Optimising matching adjustment portfolios
Excellent comprehensive article from Frederico Mollet today in Risk.net https://bit.ly/2bVEoU5 highlighting the differences between the structures developed by insurers for matching adjustment compliance.
It covers some of the pros and cons of the different structuring options. You can see my personal views that one can extract more value through a more complex approach but care is needed over managing the operational burden that this creates.
It also highlights some of the innovative structures which are likely to come to market to fulfil insurers' desire to create fixed notes whilst continuing to invest in assets with a yield high enough to sustain annuity pricing and optimise capital.
In a way, it's great to see the innovation that has gone into the creation of such structures to preserve or maximise capital efficiency. In another way, it is a shame that such lengths are required to gain treatment which was accepted under Solvency I.
Look forward to comments that this article will undoubtedly stimulate!
Gareth.
Gareth please could you forward me this?
Co-founder and Chief Risk Officer & Chief Actuary at Triangle Life
8 年Deterred by Basel’s punitive capital charges, banks are keeping a safe distance from long dated assets such as equity release mortgages. Luckily for current and prospective pensioners, insurers have been creative in engineering these complex structures to overcome the regulatory challenges introduced by Solvency II, which has allowed them to continue to offer this product. Such solutions are critical for the market as current and prospective pensioners can unlock the savings currently trapped in the value of their homes, thereby providing much needed liquidity for pensioners who are asset rich but cash poor. As insurers continue to develop their expertise in these complex structures, they will be able to capitalize on other high yielding illiquid assets to reduce the strain brought on from the seemingly everlasting low interest rate environment.
Partner at Becquerel Ventures; Director at Northwood Actuarial
8 年Whether right or wrong, I wish everyone would stop playing the "but it was ok under S1" card as if S1 is the benchmark for all time.
Interim Head of Origination and Execution at M&G, Consultant, NED, IFoA Council
8 年So much effort that could be used productively - to comply with arbitrary rules, arbitrarily applied. But it has to be done, so we do it.