Can’t know the pandemic fund players without a scorecard

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It’s getting more and more difficult to keep track of economic responses to COVID-19 without a scorecard; new or updated grant, loans, fund discussions and press releases fill the news each day.  And why shouldn’t that be the way?  It’s a multi-trillion (fill in currency of choice here) issue for economies with current and future ramifications.  This column has discussed COVID-19’s effects in depth since February; let’s consider a response score card as this week’s effort. And for those who are patient to the end- some bonus business interruption content!

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Before we fill in the current scorecard let’s agree that governments’ central monetary authorities have been throwing a lot of liquidity into the markets, and treasuries have been distributing direct funds and issuing loans to buoy up businesses during lock down periods.  That’s all well and good but it’s reactionary, inefficient, and ignores in most part the resources of private capital markets.  Ironically in some fashion government efforts have been ‘sending riches to the rich’ through distributions that end up in those same cap markets.

Setting government actions aside we again find not much from the indemnity world of insurance, although John Neal of Lloyd’s and Evan Greenberg of Chubb might disagree since their published assessments estimate that COVID-19 insurance exposure is $100 billion.  Place that estimate in perspective of the pre-COVID insurance market that approximates $5 trillion annual revenues and its magnitude becomes less impressive.

Let’s not belabor what is known and focus on how the industry and governments are working to anticipate responses to future like events. Any chosen option needs to be affordable for businesses, provide prompt and/or efficient payment, not be politically expendable over time, have stable, uniform funding, and not be complex to administer. That’s all.

There are several prominent fund/backing proposals and while the exemplars are not exactly all apples or all oranges, we can contrast them by:

    • Sponsor
    • Constituency
    • Fund size
    • Distribution model
    • Backing /funding
    • Admin

First chart

*Proposed

**Proposed by coalition of the National Association Mutual Insurance Companies, Insurance Information Institute, American Property Casualty Insurance Association

That scorecard shows the who’s, how’s and how much, but what of potential fund efficacy?

second chart

Review of these general data prompts some caveat observations:

  • Often the correct answer is not the right answer, as is suggested for option C. Having pre-purchased recovery insurance at a level supported per each customer’s business activity is smart, but will the program be caught by moral hazard issues, and what of those businesses that do not participate?  Another (yet smaller) PPP experience?
  • Option G is untried collaboration in private insurance and capital markets, but will government backing be available for early years of the program?
  • A, C, and D require significant government funding or admin. Considering that administrations change and budget issues crop up, will the finds have political interest that outlasts short memories?
  • F existed before COVID-19 was known, with no takers. What will change that reality now?
  • Will B have the buy in of the balance of the EU, or will the members need to revert to individual plans?
  • How scalable are E and F, or will other carriers need to come on board?
  • Are any of the plans looking to leverage private capital markets?

There are scores but we don’t know the score- yet.  What is certain after the discussion is as was at the beginning- it’s a multi trillion (fill in the currency here) concern that needs one or more solutions.  Status quo keeps all with zeroes on the board.

(Full disclosure- the author is a co-founder of the Ten C’s Project, but is agnostic on which type of fund is supported as long as insured companies benefit.)

Now for your bonus-

I came across a fascinating infographic representing COVID-19 insurance around the globe  published by P2P Protect Europe :

infography-covid-insurance_orig

I reached out to the firm for any further comments they may have to accompany the infographic and my expectations were exceeded by the comments made by P2P President/Managing Partner, Tang Loaec.

Mr. Loaec provided a different view of business interruption (I’ll use the full quotation):

“As regard property insurance and the embedded business interruption insurance, there is a catch 22 between the desire to exclude the massive concentrated financial impact – which can threaten insurance stability – and on the high frustration of the insured which remains exposed while they thought their business interruption insurance was ensuring their business continuity.

What  P2P Protect Europe recommends to its insurance clients is to approach it from an assistance logic. For example, if you want to include a mechanism protecting a university against the impossibility to use its premises when pandemics strikes, you may extend the coverage not by opening you to monetary claims (the sky is the limit sometime), but by integrating a pedagogical continuity service with a dedicated online classroom provider such as for example LiveClass.fr to deliver protection against the business interruption risk without opening up to massive liabilities. Similar approaches can be envisaged for many other types of business activities. Through innovative assistance services, we can improve the resilience of our society to pandemics, reduce the negative impact on the insured business, while not bankrupting insurance either.”

Well that gives the issue a whole new viewpoint.

You’re welcome.

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Insurance- the great water balloon- squeeze here, bulges there

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Insurance is not a new business, but its functionality and appearance to the public may be in the post COVID-19 world. Plenty of thought is being given to the future of many types of insurance cover, its underwriting, distribution, and claims, etc.  But what about the ‘right now’ for insurance lines during COVID-19 operations?  Insurance is a global $5 trillion business, and while there are sectors that will be depressed, business marches on and so does insurance cover. So what factors may be affecting lines of cover, and what is the outlook going forward in 2020?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Without question 2020 will be a down year for global GDP, with one estimate supporting an overall decline of 2.4% (Economic Research: COVID-19 Deals A Larger, Longer Hit To Global GDP .)  Will insurance premiums decline by that amount, more less, increase?  It’s certain that the global economies will continue to require risk management. Having mandated shut downs does not allow for shut down of insurance cover for a business; liability remains something for which protection must be maintained. Motor cover has been shown to be less important by the mile, but still mandated in most jurisdictions.  The thought process carries on, and the process seems a good exercise for us this week, perhaps will generate some thoughts and discussion.  I’ll lead off, give my 2p and you can chime in.

Business Interruption

We’ll get the obvious cover out of the way.

COVID-19 has exposed business interruption cover as the factor no one knew that everyone needed.  There will be two main efforts for BI- litigation for those who insist their policy included it, and looking for purchase for those who know they will need it for the next pandemic. Government pressure for mandated cover (if successful) for BI would make all arguments moot- the BI response would cripple the industry for all covers.  As for availability of BI cover that addresses pandemics? A sea change for BI cover would be needed to exempt the cover from needing a covered physical loss, and removal of exclusions (or establishment of endorsements) related to pandemics. Oh, and the pesky needs for capacity, underwriting understanding, planning for claims, etc. Nothing available soon, at least in an indemnity product.

Two interesting related facts- Marsh and Munich Re had offered pandemic cover- Pathogen Rx as recently as Fall, 2019, but had little demand for the cover. And Amsterdam’s DGTL Festival ‘accidentally ‘ had event cancellation cover for pandemics due to an admin error by the organizer’s staffer who checked off a box for pandemic in error .  A $2.3 million error to the good.

Workers’ Compensation or Employers’ Liability

The cover that is a looming monster due to potential latent effects of COVID-19 being contracted after businesses begin to reopen. The WC cover in the U.S. while slightly differing state to state in large part will afford cover for employees who claim contracting the virus on the job. There’s not a heavy burden of proof so medical costs and loss of wages will accrue to the WC policies- all new peril costs for the systems.  India has similar potential for excess costs, the UK’s Employer Liability cover that mirrors WC a little will be limited for severity but will have frequency effects. For all jurisdictions there will be an expense increase as WC claims are cumbersome and heavily involved in unstructured data.

Business Owners/General Liability

If fewer feet are through the door there is less exposure to claims, so this cover will be a function of the length of shutdowns. What will affect the liability portion will be allegations of customers claiming COVID exposure and those businesses that are not careful and organized in their operations regarding safe methods and clear notices to customers may be higher frequency targets for lawsuits. And in similar fashion to WC and BI claims, handling the claims will consume adjuster production time. Carriers will be less able to simply deny/repudiate claims as regulatory oversight will be heightened. The UK’s FCA has opined that while it’s not the regulators place to determine cover, the carriers had better be thorough and prompt in determining cover and making payment where warranted.  The post-COVID environment would be an unfortunate place for a carrier to engage in coverage shenanigans.

Motor/auto

This cover has been the poster-child response cover for carriers in recognition of less service frequency needed, fewer claims, and the need to rebate premiums due to the reduction in exposure. Many carriers have taken those steps in handing premiums back or establishing forward looking credits (summarized well here by Nigel Walsh. )

An aspect of significant reductions in claim costs will be reduced loss ratios (surely a 1/1 rebate will not occur), but absent significant reductions in cost structure one might expect increased expense ratios due to earned premiums be reduced by rebate amounts.  It’s a big water balloon, isn’t it?

Property/Homeowners

Might just be a push- higher occupancy periods to detect issues sooner, but also higher occupancy rates to task mechanical systems and prompt sudden failures with ensuing damage.  No rebates offered quite yet, but one is never surprised.

Credit Risk

The ability to pay invoices will be hamstrung across many business sectors and severity concerns are already transmitting through to reinsurance products focused on same, and hedge vehicles have had the elevated risk priced into their trading prices already. Another form of credit risk- supply chain activity- will experience fits and starts as suppliers have reservations about purchasers’ ability to pay, and associated insurance costs will increase.  More water balloon action.

Mortgage default risk

Seems intuitive- higher unemployment, gradual recovery, delayed benefits flowing from the government, and those who live month-to-month will have less ability to pay mortgages, both individuals and businesses. Artemis.bm indicates approximately $9 billion in ILS/bonds related to mortgage default risk; combine that volume with the significant drop in the EurekaHedge ILS index during the month of March and while the data are not directly correlated they are related and suggests one’s pause for thought.

Health insurance will be left out of the discussion- that is the wild west in terms of severities prompted by COVID-19 treatments. The corollary however is that elective surgery has been curtailed as has regular health oversight, both high costs for insurers.  Combine the assistance governments have been providing and health insurer positions may not be as bad as one would expect. May not.

Reinsurance has little exposure to COVID-19 and so far pricing has been favorable for renewals and new placements based on market factors for those lines, see an example reported by SCOR here .

BIG water balloon, insurance.

The industry also must keep a weather eye on the next occurrence of systemic risk, including a pandemic, and the response would not serve well if it’s a fully government funded program. Too slow, inefficient, needlessly expensive and would overlook strengths the insurance industry and capital markets would bring. All the players affected by and influencing risk management need to work to collaboration- would make all the lines of cover more stable. #TenCsProject

You get three free articles on Daily Fintech; after that you will need to become a member for just US $143 per year ($0.39 per day) and get all our fresh content and archives and participate in our forum.

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Hybrid Security Tokens – What are they and What are they not?

NEWS  – Crypto and Security Token Exchange INX to Raise $130 Million in Landmark IPO: INX Limited, a crypto exchange startup, plans to raise up to $129.5 million through an IPO, in the first security token sale registered with the U.S. Securities and Exchange Commission. No, that’s not a typo for “ICO,” the initial coin offerings […]

The post Hybrid Security Tokens – What are they and What are they not? appeared first on Daily Fintech.

Zooming out on Capital Markets and Wealth management

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A New Year doesn’t always necessarily mean a new mindset but it does allow us to reflect and zoom out.

Capital markets and wealth management, are being disrupted but we are still early in the journey.

In financial products, Price wars continue and zero-fee products keep growing.

In business models, ‘Go Big’ through volume and marketplace offerings continues to dominate; but beware.

The dream of decentralized Community building through blockchain Tech, has failed miserably for now.

The dream of unlocking value through accounting on DLT and automating liquidity through P2P networks, is gaining traction at the country level too.

Robo-advisors and neobanks, have been pushing prices down. Whether it is ETFs themselves, single stock trading, constructing or rebalancing portfolios, buying insurance, Currency exchange, remittances. Customer is king not only getting better UX but also pushing the Fidelities and the Blackrocks of the world to increase their zero-fee offerings. From zero-fee index funds, to zero-fee trading of single stocks. Robinhood and Vanguard have a huge effect on keeping the pricing war very much alive.

The oxymoron is that the dominant business model remains platforms and marketplaces that cross-sell and aim to keep the customer hoping to sell more and more. But as long as the focus is on the product, as the margins will keep diminishing, it will be a Catch22 game. Margins are not uniform but the tech-enabled price war will eventually squeeze them all down to zero.

Think of Robinhood who started off from freemium stock trading. Their growth has been hugely ‘subsidised’ by VCs – $539million over 5yrs – and now they went out offering checking and savings accounts (albeit screwing up on the pricing)[1].  Sofi who started in student loan refinancing, and went into mortgages, thereafter moved into wealth Management. Goldman Sachs, an incumbent investment bank, who went in and out of banking, then targeted retail customers through Marcus, a consumer loan fixed fee service; and is now moving Marcus to their investment unit.

Will a new business model emerge in 2019 that circumvents this investable Catch22 of going after ‘Growth’ only to sell financial products whose margins are going to zero, one after another? This is what will be on my radar screen for this year.

The other oxymoron that is evident both from 2017 and 2018, is that the current designs and implementations of blockchain technology (predominantly, cryptocurrencies) have failed in building communities natively. During the bull phase, this was masked as “the crypto community” had a growing number of cross-over[2] members. But the common thread was only FOMO and herding. During the bear phase, the “carrots” put out to design communities were IMHO “a disgrace”. Incentives like retail bounties, airdrops of all sorts, are no innovation. Using Telegram and 24/7 digital community managers, has been ineffective in building trust with the potential retail investors and being transparent post ICO with governance and financial reporting.

The good news is that DLT experimentation grew substantially during the crypto winter and even countries are stepping in. The motives are either to boost the local economy by creating a tech ecosystem – in a decentralized design there can be several players included instead of “a winner takes all” operation – or to transform the government in several areas like land registries, self-sovereign IDs, voting, health, education, capital markets ect.

Happy New Year for those that were still on vacation last week. Lots of exciting insights to share this year too.

[1] I’ll ignore their failure in executing. What fintech can learn from Robinhood’s ‘epic fail’ of launching checking accounts

[2] Cross-Over Buyers is a Wall Street term that refers to investors that buy into an asset class only to capture high returns in the short term; whereas typically they invest in another asset class in the long term.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

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