Month: September 2022

Bank of England in £65bn scramble to avert financial crisis

Mary Pat Campbell

Link: https://www.theguardian.com/business/2022/sep/28/bank-of-england-in-65bn-scramble-to-avert-financial-crisis

Graphic:

Excerpt:

The Bank of England has been forced into emergency action to halt a run on Britain’s pension funds after the impact of Kwasi Kwarteng’s ill-received mini budget prompted fears of a 2008-style financial crisis.

Threadneedle Street said the fallout from a dramatic rise in government borrowing costs since the chancellor’s statement had left it with no choice but to intervene to protect the UK’s financial system.

City sources said the surprise move, less than a week after Kwarteng’s unfunded tax giveaways, was needed to halt a “doom loop” in the bond markets that risked draining pension funds of cash and leaving them at risk of insolvency.

….

Interest rates on government bonds, or gilts, have risen sharply since the chancellor’s £45bn package of tax cuts – making it punitively expensive for thousands of pensions funds to fund their hedging activities.

Officials in the Financial Services Group of the Treasury were at an away day – said to have been held at the Oval cricket ground in London – on Wednesday, but returned to their desks that afternoon. A source said they were not working on the response to the Bank of England’s announcement.

The Bank’s action helped provide Kwarteng with some respite from the financial markets after three days of turmoil that has seen sterling hit its lowest ever level against the dollar, strong criticism of the mini-budget from the International Monetary Fund, about 1,000 mortgage products pulled and interest rates on UK government bonds hit their highest level since 2008. Bond yields fell while the pound recovered in the currency markets after Threadneedle Street’s announcement.

Author(s): Larry Elliott, Pippa Crerar and Richard Partington

Publication Date: 28 Sep 2022

Publication Site: Guardian

Pension funds crisis forces £65bn bailout by Bank

Mary Pat Campbell

Link: https://www.telegraph.co.uk/business/2022/09/28/pension-funds-crisis-forces-65bn-bailout-bank/

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Excerpt:

Britain’s pension funds were on Wednesday at the centre of the financial crisis sparked by the mini-budget forcing the Bank of England to launch a £65 billion emergency bailout. 

The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts, as plunging markets for UK debt sent borrowing costs spiralling and forced pension funds to dump their assets. Economists compared the crisis to the run of withdrawals that led to the collapse of Northern Rock in the financial crisis. 

However, the move by Governor Andrew Bailey helped restore some calm to markets, and pensions experts said retirement pots were not under threat. Nevertheless, worries that Mr Kwarteng’s radical mini-Budget will trigger further shocks for investors in gilts wiped billions of pounds off the stock market value of Britain’s biggest pension funds.

….

The Bank hopes to halt a domino effect in the City by temporarily suspending plans to offload £80bn of gilts held on its balance sheet. Instead for 13 days it will revert to buying them at a rate of £5bn per day using newly created money in a process known as quantitative easing.

The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more than 1 percentage point, a significant downward move. Meanwhile the pound fell initially after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.

Author(s):

Tim Wallace
and
Ben Riley-Smith

Publication Date: 28 Sept 2022

Publication Site: UK Telegraph

Montana Health Officials Aim to Boost Oversight of Nonprofit Hospitals’ Giving

Mary Pat Campbell

Link: https://khn.org/news/article/montana-health-oversight-nonprofit-hospitals-giving-charity/

Excerpt:

Montana health officials are proposing to oversee and set standards for the charitable contributions that nonprofit hospitals make in their communities each year to justify their access to millions of dollars in tax exemptions.

The proposal is part of a package of legislation that the state Department of Public Health and Human Services will ask lawmakers to approve when they convene in January. It comes two years after a state audit called on the department to play more of a watchdog role and nine months after a KHN investigation found some of Montana’s wealthiest hospitals lag behind state and national averages in community giving.

….

The IRS requires nonprofit hospitals to tally what they spend to “promote health” to benefit “the community as a whole.” How hospitals count such contributions to justify their tax exemptions is opaque and varies widely. National researchers who study community benefits have called for tightening standards for what counts toward the requirement.

Author(s): Katheryn Houghton

Publication Date: 28 Sept 2022

Publication Site: Kaiser Health News

Macron buckles on raising France’s retirement age in budget bill

Mary Pat Campbell

Link: https://www.ft.com/content/cf3eff53-2dfb-4530-a756-1e1361990d7d

Excerpt:

French president Emmanuel Macron has decided against pushing through a rise in the retirement age to 65 in a budget bill, backing off an idea that had angered labour unions and divided his centrist alliance.

The move signals how Macron has been forced to contend with a stronger opposition in his second term after his party lost its majority in parliament in June.

….

Prime Minister Élisabeth Borne told Agence France-Presse on Thursday that the government would start negotiations with labour unions, employers and other political parties with a view to passing a law over the coming months.

The government still wants to raise the retirement age from 62 at present to 65, one of Macron’s campaign promises that he sees as key to fixing France’s public finances.

Author(s): Leila Abboud

Publication Date: 29 Sept 2022

Publication Site: Financial Times

What to consider when using text in data visualizations

Mary Pat Campbell

Link: https://blog.datawrapper.de/text-in-data-visualizations/

Graphic:

Excerpt:

Text is maybe the most underrated element in any data visualization. There’s a lot of text in any chart or map — titles, descriptions, notes, sources, bylines, logos, annotations, labels, color keys, tooltips, axis labels — but often, it’s an afterthought in the design process. This article explains how to use text to make your visualizations easier to read and nicer to look at.

Show information where readers need it
01 Label directly
02 Repeat the units your data is measured in
03 Remind people what they’re looking at in tooltips
04 Move the axis ticks where they’re needed
05 Emphasize and explain with annotations

Design for readability
06 Use a font that’s easy to read
07 Lead the eye with font sizes, styles, and colors
08 Limit the number of font sizes in your visualization
09 Don’t center-align your text
10 Don’t make your readers turn their heads
11 Use a text outline

Phrase for readability
12 Use straightforward phrasings
13 Be conversational first and precise later
14 Choose a suitable number format

Author(s): Lisa Charlotte Muth

Publication Date: 28 Sept 2022

Publication Site: Datawrapper

A Fresh Look at Accounting for Reinsurance of Universal Life

Mary Pat Campbell

Link: https://www.soa.org/sections/financial-reporting/financial-reporting-newsletter/2022/september/fr-2022-09-malerich/

Excerpt:

Under LDTI, DAC amortization will no longer obscure the relationship between direct and ceded accounting. It is now possible to align ceded accounting with direct, without any noise from DAC amortization. With poor alignment, distortions within the results reported to management and financial statement users will be different, sometimes greater than before. Whether the goal is to improve reporting or to avoid making it worse, a fresh look can help.

Most of the approaches that have been used to account for UL reinsurance can still be used. One exception is the implicit approach where, in lieu of explicit accounting for reinsurance, the gross profits used to amortize DAC were adjusted to be net of reinsurance. With the elimination of gross profits as an amortization base, this approach no longer has meaning.

For surviving approaches, it is now easier to evaluate their effectiveness in presenting the economic protection provided by reinsurance.

In this article, I begin an evaluation by examining the fundamentals of accounting for the insurance element of universal life. After that, I consider the economic protection provided by reinsurance and look for an ideal—a way to effectively account for that protection.

In a second article to be published later this year, I’ll evaluate several reinsurance approaches in terms of noise from missing the ideal, then end with some thoughts on what might be done to eliminate noise.

The focus of both articles is on the insurance element. Accounting for the deposit element, embedded derivatives, and market risk benefits is beyond the scope of these articles. Also outside of scope is the requirement, in Accounting Standards Codification (ASC) Topic 326, to recognize a current estimate of credit losses from the failure of a reinsurer to reimburse reinsured benefits.

Author(s): Steve Malerich

Publication Date: Sept 2022

Publication Site: Financial Reporting newsletter, SOA

5 Worst States for Working-Age Deaths in August

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/09/27/5-worst-states-for-working-age-deaths-in-august/

Graphic:

Excerpt:

The number of deaths of working-age Americans was lower in August than in August 2021, but it was still much higher than it was in August 2019, before the COVID-19 pandemic began.

Death figures for the period from July 31 through Aug. 27 are just starting to firm up. But very early figures show that at least 53,655 U.S. residents ages 25 through 64 died from COVID-19 and all other causes during that four-week period.

The number of deaths was down sharply from 77,847 in August 2021, but it was still up 6.1% from the total of 50,590 for August 2019.

Author(s): Allison Bell

Publication Date: 27 Sept 2022

Publication Site: Think Advisor

Transition to a High Interest Rate Environment: Preparing for Uncertainty

Mary Pat Campbell

Link: https://www.soa.org/globalassets/assets/Files/Research/Projects/research-2015-rising-interest-rate.pdf

Graphic:

Excerpt:

Interest rates cycle over long periods of time. The journey tends to be unpredictable, full of
unexpected twists and turns. This project focuses on the impact of interest rate volatility on life
insurance products. As usual, it brought up more questions than it answered. It points out the
importance of stress testing for a specific block of business and the risk of relying on industry
rules of thumb. Understanding the nuances of models could make the difference between safe
navigation of a stressed environment and a default. Proactive and resilient practices should
increase the odds of success.


Hyman Minsky had it right—stability leads to instability. We live in an era where monetary
policies of central banks steer free markets in an effort to soften the business cycle. Rates have
been low for over 20 years in Japan, reshaping the global economy.

The primary goal of this paper is to explore rising interest rates, but that is not possible without
considering that some rates could stabilize at low levels or even decrease. Following this path,
the paper will look at implications of interest rate changes for the life insurance industry, current
stress testing practices, and how a risk manager can proactively prepare for an uncertain future.
A paper published in 2014 focused on why rates could stay low, and some aspects of this paper
are similar (e.g., description of insurance products). This paper also uses a sample model office
to help practitioners look at their own exposures. It includes typical interest-sensitive insurance
products and how they might perform across various scenarios, as well as a survey to establish
current practices for how insurers are testing interest rate risk currently.

Author(s): Max Rudolph, Randy Jorgensen, Karen Rudolph

Publication Date: July 2015

Publication Site: SOA Research Institute

Letter to FIO and NAIC from Senate Banking Committee

Mary Pat Campbell

Link: https://www.banking.senate.gov/imo/media/doc/brown_letter_on_insurance_031622.pdf

Excerpt:

  1. What risks do the more aggressive investment strategies pursued by private equity-controlled insurers present to policyholders?
  2. What risks do lending and other shadow-bank activities pursued by companies that also
    own or control significant amounts of life insurance-related assets pose to policyholders?
  3. Are there risks to the broader economy related to investment strategies, lending, and
    other shadow-bank activities pursued by these companies?
  4. In cases of pension risk transfer arrangements, what is the impact on protections for
    pension plan beneficiaries if plans are terminated and replaced with lump-sum payouts or
    annuity contracts? Specifically, how are protections related to ERISA and PBGC
    insurance affected in these cases?
  5. Given that many private equity firms and asset managers are not public companies, what
    risks to transparency arise from the transfer of insurance obligations to these firms? Will
    retirees and the public have visibility into the investment strategies of the firms they are
    relying on for their retirements?
  6. Are state regulatory regimes capable of assessing and managing the risks related to the
    more complex structures and investment strategies of private equity-controlled insurance
    companies or obligations? If not, how can FIO work with state regulators to aid in the
    assessment and management of these risks?

Author(s): Sen. Sherrod Brown

Publication Date: 16 March 2022

Publication Site: U.S. Senate Banking Committee