I was ‘just’ about to pen today’s geek-friendly article on fat tails when the postman arrived with the latest Private Eye. Yet another piece on our favourite firm.
Brownian dilapidation
(Geeks only). Thanks to T Pocock for pointing out this amazing page of data on Aviva ERM securitisations, some of them dating back to 2001. Lots of stuff to dig out or back out, including data on NNEG claims. The chart above shows cumulative NNEG claims on ERF4, which was set up in 2004.
No surprise at first. Most ERMs start with a loan to value of lower than 50%, and property prices have gone up in most areas of the UK since 2004, so it takes a few years for the compound loan amount to reach current property value and reach NNEG territory.
But there is a real surprise in store.
The independent faculty
Recently published here, the first mention as far as I know of the amount paid to Radu Tunaru’s Centre for Quantitative Finance, namely £56,000 for ‘key research into determining appropriate methods for determining ERM cashflows and their value’.
As Kevin pointed out, we have already done that, as have the PRA.
Of course it is always a good thing to have more than one pair of eyes on the problem, and worth every penny, no doubt, but it does raise the question of independence. I have repeatedly been told by those connected with the Institute that the working party is just another working party, that any paper it produces is the working party’s paper, nothing to do with the Institute etc.
But that clearly isn’t true. Money has changed hands, and it appears – if the announcement by Kent University is correct – that it is not the working party’s money.
Who at the Institute authorised the grant? We should be told.
Libor flat
I mentioned David Land’s bemused question to the Equity Release working party yesterday. If the working party hasn’t yet fixed the right method of calculating the forward, isn’t that a pretty major source of possible error?
No coherent answer emerged, but Land raised an interesting point. If we can’t lower the value of the no negative equity guarantee by putting in an optimistic growth forecast, perhaps we can tweak the funding rate instead? He drops a hint when he suggests that there’s a large range of possible funding rates that you could think about, and that ‘The PRA thinks that you could possibly fund a house at Libor flat, which seems remarkably difficult’.
Nice try, but there is a problem with that idea too.
Sold out
The presentation of the totally independent review committee on ERM valuation is sold out. The final research report (by Kent University) will be uploaded about a week beforehand (i.e. around Thursday 21 Febuary), so watch that space.
The launch event will bring together a multidisciplinary group of professionals to discuss Professor Tunaru’s findings. Due to the high profile nature of this research topic the launch event is expected to attract a high number of attendees and spark a topical debate, so early registration is advised.
By coincidence I noticed the 11 December presentation by the same committee is available on YouTube.
Revolving doors
De risking
Just Group’s business update for 2018 is now published. Shares climbed on the back of continued growth in Defined Benefit De-risking (“DB”) sales.
I don’t know what genius thought up the term ‘de risking’.
Doomed to failure
I have got round to preparing my presentation for Friday 8th. The sacred text is from the co-founder of Wikipedia.
Wales: “The internet interprets any type of centralized planning as a malfunction and routes around it. The command-and-control model is doomed to failure here by the very nature of the network. This is inevitable”.
My question is whether ‘the secretive nature of regulation threatens, rather than supports, the stability of the financial system’.
You see the tension. If the command-and-control model really is doomed to failure, as though by a process of historical materialism, then we can sit around and watch while it eats itself.
But regulation is still with us, more than 20 years after Wales said that (in 1997). So is the command-and-control model really doomed to failure? Doom: from OE dōm ‘statute, judgement’, from a Germanic base meaning ‘to put in place’, figuratively speaking fate or destiny etc.
Find out. There will be quotations from Marx and Sartre, no less (but don’t let that put you off).
The less you have, the more you need
As I discussed here, the sensitivity of an option to one parameter can change as another parameter changes. A rough and ready check using CMI longevity data (nothing for CBD yet) bears out my intuition that as property values change, the longevity sensitivity of a no negative equity guarantee (NNEG) on a loan written on that property will also change.
Equity release and annuities
Those who tuned in to my presentation here may have noticed a teensy hesitation at slide 12 where I discussed the sixth stress test on an example ERM. Continue reading “Equity release and annuities”