Keeping an eye on things
What with all the recent excitement about Matching Adjustment, Age Co and the PRA’s unfailable insurance stress tests, I clean ran out of time to report on the Adam Smith Institute’s new report on bank capital (report, press release) released last week. This new report includes chapters by John Cochrane, ASI research director Matthew Lesh and yours truly.
Continue reading “UK Banks Still Need Much Higher Minimum Capital Standards”
By DB and KD
Our friends Tony Jeffery and Andrew Smith have some wise advice that the PRA should consider in their new insurance stress tests. Our advice was not to bother, but assuming the PRA chooses for once not to follow our advice, they might look at the following passage from Andrew and Tony’s recent Society of Actuaries in Ireland (SoAI) report on NNEG valuation:
In 1995 a SoAI paper (Demographic Margins for Prudence – Jeffery & Quinn, 1995) suggested that a valid approach to setting margins was to consider how it would look to a public with the benefit of hindsight if it has gone wrong, noting that with the clarity that hindsight brings can be harsh.
In the Telegraph today. Continues the story that began in Private Eye about Age UK inviting us to take out equity release with the help of its ‘Age Co UK Equity Release Advice Service’, provided by Hub Financial Solutions Ltd, owned by Just Group.
You can read the article for yourself, the crux of it is that, according to the article, Hub Financial routinely recommends equity release deals from its own parent company (i.e. Just).
While it makes clear that it offers only a selection of the plans sold by these firms, Telegraph Money can disclose that the way its advice process is structured means that in most cases a customer will be offered a deal by just one panel member – Just.
Precisely why the customer in most cases is offered the Just product is not disclosed. Hub claim that “The panel at any point reflects the attractiveness and competitiveness of each loan’s design, features, rate and service levels.” On the other hand, the Telegraph hints that “In 2016 Age UK was criticised by the Charity Commission for recommending an energy tariff, through a business partnership with E.On, which was not the cheapest available”.
Kevin and I are quoted.
By DB and KD
Late in April, the PRA announced that it was planning a new life insurance stress test for 2019. At first sight, the test looks plausible: to stress AAA bond holdings by 150bp, going up to 400bp for unrated. However, the spread is divided into the Matching Adjustment, which is the spread deemed to represent illiquidity and which is therefore considered risk free, and the ‘fundamental spread’ (FS), which represents the true credit risk, as it were.
If you have come to this blog looking for upbeat fluffy stories then you have come to the wrong place. If the market is up at record highs, then we say the bubble will burst, and it’s doom. If we are in the vasty deeps of a massive bear market and, well, it’s gloom all round.
We have been following the Aussie and Canada housing market for a while
By DB and KD
Since we published our objections to the Matching Adjustment, and particularly since the FT article about the magic money tree, Eumaeus has been faced with a barrage of criticism. Are we being funded by right-wing think tanks such as the Adam Smith Institute? (No we aren’t) Shouldn’t the Guardian investigate Kevin’s links to pro-Brexit groups? (No point. ‘Unearthed’ already did and they didn’t, er, unearth anything that was not already in the public domain. Took them a year to find out less than they could have found had they asked politely.) Are we trying to bring about the zombie apocalypse of the insurance industry by mass insolvency? Give us a break. We are however trying to expose bad practice, and there seems to be a bit of that around.
There are three objections to consider.
Jonathan Ford’s article last week (Investors should beware the insurance magic money tree) predictably attracted a lot of comment. A few observers, noting Martin Taylor’s famous comment that the “actuarial convention” by which the composition of an insurer’s assets determines the size of its liabilities was “one of the weirdest emanations of the human mind”, suggested that poor Martin was out of kilter with the rest of the Bank, or the PRA.
Far from it.
FT letters today.
It is unfortunate that John Taylor (Letters, April 18) elevates “one of the weirdest emanations of the human mind”, the matching adjustment, to the status of a “fundamental actuarial principle”.
Matching adjustment allows life companies to buttress their balance sheets by creating tens of billions in fake capital, and makes companies appear to be in much better financial shape than they are. There are companies whose capital would be wiped out but for matching adjustment.
It is also naïve to think that matching adjustment is not open to abuse merely because it is consistent with rules that the companies lobbied for. For life companies, matching adjustment provides the ultimate way to game the capital rules — in some cases, with no capital. The Prudential Regulation Authority should put a stop to it.
Dean Buckner
Kevin Dowd
The Eumaeus Project and Durham University, UK
John Taylor (President elect, the Institute) writes to the FT today
I commented on Monday’s FT article as follows.
Continue reading “Crises what crises”