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Bits and pieces

A fair bit going on in Eumaeus world right now. More later. For the moment:

  • The Radio 4 Moneybox programme at 12:00 tomorrow will have an item on the Law Commission report on leasehold enfranchisement published on Thursday. I (DB) am featured trying to explain the no-arbitrage principle without using any technical term such as time value, discount rate etc.
  • Ian Mulheirn has a great piece out here on a recent Bank working paper by Victoria Monro and David Miles, the main conclusion of which is that, relative to incomes, the rise in house prices between 1985 and 2018 “can be more than accounted for by the decline in the real risk-free interest rate observed over the period”. Ian comments “Stop me if you’ve heard that before”. Indeed, and see our post from September 2018 on the same subject.

 

 

 

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Bailey out in the cold?

Unfortunately timed article in the Eye Christmas edition, on how the rising tide of criticism of the FCA would make Bailey’s appointment as Governor “a tough sell”. Ho ho, as Kevin would say.

What can I say, except to wish Eumaeus’s readers the very best for a happy Christmas – and a merry New Year – when we will of course be back.

 

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Considering every angle

I just spotted a comment from ‘JKingdom3’ on our letter to the FT last month (Capital created by matching adjustment is entirely artificial, see Eumaeus “Our Reply to Rothesay“, 5 November 2019).

Kingdom wonders whether we have considered every angle, arguing that “In a world where firms seek to maximise their profit subject to the constraints they face, the “correct” assets required to meet this will be the assets corresponding to the least cost to the shareholder”. He contrasts investing

1. … $74.41 in the risk-free asset, hold no capital over ten years, and pay the policyholder $100 in ten years’ time with certainty; and

2. … $67.56 in the risky asset, and hold the minimum capital needed to meet the 99.5% requirement each year over the ten years.

He suggests that option 2 is a good deal for policyholders, and a better deal for investors. Correct or not?

Continue reading “Considering every angle”

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More sitting time bomb

In a follow-up to the article we mentioned here, Sarah Bright has revealed that the Treasury Committee may (at long last) investigate the equity release problem.

Steve Baker, who was last week re-elected as Conservative MP for Wycombe, says: ‘Close scrutiny of equity release is long overdue and I welcome the FCA’s action. In the event I am re-elected to the Treasury Select Committee I will certainly want to see an inquiry carried through.’

Continue reading “More sitting time bomb”

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Watchdog confirms it is looking into ERMs

In This is money today.

Homeowners told to take equity release could have been given the wrong advice it has emerged, as the City watchdog confirmed it is looking at mortgage lending practices in the later life market.  This is Money can reveal exclusively that the Financial Conduct Authority has been engaging with firms to help it better understand the market to reduce any potential harms.

Hard to say whether the review is connected with the issues we have raised here and elsewhere, though.

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CBDX – A Workhorse Mortality Model

(Mortality geeks only)

David Blake, Andrew Cairns and yours truly have just finished an article outlining a new(ish) mortality, model, CBDX. The purpose of the model is to offer a workhorse model that spans middle age as well as old age.

To recap: our original Cairns-Blake-Dowd (CBD) mortality model was specifically designed to capture the mortality behaviour of older people, e.g., people over 50. We were thinking of annuitants but equally it could apply to equity release borrowers, who must be at least 55.

Our original model had only two period (or passage of time) effects, the second of which enters the model through a coefficient that is a linear function of age. We then generalised then it to a CBD family consisting of 3 related models: M5, which is equivalent to a reconfigured CBD; M6, which is M5 plus a cohort (year of birth) effect; and M7, which is M6 plus a further period effect, which enters the model through a coefficient that is a quadratic function of age. More details on these models can be found here.

In subsequent work we discovered (to our surprise) that M7 performed robustly well across a number of different data sets. We had not expected a model with a quadratic function to perform as well as it did.

However, these models do not tend to perform well over age ranges that include younger ages. So one would not use the CBD family for, say, a model of a DC pension started at a youngish age. Andrew, David and I have long felt the need to remedy that limitation.

Continue reading “CBDX – A Workhorse Mortality Model”

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Single point of failure

Wikipedia: “A single point of failure is a part of a system that, if it fails, will stop the entire system from working”. Right. You try to avoid this in any decent system, building in redundancy at every critical point. The classic example is a chain, where any single link is a single point of failure. You can build in redundancy by, e.g., adding a second chain. So long as each chain on its own can support the weight, nothing bad will happen if one chain breaks (bad luck if both break, though).

Something like that principle of redundancy was meant to be part of the life insurance Part VII regime. You have the PRA which approves the default model of the insurer. The FCA is meant to look at the same thing from the point of view of the policyholder (the PRA being a prudential regulator, as I pointed out to the court here, see page 5). The Independent Expert provides further assurance with his/her ‘independent’ report.  Finally, the court itself forms a judgment.

However, that principle seems to have been disastrously weakened in the light of the recent judgment by Justice Zacaroli.

Continue reading “Single point of failure”

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In the matter of matching adjustment

Here is an edited version of the transcript from the hearings on 22 and 25 November 2019, relating to the oral submissions by Martin Moore QC, Tom Weitzman, and myself (‘Dr Buckner’).

I have lightly edited my submission only, to remove repetitions and to make minor corrections. I also added the diagrams which the judge and I would have seen while I was referring to them, but not the rest of the Court (although the applicants had copies for their own reference).

I will comment next week.