Author: db

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Still winning

We commented here in May 2022 on some specular forecasting failures, even by the Bank’s standards.

August 2020 “In the MPC’s central [inflation] projection, conditioned on prevailing market yields, CPI inflation is expected to be around 2% in two years’ time. [i.e. August 2022]”

August 2021 “… The MPC expects CPI inflation to rise temporarily to around 4% in the near term, before falling back towards 2%. … Inflation starts to decline in 2022, and returns to the 2% target in late 2023”

Hat tip to ‘The Courgette’ who has helpfully continued this sad story in an FT comment here.

Continue reading “Still winning”

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UK sets out plans for failing insurers

The HM Treasury Consultation document is here,  setting out the government’s proposal to introduce a dedicated insurer resolution regime in the UK.

It would be so tempting to reply asking why such a regime would be necessary, given that insurer capital is determined by Solvency II to a 1 in 200 year event of insolvency, and that all insurers have a capital buffer well in excess of the required amount, making insolvency something like a 1 in 10,000 year event. The government doesn’t plan for asteroids hitting Westminster, why plan for insurers going bust? Could never happen.

(Irony)

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Potential equity release mis-selling?

We were also quoted in the Telegraph yesterday on potential equity release misselling.

Kevin Dowd, professor of finance and economics at Durham University, said misselling is “always a risk” with commission-driven sales and the equity release sector “has a less than stellar record in this area”.

Dean Buckner, policy director of UK Shareholders Association, formerly of the Bank of England, said ideally struggling homeowners would downsize to a smaller property and invest for a better income, adding: “Instead, they are being encouraged to take out equity release at currently high rates.”

Mr Buckner said homeowners were at risk of being sold loans that were not appropriate to them. He said: “There is a temptation for financial advisers not to dwell on these aspects, and providers should think carefully about how this could be viewed as mis-selling by future regulators.”

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Wood’s Solvency UK comments welcomed by industry

Insurance ERM this morning on Sam Woods’ comments to the UK Treasury Committee last Monday.

“Dean Buckner, policy director of the UK Shareholders’ Association, welcomed Woods’ admission the new regime would put policyholders at more risk.

He has repeatedly argued how the use of the matching adjustment grants life insurers upfront capital against future investment returns, which may not emerge, and therefore puts firms at risk of running out of capital.

“Our members are increasingly fearful of investment in life insurance companies, given the tendency to decreasing levels of capital, and increasing levels of risk. We thank Sam Woods for speaking out. However, we are disappointed that the government appears to be ignoring these valid concerns,” Buckner said.”

At the same time, the Bank has published the results of its insurance ‘stress test’. Scare quotes, because

In the spread widening stress, the MA increases to offset most of the corresponding fall in asset values within the MA portfolio; and balance sheet deterioration through increased credit risk is not observed until assets start to downgrade. While this result is to be expected under the regime, it does illustrate that the MA does not automatically take account of market signals relating to elevated credit risk at the point where they start to come through

The exam that no firm can fail.

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Now we can all relax

“Bank of England to stress test risks in non-bank financial markets” (link)

Phew! Now we can all relax as the Bank looks at a risk that came to its attention. Hope it is also looking for risks that haven’t yet come to its attention!

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IFOA Thematic Review Report on Equity Release

The Institute of Actuaries report on  Equity Release is published today.

It opens “Actuaries have played a leading role in developing the market for equity-release products”. From my memory, the role that actuaries played in developing the product was an active resistance to developing a correct pricing model, but never mind.

The report found, astonishingly, that “actuaries view much of equity-release pricing and proposition work as (technical) actuarial work, in common with valuation and capital activity”.

Unsurprisingly, the extensive bibliography did not include  The Eumaeus Guide to Equity Release Valuation: Restating the Case for a Market Consistent Approach, 2nd edition. KSP Books.

 

 

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More nonsense from the Bank

Sarah Breeden (Bank Of England Executive Director, Financial Stability Strategy And Risk) who has said this today:

Many UK DB pension schemes have been in deficit, meaning their liabilities – their commitments to pay out to pensioners in the future – exceed the assets they hold. DB pension schemes invest in long-term bonds to hedge the interest rate and inflation risk that arises from these long-term liabilities. But that doesn’t help them to close their deficit. To do that, they invest in ‘growth assets’, such as equities, to get extra return to grow the value of their assets. An LDI strategy delivers this, using leveraged gilt funds to allow schemes both to maintain material hedges and to invest in growth assets. Of course that leverage needs to be well managed.

She does not mention at all the risk to these funds from investing in risky assets (anywhere in the speech) and the part above would lead an outsider (like many pension fund trustees) to think that taking risk via leverage is a sensible thing to do.

To be fair, she adds

Leverage is of course not the only cause of systemic vulnerability in the non-bank system – as we have seen with liquidity mismatch driving run dynamics in money market funds (MMFs) and open-ended funds (OEFs) during the dash for cash. ] But it is important where any form of leverage is core to a non-bank’s business and trading strategy. Indeed what happened to LDI funds is just the latest example of poorly managed non-bank leverage throwing a large rock into the pool of financial stability. From Long Term Capital Management in 1998; to the 2007 run on the repo market; to hedge fund behaviour in the 2020 dash for cash; and the failure of Archegos in 2021.

Nice of her to set out where the Bank failed in one of its two core objectives! As for the other core objective, er …