Keeping an eye on things
Both the ABI and the Institute of Actuaries have published their response to the recent Solvency II consultation by HMT. It is depressing to see the President has signed it, but then the Institute has form on that.
Congratulations to the NASA team for successfully landing the Mars Rover this evening. The most ambitious technology project yet.
Earthlings everywhere should be proud.
With technology advancing at such a rate, perhaps one day we will be able to price an insurance contract correctly? I live in hope.
Peace,
Eumaeus
Mr Postbag complains, concerning my previous post, and my claim “I believe it is the first time a qualified, professional actuary has commented on MA in such terms”, that Craig Turnbull has also made some fairly critical comments of MA in his HMT submission here.
Please accept our apology, Craig.
Alan Reed has posted his response to the HMT consultation on Matching Adjustment on LinkedIn here. The key paragraph is this:
The proposals suggested in this section of my response address what I consider to be serious issues. To the extent that the current MA regime is allowing firms to claim more MA benefit than is justified by the inherent features of their assets and their portfolio management strategies, as a result of arbitraging weaknesses in the regime, then some MA portfolios must, as a direct result, be providing a lower level of long-term security for their policyholders/beneficiaries than the MA regime intended. Further, potentially, one or more MAPs may plausibly become unsustainable as a result of too much extraction of value early by advisors and shareholders, leaving insufficient to allow the MAP to continue to operate sustainably in compliance with the MA regime. Such an outcome could reasonably be seen by society as a failure of the industry, regulation and associated professions which a society that has already tolerated Equitable Life and the Great Financial Crisis may, reasonably, not be accepted lightly by society.
I commend Alan for this, and I believe it is the first time a qualified, professional actuary has commented on MA in such terms. Let there be many more.
Andrew Bailey is VERY VERY ANGRY. The London Capital and Finance collapse wasn’t his fault so don’t blame him!
Bailey acknowledged that a key problem had been a failure to act on phone calls to the FCA’s call centre raising concerns about LCF. But he said this was an operational flaw he inherited [in 2016] when taking up the CEO role. “The contact centre in my time was receiving 200,000 calls a year and there was no system for extracting information from those 200,000 calls . . . the red flags were buried in those 200,000 calls.”
On YouTube as I speak.
Why you should watch: There may be as many as 11 million people trapped in apartments that are unmortgageable (and hence unsaleable) as a result of building deficiencies revealed after the Grenfell disaster. Remediating those deficiencies could cost well over £10 billion – vastly more than the £1.6 billion that the government has budgeted for.
Who pays?
Legally, at present, it’s the leaseholders – who can face bills up to £100,000, on top of insurance premiums that shot up five-fold. ‘Morally’, it might be the developers – if you can find them. It doesn’t seem to be the freeholders. This is a major issue – economically, financially, socially, and politically. At present, there is point-scoring in Westminster, with Labour demanding that leaseholders shouldn’t pay anything, and Government ministers backtracking a bit from a firm pledge to a softer promise that leaseholders shouldn’t be faced with ‘unaffordable’ bills.
Maybe this is an area where a bit of financial innovation wouldn’t come amiss…
Moderator: Andrew Hilton (Director, CSFI) Panellists: Sir Bob Neill is the Conservative MP for Bromley and Chislehurst. A barrister, educated at LSE, he was formerly a member of the London Assembly and Shadow Local Government Minister. He is chair of the Justice Select Committee, and has recently become chair of an APPG on the cladding issue. Martina Lees is a senior property writer at The Times and the Sunday Times, where she previously spent ten years as a digital section editor. She began her journalistic career as a crime reporter in Johannesburg. Dean Buckner is policy director at the UK Shareholders’ Association, and a trustee of the Leasehold Knowledge Partnership. He is a former insurance data specialist at the PRA and BofE, and, before that, spent a number of years in the City.
Here.
Key points. On the sale of £540m of lifetime mortgage balances on December, a footnote explains that the proceeds are “Amount outstanding, including rolled up interest”. This is simply the loan balance, without any benefit of MA, but they replaced with corporate bonds, saying that “sale proceeds were immediately reinvested in corporate bonds, with the reduced yield resulting in a one-off reduction in IFRS net equity of £90m.” I.e. they are claiming MA on the bonds, but it is not as much as the MA on the ERMs, unsurprisingly.
I occasionally correspond with a Just shareholder who refuses to believe that the firm bakes in expected profit from ERMs. I wonder how he would explain that.
They note also that they have completed their third NNEG hedge. Again, you would expected this would lead to a loss on the assumption that the hedge is at market value, although nothing is certain in the crazy world of non-market actuarial valuation.
The Guardian reports on warnings from “a veteran City guru” that “an epic bubble of Wall Street crash proportions” is likely to burst1.
Jeremy Grantham, the British co-founder of the US investment firm GMO, said in a letter to clients that current investor behaviour bore the hallmarks of the mood in the run-up to the 1929 Wall Street crash.