Valuation uncertainty expected to be ‘even greater’ for securitised private assets than sub-prime mortgages

Written by Adam Cadle

21/09/2022

Valuation uncertainty is expected to be even greater for securitised private assets than sub-prime mortgages, the BoE’s executive director for insurance Charlotte Gerken has said.

Speaking about concentration risks in life insurance at the Bank of America’s 27th Annual Financials CEO Conference, Gerken said: “During the benign credit conditions in the lead-up to the global financial crisis, investors moved heavily into assets such as sub-prime mortgages, which, as risk of understatement – suffered from an over-valuation problem. Valuation uncertainty is expected to be even greater for securitised private assets, and for all private assets under stressed conditions.

“Firms have reported that more than half of the credit risky assets in their MA portfolios are not based on quoted prices in active markets. Despite the heterogeneity of these assets, valuation uncertainty still represents a potentially material source of concentration risk.”

Continuing the focus on private assets, and the associated material MA benefit, Gerken added that the PRA is seeing a “risk of insurers becoming over-reliant on models to drive investment and capital decisions, models that are inherently reliant on public market performance as proxies and limited history”.

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