Richard Murphy says:
September 16 2017 at 6:47 pm
I said anything is possible

And interest rates do not make insurance companies insolvent

Cash flows do, caused by failed contributions in most cases

If you don’t know basics your time here is over

Right now

So now he’s saying that the problem insurance companies might have is a reduction in cash flows – I assume by contributions he means income from investments. He can’t possibly mean loss of premiums, that would just be too stupid even for him (for the mouth breathers, if premiums stop then that means you’re no longer insuring losses, this cannot be a problem).

So, the problem with insurance companies holding gilts is that government might stop paying the coupon?

Well, OK, that would be a problem, yes, but if the British Government is no longer paying the coupon on its debt – and, recall, these are the people who can never run out of money – then we do really all have something of a problem.

31 thoughts on “Rilly?”

  1. caused by failed contributions

    I took this to be a throw back to an era which is still alive in the cankerous tuberous mind when contributions to life policies were collected in cash every week.

  2. Where to start!

    Of course movements in interest rates can put an insurance company into an insolvent position, as can a variety of other shocks, including lapses, which insurers have to hold capital against. The importance of said shocks will vary depending upon the guarantees offered and how well they are hedged (if indeed they are hedgable).

    There are two types of insolvency – technical insolvency when an insurer cannot cover its capital requirements and actual insolvency when it is unable to meet liabilities as they fall due. no doubt those pontificating understand the difference (or not as the case may be)…

  3. In Snippa’s world “anything is possible” but most things are unlikely. Anything in Snippa’s world is unlike to happen unless Ridley Scott is on hand

  4. “He can’t possibly mean loss of premiums”: oh yes he can. He could mean Princess Margaret’s cigarette holder. He said anything is possible.

  5. Richard Murphy says:
    September 17 2017 at 1:14 pm
    Worstall’s weakness is a total lack of economic wisdom mixed with a surfeit of neoliberal knowledge.

    What’s your weakness spud apart from overwhelming arrogance combined with overwhelming ignorance ?

  6. I still wish to know Murphy’s total net income compared to yours, my host and commenters.

    The man may be more clever than you think.

    By the way, what makes you think he is a “lecturer” or an “accountant” or anything technical? Could he be an “entertainer”? I thinks so.

  7. worth noting that a significant cause of UK insurers going into insolvency over the last twenty odd years has been US asbestos claims – no failure on contributions, just massively greater liabilities than they had allowed for. Underpricing of misunderstood risks is the root cause, which the Spud misses completely.

  8. This could be a seminal moment.

    Most of his cretinous, stupid and wrong utterances have been useful to some fantasists, but this is naked, ignorant stupidity, allied to a refusal to admit an error.

    If we keep referring to this, we may be able to sink him without trace.

  9. “for the mouth breathers,….”

    Hey, I thought I was doing well to keep up!

    I’m only a professor (of practice)! Give me a break! We can’t all be clever

  10. Unbelievable lack of basic knowledge shudder to think that this guy advises TUC, PCS and other trade unions even had a column in Forbes. Murphy claims to know a lot about lots of things but then speaks and shows that he knows nothing about most things.

  11. I’m definitely in favour of the Ecksian (I think) suggestion that the comments that are subsequently deleted be preserved. Those on the original blog post by one Shyam Shah really do expose what a cretin he is. Oddly Murphy does have a point that a number of assets are very difficult to value and in a crash might be near worthless, but I would not put Uk Gilts in that category. His combination of self- regard and ignorance is truly remarkable….

  12. “So now he’s saying that the problem insurance companies might have is a reduction in cash flows – I assume by contributions he means income from investments. He can’t possibly mean loss of premiums, that would just be too stupid even for him ”

    Surely, he simply means outflows (ie, getting the risk calculation wrong)?. It’s why actuaries are so damned well paid..;)

  13. Apols – read other comments (Flatcap) first.

    And, on reflection, there is no way Muff actually thought about it that way in any case…

  14. Just seen this. One could say that I have more than a passing professional interest in the causes of insurance company failure.

    Murphy knows little. Cash flow failure, or liquidity failure does affect insurers but historically only in in a rare set of circumstances. It can happen. The “PRA approach to insurance supervision” even mentions this but not in the context that Murphy means. They usually have gone because of lapses of life insurance business. GI Insurers having to pay liabilities so fast they can’t generate liquidity is technically possible but is far below so many other issues in the list as mentioned about the regulatory solvency and actual solvency.

    Van_patten talks about hard to value assets and there is also the issue of being hard to assess the credit worthiness as well. The PRA have put out material on exactly this.

    Maybe they should ask him to present his knowledge to insursance supervision?

  15. @ Flatcap Army
    The US Asbestos problem at LLoyd’s was that the US government passed legislation retrospectively changing the liabilities that Lloyd’s had reinsured. The liabilities that had been insured were greater than they had allowed for but not vastly greater. The killer was being held liable for things that were specifically excluded from the insurance policies.

  16. “the US government passed legislation retrospectively changing the liabilities that Lloyd’s had reinsured”: the US is so corrupt that firms are mugs to try to do business there. Leave it to American firms that understand the corruption better.

  17. he excess is about £500 billion right now – all of which has, by definition, to unwind before these debts are repaid.

    I’m still boggled by how mad this is.

    He sees this 500 billion excess and, forgetting the coupon element, assumes an over-valuation.

    Now we all know that financial and other markets can be guilty of recklessness, however paying more than $100 for a $100 bond would be utter madness (in the Prof’s coupon-free world).

    He sees this utter madness, and doesn’t question it. City twats innit.

    Given the unhinged nature of his later comments, one can only hope he never falls out with the CyberNats. That, however, is surely inevitable.

  18. there is a massive pile of assets valued at vastly more than they can ever actually be worth because they only ever eventually pay back their nominal value

    He clarifies for the avoidance of doubt.

    He’s saying that institutions hold bonds worth x. Which will eventually pay back a maximum of x. And they have valued these bonds at x + 500 billion.

    Just how stupid does he think bond holders are?

  19. He has repeatedly shown himself unable to grasp the time value of money and the concept that a stream of payments has a finite, calculable value at any given moment. You can’t argue with someone like that. There just isn’t a suitably large overlap between his worldview and reality.

  20. BiCR,
    I think what he’s failing to grasp is rather simpler than that.

    He’s seeing the difference between market and nominal prices, and sees pounds being valued at more than one pound (and indeed, being bought and sold at more than one pound).

    The ignorant-but-sane would assume there’s something missing from this picture (the missing part being coupons).

    The ignorant-but-Murphy has no such doubts.

    What we don’t know is whether The Great Man immediately tried to buy bonds in the hope of instant profit.

  21. The odd thing about low yields on investment, generally ,is that it tends to keep Insurance companies going and increase capacity .
    Insurance has its own cycle of hard and soft markets as capacity come into, and leaves the market place . That’s what sends you motor Premium up and down basically, ( as well the cost if Insuring an oil rig or a solicitors PI et al).
    Behind all of this is the availability of Reinsurance and it is there that Insurance and banking rather merge into just money
    With lower returns available elsewhere Insurance in developed countries ,s seen as a low risk option and so we have now experienced the softest of markets for nearly ten years

    Whether or not a large Insurance Company is technically insolvent is a very tricky thing and only in 2008 did we see that happen ( it is usually associated with fraud or some specific error such as buying RI with yourself) . More usually they fold quietly into another vehicle .
    The availability of endless RI and direct capacity has kept far more capacity in the market than there should be .

    So the effect of low interest rates is to keep many more Insures afloat than there should be

  22. @BICR – if my somewhat hazy and gin-addled memory serves me correctly, Murphy has specifically criticised the concept of discounted cashflows and the time value of money because he thinks it wrong in some way that makes no sense whatsoever. As ever it’s one of his irrational, ill-thought out and pig-ignorant prejudices against a perfectly simple idea that just gives an answer he doesn’t want.

  23. @ Newmania
    It would help if you stuck to talking about subjects that you understand.
    A reduction in investment yields reduce the investment returns on the assets held by insurers in order to meet claims which they will pay out in future so are, ipso facto, bad for insurers and *increase* the risk of insolvency.
    Independent Insurance went into liquidation in 2001 not 2008 and that was due to charging inadequate premium rates (there was a fraud on investors in that the company massively overstated its profits persuading some naively optimistic investors to buy shares but the failure was not a result of that – its only connection with the fraud was that it exposed it).
    The losses/reduction in profits caused by the returns on investment being lower than forecast at the time that premiums were written reduces capacity – often absolutely, but always compared to what it would have been had investment returns been as expected. That is unarguable until you change the laws of arithmetic.
    Your last sentence is nonsense because it is derived from claims that are demistrably false.
    In general a reduction in interest rates will, ceteris paribus, lead insurers to increase premium rates to offset the expected reduction in investment income on the premiums BUT the principal driver in changes in rates is the occurrence (or not) of losses that reduce the capacity of insurers. A rise in premiums due to interest rate changes will only balance the loss of investment income so will NOT increase the profits of insurers.
    The excess capacity that has caused a soft market (except for UK motor insurers who have jacked up premiums in response to the reduction in the Ogden rate, demonstrating that you are talking nonsense) is due to the low level of catastrophe claims for several years in succession, boosting profits of reinsurers who therefore have paid out high dividends and retained profits that they have used to provide more reinsurance capacity.
    It is true that the long period of negative real interest rates has tempted hedge funds to indirectly provide additional capacity to the Reinsurance market through cat bonds but not as a “low risk” option – it is a higher risk-higher reward option than the alternatives. Anyone with a toehold in investment theory will explain to you that the negative interest rate on “safe” investments pushes investors seeking yield out along the risk axis.

  24. @Flatcap Army

    Years ago he was quoted in an interview as saying discounted cashflow models don’t work as “the discounted cashflows are literally ignored”.

    At the time I tried to give him the benefit of the doubt and assumed the journalist had misquoted him. I thought even Ritchie would see the absurdity of the suggestion that financial companies devote all that effort to forecasting future cashflows just to ignore them in a valuation. Now it’s clear that isn’t the case.

    If I have time later I’ll try to find Tim’s original post about it in the Ragging On Ritchie stuff.

  25. @GlenDorran – I vaguely recall it now – wasn’t he arguing that the application of discount factors has the shocking and unforeseeable consequence of discounting future cashflows, so they’re discounted and so valued less? The man is such a colossal dicksplat.

  26. Common sense time.

    You win £50 million on the lottery (or £50, only the psychology changes.) Would you take that tomorrow or £55 million in ten years time?

    Even without real interest rates being close to zero and real inflation being above 2% …

  27. A reduction in investment yields reduce the investment returns on the assets held by insurers in order to meet claims which they will pay out in future so are, ipso facto, bad for insurers and *increase* the risk of insolvency.

    Yes but a globally low availability of exciting earning opportunities keeps money that would leave Insurance, in the sector, so those new buckets of finance keep coming and evil day is further off . That doesn`t mean what you say isn`t true as well .
    The Independent is well know because it is so unusual for a main stream UK insurer to actually shut down due to fraud neatly showing how right I was. Michael Bright went to prison and basically what they dinvented an RI that did not exist so as to continue writing Premium to cover the losses (which were also fraudulently under reserved ).
    It was nothing to do with investment (theirs’s performed no worse than anyone else) it was due to wild long tail underwriting for income. The Independent was a fur coat no knicker cobbling to ger of scabby London Market operations and acted like many others before it trying to out-run its tail
    Insures cannot decide to increase Premiums which are a price and like any other prices a factor of supply and demand. A global reduction in interest rates keep capacity in the market and if supply is higher, then ceterus paribus,as you cleverly say, the price ( or the rates ) will go down
    When an Insure decides to increase his Premiums his products are no longer bought and so his Prices is a mental construct only .
    You know you can always tell a real wanker, who feels he is showing some thrilling insight but wittering on about Ogden ( spare me pleaeeeze). There has never been a time when the motor market were not whining that they needed to increase rates in response to …ooo lets say … no win no fee claims assessors / Increased awards / the sun coming up …bla blah blah and sometimes they try to. When the market is flush with capacity however they can never make it stick. You can`t buck the market, to coin a phrase.
    I have noticed the motor market creeping up for the last last two years , its always the first one to turn up so I daresay we are entering a harder cycle.
    Actuarial claims positions are art of the picture and in some specialist markets it works as you say, aviation for example, US Catastrophe I daresay but the level of rating amongst the billions in the ordinary market are not much to do with results and rates frequently go in the opposite direction of underwriting profits

    You say you know this mysterious “Investment theory” that shows money does not seek out the best option. I cannot say how interested I am Ogden boy

  28. @ Newmaniac
    Try to learn something.
    You said “Whether or not a large Insurance Company is technically insolvent is a very tricky thing and only in 2008 did we see that happen” so I refuted that inaccurate assertion with an example about which you should know. It’s far from the only example e.g. GosHawk in 2003 was insolvent and dumped most of its liabvilities on Lloyd’s reserve fund. The fraud did NOT close down independent so you were WRONG – as I said the fraud was exposed by the failure, it did not cause it.
    Secondly you are wrong again about whether insurers can choose to increase premium rates – it is a market and an increase (or decrease) in rates offered by one insurer may result in a decrease (or increase) in the amount of business underwritten but it is not a cliff-edge as you seem to claim – the meerkat adverts were funny but premium rates are not the only factor influencing one’s choice of insurer (policy terms, claims handling, convenience …).
    Direct insurance rates are influenced by reinsurance rates which are usually the first to turn up or down in the premium rate cycle. Motor insurance has never turned the the market from falling to rising rates or rising to falling.

    “You say you know this mysterious “Investment theory” that shows money does not seek out the best option.” Liar. I said that hedge funds had moved into cat insurance to get higher-risk-higher-reward not “low-risk” which is what you stupidly claimed

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