Keeping an eye on things
Out today by Tom Lemmon of Accountancy Age.
Coronavirus puts life insurers under threat due to ‘phantom capital’ exposure
Corporate defaults caused by the impacts of coronavirus could lead to a collapse of the life insurance market, as matching adjustment leaves many exposed.
Continue reading “Phantom capital – no loss absorbing capacity”
Here.
When UK insurers’ boards are considering any distributions to shareholders or making decisions on variable remuneration, we expect them to pay close attention to the need to protect policyholders and maintain safety and soundness, and in so doing to ensure that their firm can play its full part in supporting the real economy throughout the economic disruption arising from Covid-19.
[…]
In the current situation of high uncertainty, it is therefore critical that insurers manage their financial resources prudently in order both to ensure that they are able to meet the commitments they have made to policyholders in a way that is consistent with the expectations of the Financial Conduct Authority, and to enable them to continue to invest in the economy.
But that is odd though. The whole purpose of the Solvency II regime is to provide the necessary safety and soundness through model-based, PRA-approved capital management. A 100% coverage ratio corresponds to a 1 in 200 probability of default, and to my knowledge, no firm is allowed to operate under the soft limit of 130% capital coverage, which corresponds (by my mathematics) to a probability of lower than 1 in 2,000 years.
So why the worry, Sam?
Kevin Dowd 31 March 2020
The political blog Guido Fawkes wrote yesterday: “Since the lockdown came into force last week, along with the emergency powers act being passed, it’s not gone unnoticed by the public that the police have gone ever so slightly maniacal with power.” Guido is right. He continued: a number of police forces are “allowing newly-received powers to go to their heads [and] going far beyond their legislated-for powers.”
Examples include:
Continue reading “UK Police Exceeding their Legal Authority”
In an excellent article published last week in the FT, Jemima Kelly unravelled some of the claims and confusions, many of them coming from experts, supporting the idea that the corona virus is ‘simply a flu’ and that we should not taking it as seriously as European states (and most states in the East) are taking it.
A disturbing article in the Grunian yesterday challenging the Chinese cases-deaths-recovery statistics suggesting that the virus has been completely eliminated. Many doubt the numbers are as good as officials have reported, and while the data we have used here comes from John Hopkins University, that is simply a copy of what the Chinese authorities say it is.
Any rational person would doubt these figures,” one internet user wrote in response to an essay posted by a volunteer in Wuhan questioning the statistics.
So the data really reflects 3 things. (1) the biological properties of the virus, i.e. whether it can be transmitted by sneeze droplets, how far and so on. (2) The expectations and fears of the population reacting to data about the epidemic, and (3) control exercised by the authorities over the properties of the data.
An excellent article from Jonathan Kay published last week, echoing the points that Eumaeus has been making for the last month.
The more aggressively that our leaders act to suppress the spread of COVID-19, the more quickly the crisis will pass, and the sooner we will all be able to return to normal daily life. The decisions we make now could mean the difference between a global recession and a historical event on par with The Great Depression.
The good news is that we definitely can suppress COVID-19, even if no cure or effective vaccine emerges. We know this because it already has been done in the most populous country on Earth.
InsuranceERM today.
Solvency blow out
The market moves have taken a toll on some firms’ solvency ratios. Aviva estimated its coverage ratio at 175%, based on the closing market position on 13 March – down from 206% at the year-end and the lowest the ratio has been since 2016, but within its 160%-180% working range.
Dean Buckner, former technical expert at the Bank of England, fears the balance sheets of some annuity underwriters will be dangerously exposed if the crisis persists.
“Investment grade spreads have exploded as a result of the crisis, from 100 basis points at the end of last year, to nearly 250bps. At the same time, safe asset yields (such as gilts) have declined,” says Buckner.
If the pandemic continues until the end of 2020, he says some firms will be declaring “absolutely massive” losses and in some cases see their entire capital wiped out.
“It all depends on how quickly the government can give the notion they’re going to knock this crisis on the head. If they short-change on the measures, it’s going to last a very long time and spreads are going to be widening more and more and the markets are going to fall further and further.”
The chart shows the latest data from John Hopkins. Existing cases = diagnosed cases minus recoveries minus deaths.
Existing cases have been zero for a number of days. I have been discussing with public health experts and the two arguments against the Chinese experiment, with my replies, are as follows.
(1) We can’t replicate the Chinese measures, which require an authoritarian approach. I reply: First, why can’t we implement an authoritarian approach in the West? Second, the evidence from provinces outside Hubei is that the measures were not particularly authoritarian, and relied mostly on community support.
(2) There will be a resurgence of the epidemic in China once restrictions have been lifted. I reply: this hypothesis has yet to be tested. Furthermore, it is falsified by the SARS 2002 epidemic, which was completely eradicated, also by the Spanish Flu epidemic 1917-1919. Admittedly the Spanish flu resurged in 1918, but the evidence suggests that was due to demobilisation, and in any case it disappeared the following year.
In this article, Tim Gowers (highly respected mathematician and Fields Medal winner) argues for a full lockdown.
The New York Times reports:
For the first time since the coronavirus crisis began, China on Thursday reported no new local infections for the previous day, a milestone in its costly battle with the outbreak that has since spread around the world.
Officials said 34 new coronavirus cases had been confirmed, all of them involving people who had come to China from elsewhere.
In signaling that an end to China’s epidemic might be in sight, the announcement could pave the way for officials to focus on reviving the country’s economy, which nearly ground to a halt after the government imposed travel restrictions and quarantine measures. In recent days, economic life has been resuming in fits and starts.
But China is not out of danger. Experts have said that it will need to see at least 14 consecutive days without new infections for the outbreak to be considered over. It remains to be seen whether the virus will re-emerge once daily life restarts and travel restrictions are lifted.
The chart below shows the (indexed) value of the S&P from the beginning of 1920 to the end of 1940, together with the indexed value of dividends. Source is Robert Shiller’s database.
