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Barrie & Hibbert Limited wrote a new blog post titled There is nothing normal about LTGA volatility
Sandy Sharpe, David Roseburgh, Paul MacCarney Following on from our first blog which discussed the yield curve methodologies applied in the LTGA, here we highlight a few of our thoughts on the volatility data that been issued by EIOPA which can be used by participants for interest rate calibrations. The LTG assessment provides participants with example interest rate volatility surfaces which can be used along with the provided yield curves to recalibrate the stochastic nominal interest rate models. These  are then used to generate interest rates scenarios for the valuation of...
2413 days ago
Barrie & Hibbert Limited wrote a new blog post titled Long-Term Guarantee Impact Assessment
On 28 January 2012 EIOPA published the discount curves it wants companies to use for the Long-Term Guarantee Assessment (LTGA) exercise.  The LTGA is expected to run for 2 months, starting from 28 January 2012, with EIOPA supplying the European Commission with its findings by 14 Jun and the Commission committing to publish a report by 12 July 2012. The LTGA is intended to assess the impact of the proposed Long-Term Guarantee measures and provide quantitative input to help clear the current Omnibus II impasse. The EIOPA discount curves are noteworthy for a couple of reasons: The...
2426 days ago
Barrie & Hibbert Limited wrote a new blog post titled Solvency II on pensions – a necessary evil?
In February 2012, the European Insurance and Occupational Pensions Authority (EIOPA) published its final response to the European Commission’s Call for Advice on the review of the IORP Directive 2003//41/EC, now commonly known as ‘Solvency II on pensions’. Much of the subsequent debate revolves around a possible increase in pensions funding and compliance costs - for defined benefit pension schemes in particular. In the UK, various anti-SII lobbying groups argue that the UK already has strong governance structure in place such as the sponsor’s covenant to protect its...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled Alternative views on extrapolated yield curves: a fundamental question remains unanswered
The valuation of ultra long-term cash flows is surely one of the most basic challenges faced by accountants and actuaries. Yet the resulting debate grinds on about how to extrapolate observable yield curves. At its heart is an absolutely fundamental choice. On the one hand, extrapolated prices could represent where we might truly expect to trade a promised cash flow. These prices will be uncomfortably volatile and will imply relatively high levels of solvency capital for insurance firms. Alternatively, extrapolated prices can be stabilized for the purposes of avoiding this variability....
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled Jumbo jets and fighter planes: exploring the Point-In-Time approach
In previous articles, we have discussed the relative merits of the Point-in-Time (PIT) and the Through-the-Cycle (TTC) views of risk and capital; in a new research report, we analyse these approaches from the perspective of policyholder protection. This entry summarises the main findings, namely that PIT capital regimes can in principle simultaneously provide a higher degree of policyholder protection and a lower long-run average capital requirements than the TTC approach, although there are practical difficulties which must be considered. Figure 1: Comparison of TTC and PIT...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled Solvency II for pensions - an unwelcome intrusion, or an inspiration?
The 2010 EU Green paper on the future of pensions sparked many debates in the industry about the pros and cons of applying Solvency II to pensions.  Following this publication, the European Commission asked EIOPA for advice on an EU-wide legislative framework for IORPs (Institutions for Occupational Retirement Provisions) in April 2011. EIOPA has since published a second consultation on ‘draft responses to Call for Advice’ currently expected to close on 2 January 2012. Many have expressed concern regarding possible implementation of the draft proposals contained in these...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled A signal from the Fed?
In the midst of global financial market turmoil and following the downgrade of its government’s credit rating in the previous week, the US Federal Reserve Bank announced on August 9th that it anticipated that the dismal state of the domestic economy and developed world growth prospects would “warrant exceptionally low levels for the federal funds rate at least through mid 2013”. What does this mean for projection of US interest rates? In particular, is there a case for narrowing the distribution of projected possibilities for US short rates over the next two years in line...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled Barrie & Hibbert in the press: ifaonline, Risk.net, and the Actuary
How to use Barrie & Hibbert's retirement tool ifaonline.co.uk "John Higgins and David Campbell believe the at- retirement space is currently underserved by financial planning tools. Advisers are provided with plenty of options for which tools to use in the accumulation of their pension funds but have little to help decide the most effective approach to managing the transition to retirement and how to optimise their income in retirement." Comment: Practical considerations are compromising Solvency II methodology Risk.net, login required "A number of...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled Yield Curve Extrapolation: Longest reliable point
It is profoundly worrying that the most basic valuation question we might ask of an insurer -- what is the value today of a fixed liability cash flow at some future date?-- is still unanswered less than two years ahead of Solvency II implementation. Policymakers, regulators, firms, actuaries and accountants have belatedly focussed on a number of difficult questions including the choice of risk-free asset, the method for extending valuation beyond traded maturities and the possible impact of market liquidity premia on the way the valuation question is answered. This comment focuses on one...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled The path really matters - Part III: A de-accumulation example
Previous entries have highlighted the sensitivity of savings accumulation to the path or order of a set of investment returns.  We concluded that – for accumulation – savers benefit from avoiding poor returns late in the accumulation period and that these returns will do less damage early in a savings plan because the invested fund is small. The analysis presented below demonstrates that the reverse is true for de-accumulation. In the example we analyse the same set of returns (mean 7% and standard deviation / volatility of 16.5%) over a 30-year horizon where the initial fund...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled A comparison of alternative risk capital definitions
There is no universal definition for risk capital. European early adopters of risk-based capital methods (including Solvency II) have adopted a measure which requires sufficient capital to remain solvent (on a market-consistent basis) with 99.5% confidence at a 1-year horizon. In the US, firms and regulators have leaned towards a quite different measure which depends on the behaviour of the balance sheet over its lifetime ‘run-off’. These alternative definitions are difficult to compare directly. Indeed, the theory behind these measures is not well developed. However, we can say...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled The path really matters – Part II
This is a continuation of Part I Consider (again) savings accumulation over a long horizon – 30 years – where we assume an individual saves €1000 each month. Now, let’s assume that we have a fixed set of returns available for the 30 years. The returns have an (arithmetic) average of 7% pa and a volatility of 16.5% so they are in line with the sort of assumptions that practitioners might make for a financial planning exercise.  Suppose we now experiment with the order in which the returns are delivered but leave the magnitude of returns unchanged. What difference...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled On Active Markets & the Solvency II ‘DLT’ definition
In recent years market prices have taken on far greater prominence in insurance valuation and capital management as a new paradigm has been adopted by insurance regulators and accountants. This central role of market prices is recognised and, as a result, Solvency II regulators and international accountants (IASB/FASB) have drafted rules and guidance with the aim of defining which prices should be used and in what circumstances unreliable prices may be replaced with other valuation measures. However, the current rules and guidance are not well aligned (between SII and IASB/FASB) and there is...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled The path really matters – Part I
Suppose you set out to accumulate savings over a long horizon – 30 years – and set aside €1000 each month. Now take a look at the two return paths shown in the chart below for a unit of investment over such a period. The upper (green) path generates a cumulative return of just over 6% per annum while the lower (red) path delivers a little less than 4%. Which would you prefer? The obvious answer (to many of us at least) turns out to be a poor choice. For the profiles illustrated below, the particular paths shown would produce final accumulated sums of €758,000 for the...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled A Comment on the Solvency II equity dampener: more change to come?
In the Solvency II standard formula for an insurer’s Solvency Capital requirement (SCR), the standard stress adopted for equity risk for the purpose of the 5th Quantitative Impact Study (QIS5) was 39%. This was somewhat less severe than what had previously been proposed by CEIOPS in its level-2 advice where a majority of regulators proposed a standard equity stress of 45%. Under the proposed Solvency II framework this standard assumption is adjusted using a ‘dampener’ in order to avoid procyclicality. The stress test may be modified up or down depending on the where global...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled Barrie & Hibbert in the press
In the past few months, many Barrie & Hibbert experts have published articles in key trade publications.  Here is a summary of our writings around the industry: Insurance ERM Calculating the Solvency Capital Requirement Senior consultant Adam Koursaris authors a three-part series for Insurance ERM on the topic of calculating capital for solvency and regulatory purposes.  Related resarch: Solvency II Internal Models, Solvency II The Actuary Don't be Afraid... it's only Solvency II for Pensions In this article, co-founder Andrew Barrie considers what a...
2635 days ago
Barrie & Hibbert Limited wrote a new blog post titled Confessions of an investment banker
I was an investment banker. There we have it. Outed. Confessed. General applause please – it’s all part of my rehabilitation. I will always be an ex-investment banker. I may choose to omit it from my CV, but it will be there: part of me, hidden, shameful. Of course, I didn’t think of myself as one. I’ve never ever called myself one. Nobody who really knows me would recognise the label. My wife never knew....“Oh Andrew, he does sales or something”. Now she understands. Conversations with new acquaintances are gently steered away from Andrew’s...
2635 days ago