Category: complete bollocks

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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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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 …

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Easily the worst media explanation of LDI yet

See BBC News at Ten, 12 October 2022, for easily the worst media explanation of LDI yet. The fun starts 7:10.

Presenter “So let’s turn to our business editor, Simon Jack, who’s the expert on all these things.

Jack:

8:00 “Investors want more interest to justify the extra risk”. Not really. A gilt is risk free because the nominal payment (coupon and principal) is risk free. What investors are demanding is compensation for the extra inflation implied by the market.

8:05 “The cost of borrowing shot up”. Gilts are an asset, not a liability, and don’t involve borrowing. Of course, arbitrage implies the cost of long-dated borrowing will go up commensurately, so perhaps we could forgive him.

8:20 “Some pension managers have used them as security to get ready cash now”. Argh. Pension schemes have bought them using borrowed money, using them as security for the borrowing. No cash, apart from the haircut (‘margin’).

8:25 “To be able to pay out on those pension promises” Argh again. The scheme assets, typically risk bonds or equities, enable the payout. And again, there is no cash apart from the margin (and margin doesn’t have to be cash, necessarily).

Jack’s Wikipedia entry says “Before entering journalism, Jack worked for a decade as a corporate and investment banker in London, New York City and Bermuda. He has said that he neither liked the work, nor showed much ability at it.” Fair enough.

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Rip off policyholders to save the planet

Reported in InsuranceERM

On investment in green finance, Evans [Huw Evans, on his last day as director general of the Association of British Insurers] said a useful debate about how the Solvency II Matching Adjustment can be improved has been somewhat overtaken in the UK by a series of Bank of England/PRA interventions. According to Evans, these are seeking to force changes to the fundamental spread element of the Matching Adjustment.

“Not only is this an issue that wasn’t even included by HM Treasury when it set the remit for the review, any changes are almost guaranteed to increase insurer capital levels and make the UK less competitive than insurers based in the EU. And any chance of a significant boost to green investment will almost certainly be lost.”

Loving it!

 

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A failing, bloated, defensive organisation

 

The All Party Parliamentary Group (APPG) on Personal Banking and Fairer Financial Services (members) has just published some testimonies about the FCA as part of its call for evidence about the FCA.

This testimony from an anonymous FCA employee is particularly striking (though to me, as a previous FSA staffer, not surprising.

Overall, a negative and depressing time in working at the FCA. The FCA has developed a toxic culture and spends huge resources, time and effort on self-protection, of itself, at the expense of supporting consumers. The FCA appears to operate in a malicious and vindictive way and is not willing to accept any kind of constructive criticism from staff. The FCA is a wasting money and staff effort on self-protection which is quite sickening when set against the context of its failures in recent years to regulate firms properly. Based on the evidence I have seen, the FCA is simply not doing its job and has become a failing, bloated, defensive organisation – with most of its efforts and resources going on self-promotion and trying to counter the many criticisms of it.

Quite. The whole unstated purpose of a regulator is to protect itself. When I worked there, you had to suffer all these ridiculous initiatives about ‘learn and change’, ‘vision and values’, ‘making a real difference’ and (at the Bank) ’20 20 vision’, which come across as noble and visionary but really translate to “keep the gravy train running, and don’t get caught for mistakes, even if that means doing nothing much of the time”.

There needs to be strong scrutiny of this absurd organisation, but who has the patience (and the competence) to do it?

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Meanwhile back at t’mill

A technical paper here on the UKEB website suggests more trouble brewing around discount rates.

As usual it’s hard to tell, given the impenetrable language used by accountants, but I suspect the problem is the so-called Contractual Service Margin (CSM). This is a mechanism that weirdly takes away the effect of excess discount rates like Matching Adjustment (or rather, the statutory equivalent of Matching Adjustment), forcing a firm to release day one MA gains over time. How this practice differs from just discounting by riskfree is a mystery to me.

The paper says “Profit recognition will be significantly slower than under current practice, mainly due to the absence of gains on initial recognition (sometimes referred to as ‘day 1 gains’),” then continues, ominously:

Data on the likely transitional impact from this change across the industry is not available to us, but the expectation is for material reductions in equity. The scale of the impact will depend in part on the transition approach adopted …

Unfortunately the rest of the paragraph makes almost no sense.

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Complete nonsense


Thank you to all our friends who mailed us pointing out this strange request in the Institute’s call for tender.

4.2.5 Confidentiality

You agree to keep confidential this Request and all information provided therein. The information provided may be made available to your employees and professional advisers directly involved in tendering to the IFoA and ABI (who must also be made aware of the obligation of confidentiality) but shall not be copied, reproduced, distributed or otherwise made available to any other party in any circumstances without the prior written consent of the IFoA and ABI, nor may it be used for any other purpose other than that for which it is intended.

Interesting philosophical issue: how can I agree to keep confidential any information that the body insisting on confidentiality itself puts on the internet? Kevin and I scratched our noses for a while then Kevin thought perhaps it meant this

We might just feel the need to provide you with further information that we would prefer did not become public because we have already endorsed enough nonsense as it is and we would not wish to become a laughing stock.

No we wouldn’t want that. Way to go, Institute of Actuaries!