian calendar, already used in most of western Europe. ‘Give us our Eleven Days’ they cried.
I heard that I was a ‘market consistent fundamentalist‘. I guess that means I am a bad thing. But there are two things to be unpicked here.