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.
I questioned on Friday whether the PRA transitional benefit has any value. It’s a regulatory asset that produces no income and moreover its value decreases every year until it is zero in 2032. How would you value the company using the standard techniques of modern science?
There is a very fine article in InsuranceERM just published. Behind a paywall I am afraid, but it explains the idea of Eumaeus very well, although I would say that. For those without a subscription, an interesting part is here
As InsuranceERM went to press in December, the PRA published its policy statement (PS31/18), which Buckner largely welcomed. “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,” he says.
But he is scathing of the PRA’s change of heart on applying the rules for valuing guarantees to business written before Solvency II came into effect. Insurers can now apply different treatment to the same type of loans, depending on whether they were written before or after 1 January 2016. “It makes no sense to me,” he says.
Indeed it made so little sense to me that I queried it with the PRA after the interview.
Eumaeus is back. A warm 2019 welcome to all our readers who haven’t forgotten about us, and our best wishes to those who have.
As is customary at such times, we reflect on the stuff that happened last year, and upon what will happen, or might happen, in the next.
Eumaeus and I will be taking a break until the New Year, until then, have a good holiday.
I will leave you with a further thought on the equity premium which I discussed last week.
The Kingman report on the Financial Reporting Council is out this morning. Much to discuss, but the findings on the regulation of the Institute are telling.
Briefly:
The Memorandum of Understanding between the FRC and the Institute, set up in the aftermath of the Morris review, ‘is not in practice proving an altogether effective arrangement’, specifically the FRC ‘has no powers with which to enforce any meaningful oversight of the IFoA’ (my emphasis).
HMT and the Government Actuary told the Review that it wishes to see effective regulatory oversight of the actuarial profession. If stakeholders wish to see effective independent oversight of regulation of the actuarial profession, suitable legal powers must be put in place to make this possible, and the review questions whether the FRC is the best body to do this.
The review recommends
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 updated the links page as follows.
Stress Tests – links mostly to Kevin Dowd’s work on the failures of the Bank’s stress testing regime, which seem to be manifold. There will be more to come as ‘No Stress IV’ approaches publication.
Equity release and the actuarial profession – links forming the source for our work on Equity Release: A New Equitable in the Making.
Treasury Committee – links to the work of the Treasury Committee’s Solvency II investigation, including its report The Solvency II Directive and its impact on the UK Insurance Industry, October 2017.
Geeks only. As promised earlier, a chart showing the hypothetical return on a 10Y gilt, versus the total return on a portfolio of FTSE stocks.
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.