market risk – Twenty Third Floor

Actuarial and Risk, capital, financial risk, managing uncertainty, market risk, measurement, statistics

The Perils of Value-at-Risk and Portfolio Insurance

9 December 2024

David Kirk

It is essential to consider critical viewpoints that challenge conventional wisdom—especially when it comes to Value-at-Risk (VaR). In a thought-provoking dialogue, Nassim Taleb critiques VaR and highlights the dangers of portfolio insurance and dynamic hedging strategies. Here are key arguments from his 1997 forceful response to Philippe Jorion’s support for VaR. Misplaced Precision and Concrete…
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Actuarial and Risk, banking, capital, managing uncertainty, market risk, measurement

Value at Risk – not always a monster, but normally it is.

6 November 2024

David Kirk

Nassim Taleb is not a fan of Value At Risk (VaR) “You’re worse off relying on misleading information than on not having any information at all. If you give a pilot an altimeter that is sometimes defective he will crash the plane. Give him nothing and he will look out the window. Technology is only…
Read more: Value at Risk – not always a monster, but normally it is.
Actuarial and Risk, capital, insurance, investments, life insurance, market risk, measurement, Solvency Assessment and Management, Solvency II

The Equity Symmetric Adjustment: Dispelling Myths and Understanding Market Dynamics

25 September 2024

David Kirk

Introduction In the world of insurance regulation, few mechanisms are as misunderstood as the equity symmetric adjustment (ESA), also known as the equity dampener. This feature, present in both the Solvency II framework in Europe and the Solvency Assessment and Management (SAM) regime in South Africa, is often incorrectly associated with the concept of mean…
Read more: The Equity Symmetric Adjustment: Dispelling Myths and Understanding Market Dynamics
Actuarial and Risk, capital, credit risk, financial risk, insurance, life insurance, market risk, measurement, regulatory risk, Solvency Assessment and Management, Solvency II

Reinsurer credit rating and CQS – sovereign caps and misapplication of regulations

9 September 2024

David Kirk

Does the “sovereign cap” apply to credit ratings for insurer solvency reporting? This came up in a discussion about treatment of reinsurance and choice of Credit Quality Step (CQS) under South African regulations. Usually a local currency, international scale credit rating from a credit rating agency is the most direct way to establish a reliable…
Read more: Reinsurer credit rating and CQS – sovereign caps and misapplication of regulations
Actuarial and Risk, costofcapital, Embedded Value, Equity Risk Premium, financial reporting, IFRS17, market risk, measurement, Solvency Assessment and Management, Solvency II, valuation

Frictional cost and tax

15 May 2024

David Kirk

There are many reasons to doubt the perfect applicability of the 6% cost of capital rate used in South Africa for the solvency Risk Margin calculation. Not least of which is the decrease to the rate in Europe and in the UK. However, if we borrow ideas from Embedded Value (TEV/EEV or MCEV) and look…
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Actuarial and Risk, alternative investments, capital, capital structure, credit risk, economics, Emerging Markets, insight, market risk, measurement

Does Business Rescue count as default?

5 December 2019

David Kirk

What does Business Rescue mean for credit risk, ratings and cross-default? Business Rescue precludes creditors from applying for liquidation of the business. This is the removal of an existing right of lenders: “a temporary moratorium on the rights of claimants against the company or in respect of property in its possession” From what I gather…
Read more: Does Business Rescue count as default?
Actuarial and Risk, alternative investments, capital, credit risk, financial risk, hedging, insurance, investments, life insurance, liquidity risk, market risk, Solvency Assessment and Management, Solvency II, valuation

Capital implications of infrastructure assets for insurers under SAM

10 September 2019

David Kirk

Infrastructure as an asset class is hardly a new idea. Retirement funds are attracted to the promise of higher turns, long-dated cash flows, and consistency with increasingly important ESG factors. Insurers, unlikely retirement funds, have to hold risk-based capital against the risks inherent in their investments. This makes it more difficult to underestimate the risks…
Read more: Capital implications of infrastructure assets for insurers under SAM
Actuarial and Risk, creating value, Equity Risk Premium, financial risk, managing uncertainty, market risk, valuation

Unbelievable Risk Discounts Rates

23 May 2019

David Kirk

Setting discount rates is a crucial and subjective exercise. This is true for life insurance embedded values too. Many researchers are comfortable with a range for Equity Risk Premiums of between 3% and 5%. Many corporate finance practitioners use a range from 5% to 8% or even higher. My nearly eight-year-old blog post on mis-estimating…
Read more: Unbelievable Risk Discounts Rates

Twenty Third Floor

Figuring out the future and the now

Category: market risk

The Perils of Value-at-Risk and Portfolio Insurance

Value at Risk – not always a monster, but normally it is.

The Equity Symmetric Adjustment: Dispelling Myths and Understanding Market Dynamics

Reinsurer credit rating and CQS – sovereign caps and misapplication of regulations

Frictional cost and tax

Does Business Rescue count as default?

Capital implications of infrastructure assets for insurers under SAM

Unbelievable Risk Discounts Rates

About David Kirk

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