Posts

Posted on

PRA maths doesn’t add up

Well we said we would be back. Here is the newly released PRA Policy Statement 19/19, and there is some really weird stuff in there. We start with section A, ‘Reviewing and updating the minimum deferment rate,’ and in particular the part which starts at paragraph 2.6, ‘The PRA considers that the approach of linking changes in the minimum deferment rate to changes in real interest rates is economically sound and appropriate for the intended purpose of a diagnostic test.’

They write:

The PRA considered net rental yields in paragraph 2.59 of PS31/18 and agrees that net rental yields could be a reasonable starting point for determining deferment rates over short terms, as they are a measure of the income foregone by an ERM investor as compared to a direct owner of a property. However, a net rental yield is a short-term measure of deferment.

Which is very strange indeed.

Continue reading “PRA maths doesn’t add up”

Posted on

The spirit is willing, and also the letter

Kevin’s piece earlier this week raised the issue of the Institute of Actuaries ‘putting things right’.

In that spirit, we publish our letter to the Institute sent in August, concerning the governance over the voodoo ERM valuation project that it sponsored with the ABI.

The whole point is that the IFoA/ARC must demonstrate its quality assurance, as opposed to asking that interested outside parties take their word for it when they tell us that the assurance process was done correctly but won’t give out any concrete details. After all, if the quality assurance is good, then there is no good reason to withhold the evidence that leads to that conclusion. Otherwise, the IFoA/ARC leave themselves open to the criticism that there is no actual assurance, no transparency and no accountability.

We are not holding our breath.

Posted on

Market Consistent or Real World?

Although we have often criticised it, the Discounted Projection aka ‘Real World’ Approach used by the equity release industry to value their NNEGs and ERMs has two significant things going for it. The first is fantastic marketing. Who could be against a ‘real world’ approach, especially when the alternative is a Market Consistent or ‘Risk Neutral’ approach? Everyone knows that most people are not risk-neutral. ‘Real world’ or ‘risk neutral? It’s a no-brainer.

The other thing that the DP/’Real World’ approach has going for it is that it produces much lower valuations. Hosty et alia (2007) hit the nail right on the head:

7.3.3 Market consistent or real world?

On our proxy market consistent approach we have derived a cost for the NNEG which would render the product non-profitable, whilst real world modelling has produced a significantly lower cost.

The importance of commercial considerations as a reason for preferring this approach was confirmed by Tom Kenny at the 28 February 2019 Staple Inn launch event for the Tunaru report. Mr Kenny was the chair of the event, and is Director of Actuarial & Underwriting, Retirement Lending at Just Group plc in his day job: “clearly if we move down a purely market consistent route … it’s going to be extremely expensive,” he said.

 Darn right it’s going to be expensive.

Continue reading “Market Consistent or Real World?”

Posted on

The Discounted Projection Approach

The standard approach used by UK ERM actuaries to value NNEGs and ERMs is the Discounted Projection (DP) approach, which its adherents like to call the ‘real world’ approach.

This approach is based on the use of a projection of future house price growth to value the NNEG. In particular, it replaces the forward house price as the underlying in the Market Consistent (i.e., correct) approach with some expected future house price ‘forecast’ that a cynic (not us!) might say was indistinguishable from a convenient guess.

Continue reading “The Discounted Projection Approach”

Posted on

Just Group interim

The Just Group 2019 interim statement is out today. It has already received coverage in mainstream financial media, and we don’t normally repeat what is already said.

What caught our eye, however, was the mention on p.50 of the put option on property index, the NNEG hedge we discussed earlier. We speculated whether the firm has put the hedge in place, or whether they are still waiting to establish ‘appropriate regulatory treatment’ with PRA. Turns out (and we should have spotted this from the 2018 financial statement – 2018 p.72, section 25 ) that it was already in place by 2018, so it is merely the regulatory treatment they are waiting for .

But here’s the interesting thing.

Continue reading “Just Group interim”