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Submerged infections

Article in the FT today which corroborates everything we have been saying at Eumaeus. For those without access, the key points:

Through testing and retesting of all 3,300 inhabitants of the town of Vo’, near Venice, regardless of whether they were exhibiting symptoms, and rigorous quarantining of their contacts once infection was confirmed, health authorities have been able to completely stop the spread of the illness there.
The first testing round, carried out on the town’s entire population in late February, found 3 per cent of the population infected, though half of the carriers had no symptoms. After isolating all those infected, the second testing round about 10 days later showed the infection rate had dropped to 0.3 per cent.
Importantly, however, this second round identified at least six individuals who had the virus but no symptoms, meaning they could be quarantined. “If they hadn’t been identified, the infection would have resumed,” explained Prof Crisanti [an infections expert at Imperial College London who is taking part in the Vo’ project].
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Just the spread changes

Data source: ICE BofA US Corporate Index Option-Adjusted Spread, and Eumaeus

The chart above shows estimated losses on the recent credit spread movements on the corporate bond exposure of a firm like Just Group. First of all, let me state I have nothing against Just, which I am using as an example. My target, as always, is the regulatory system that approved the capital position of such a firm in the first place.

Continue reading “Just the spread changes”

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China 15 March

Source: John Hopkins University

Contrasts with the rest of the world, particularly Europe. Yet when you look at the media, China always appears as a massive blob, as though the worst of the lot.

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News from Hunan

This may partly reassure us. Hunan (population 67m) is another province where all cases are now resolved (i.e. cases = deaths plus recoveries). See chart. Case fatality rate about 0.4%. Population fatality rate 0.000006%.

‘Partly reassure’ because UK scientific advisers are not following Chinese policy.

People have been attributing the different policy to Tory politics (‘slay them all, or most of them’). I think it’s a Kuhn thing. Senior advisers are not scientists any more, having last engaged with a peer reviewed paper perhaps 20-30 years ago. And they adhere to what seemed to work 20-30 years ago.

Thankfully a lot of scientists wrote in and pointed out this is not such a good idea. Let’s see.

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Pile of junk?

Source ICE

As we commented here, increase in spreads could indicate decrease in ratings down the line.  The chart indicates that the BBB spread has jumped up following the market collapse this month. Insurers hold significant amounts of this ratings class – see e.g. the Just Group financial report out today, p.17, so they are at some risk of their holdings being downgraded to junk status.

InsuranceERM comments today “Widening credit spreads and bond downgrades will weaken insurers’ capital, particularly for life insurers with guaranteed products or large portfolios of annuities. Bond downgrades will either force insurers to hold more capital, or sell the assets.” Correct, and as we noted in our earlier post, the assets sold will have to be replaced by better-rated assets, generating an instant and irrecoverable loss.

Zerohedge discusses the problem here, noting that $3 trillion in bonds are on the cusp of downgrade, that the bulk of BBB rated issuance was used to fund the trillions in buybacks that levitated the stock market over the past few years, and stating (without any sense of alarmism, meh) that

as of this moment, over $140 billion of debt issued by independent oil and gas producers, oilfield services providers and integrated energy companies has triple-B credit ratings from Moody’s or S&P and is now at risk of falling to junk status.

But as they also note, rating agencies have in the past been “painfully behind the curve and slow to adjust to changing fundamentals” so it will take some time for all this to work out.

Fortunately life insurers have plenty of time.

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Crisis wot crisis

From our friends at the Bank today:

In response to the material fall in government bond yields in recent weeks, the PRC invites requests from insurance companies to use the flexibility in Solvency II regulations to recalculate the transitional measures that smooth the impact of market movements.  This will support market functioning.

Transitional measures are a fake regulatory asset that can be used create capital to replace what is lost when liabilities rise through, e.g. fall in long term discount rate.

We could use this method to address the current epidemic. Instead of causing an epidemic by reporting the number of diagnosed cases, simply change it to a lower number.

Problem solved.

 

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Insurers can’t model pandemics

An article here in InsuranceERM quotes Nita Madhav, chief executive of epidemic risk analytics company Metabiota, as saying that insurers are not prepared to model the effect of crises such as the current coronavirus one.

From the insurance sector perspective, they are not well prepared to handle epidemics,” says Madhav. “A lot of times companies are applying very crude shock scenarios to the portfolio. For example, they are not taking into account the difference in countries preparedness. It is an area where insurers are not embracing the full power cat [catastrophe] modelling can bring.

I would not be surprised. The shape of the curves I have been posting in our cvirus coverage is not a biological property of the virus itself. With no concerted action, the curve will keep on rising and will only flatten out when pretty everyone is either infected and recovered, or die. The flattening effect is caused by the concerted action, and different administrations will have different reaction times to the crisis.

Can insurers model anything, we wonder?