Coronavirus will shape the next decade. Will we prep before the next one?

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Everywhere people are dying, global lockdown and massive government intervention. The coronavirus pandemic is disrupting global industries and supply chains, causing disastrous problems for businesses, consumers and the global economy. Just like the disease is killing older people at high rates, it is also about to kill mature western economies. Businesses are struggling to produce and distribute products and services, that consumers depend on. The coronavirus outbreak has limited our ability to produce and consume goods. Its financial ramifications are already severe and will only get worse. The COVID-19 pandemic will change this decade, just like 9/11 changed the 2000s. The impact from pandemic on global economy will be severe, but eventually the crisis will all end and life will resume. The question what direction will we follow and how prepared will we be when the next one comes along?

Ilias Louis Hatzis is the Founder at Mercato Blockchain Corporation AG and a weekly columnist at DailyFintech.com.

When businesses are unable to make money, they can’t pay employee wages and operating expenses. As business revenues decline, employee layoffs accelerate, which eventually leads to people not being able to pay their rent, mortgage and loans, buy goods and services or spend money at restaurants, sporting events, vacations.

This is not just a health pandemic, it’s a pandemic of fear and mistrust that is hitting advanced economies in Western Europe and the United States. Governments are announcing travel restrictions within their borders and from outside, and are shutting down businesses everywhere. In mature economies, when people become fearful for their lives, they withdraw and stop spending money on things they frequently do. Businesses that operate in face-to-face service industries, which usually dominate high-income economies, are the one’s that get hit the hardest, when people are in lockdown.

This is not to minimize the damage the pandemic is causing to the global product supply chain. The production around the world is out of action for an indefinite period of time. We are already seeing shortages for things like auto-parts, electronics and products like iPhones, and Diet Coke and don’t be surprised when we see disruptions for food, condoms and so many other basic things we take for granted.

In 2015, the year after West Africa’s Ebola outbreak, Bill Gates gave a TED talk called “The next outbreak? We’re not ready.” Gates saw the COVID-19 outbreak coming and he knew we weren’t prepared for it.

“If anything kills over 10 million people in the next few decades, it’s likely to be a highly infectious virus rather than a war,” Gates said during the Ted Talk. “Not missiles, but microbes.”

 

 

Authorities around the world are doing their best to contain the coronavirus pandemic. Disease outbreaks can happen at any time and anywhere, with little or no warning. These are events that have occurred in the past and will occur again in the future.

We are facing an uphill battle, but blockchain can help. Blockchain will not prevent new viruses, but it can help create a first line of defense, through a network of connected devices with a single purpose: to alert us about disease outbreaks. The use of blockchain can help prevent pandemics by enabling early detection, fast-tracking drug trials, and impact management of outbreaks and treatment.

Blockchain platforms could help connect local hospitals and health organizations. Local hospitals could record medical data about patients with flu- or virus-like symptoms. The data could be used by health organizations to predict the spread of the virus, to help them take preventive measures (increase medical staff, supply medical equipment) in the areas where the virus could spread.

Recently, the World Health Organization (WHO), IBM and Oracle teamed up to create an open-data hub that will use blockchain technology to check the veracity of data relating to the coronavirus pandemic.

Blockchain based livestock tracking could help to better trace an outbreak at the source, before it becomes impossible to contain. Deadly viruses have originated by contaminated livestock, that made it into our food supply. Imagine how many lives and resources we could save, if we could collect and analyze data to assess livestock risks for various regions.

We could also improve the medical supply chain for products and vaccines. It’s vital to be able to track where things are and where they came from and ensure they are genuine.

Researchers, biotech and pharmaceutical firms are racing against time to create the vaccine for this virus, as well as develop potential treatments for COVID-19. Blockchain based platforms could help vaccine development across various stages starting from exploration to pre-clinical stage, clinical development, regulatory approval to production and distribution and continuous quality control & monitoring.

Like the September 11 terrorist attacks, the fall of the Berlin Wall, the financial collapse of Lehman Brothers, the coronavirus pandemic is a world-shattering event that will lead to permanent shifts in political and financial power.

Many, fear the pandemic will strengthen state control and reinforce nationalism. Governments everywhere are adopting measures to deal with the health and financial crisis, and some governments will find it difficult to give up these new powers, when the crisis is over, similarly to what happened in the wake of 9/11, when civil liberties around the world were trampled.

More than a hundred years ago, in the “The Machine Stops“, E. M. Forster wrote about a dystopian future where humans relied on a machine to provide food, clothing, shelter, and interaction with each other, using audio and visual devices. This story sounds like the present, and the pandemic is pushing us even more in that direction, to become more reliant on the “machine”.

But the coronavirus pandemic is also causing everything to come to a grinding halt. Health care, government and business “machines” are breaking down and stopping. Maybe this is a wake up call, that pushes in the exact opposite direction, away from centralized machines and structures.

The coronavirus global health crisis has the potential to massively disrupt our lives, both economically and socially. I can only hope, we move in the right direction.

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Business interruption- cover that’s too big to cover- but needs to be next time

Business interruption insurance

On February 27  Daily Fintech published this article, “Dominoes fall- business disruption and risk management in the COVID 19 environment,” wherein there was a discussion of the indirect effects of the then China-based COVID-19 outbreak, and the estimation of economic damage due to the outbreak being $1 trillion.  We now know the effects of the pandemic will be in the many trillions of dollars, and business enterprises around the globe are realizing that business interruption (BI) financial losses due to the outbreak are generally not covered by their commercial insurance policies.  This is not a surprising finding since BI cover has the policy need of direct physical loss, which a viral pandemic does not produce.  Many implications here regarding coverage gaps and systemic risk, and global application of moral hazard.

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’.

In one month’s time the anticipated BI losses due to COVID-19 increased manifold, became global, and have become difficult to quantify accurately, an apt expression of the unexpected outcome a systemic risk like a pandemic can cause- an uninsurable risk due to those exact criteria.

Business interruption cover is described by Marsh & McClennan as follows:

  1. We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” 
  2. The suspension must be caused by the direct physical loss, damage, or destruction to property.
  3. The loss or damage must be caused by or result from a covered cause of loss.”

The problems with the BI cover regarding COVID-19 effects are…all three points.  Items 2 and 3 are not applicable due to the outbreak being the cause, and a viral and item 1 sets such wide expectations for the insureds as to be impossible to summarize.  Loss of business income? Is that cash flow, ongoing bills, net income reduction (based on what?)

Even in the most direct loss cases, say a fire experienced by a business owner, BI losses are seen differently by the business as compared with the carrier.  Again, what constitutes loss of income, and how is the loss indemnification supported and adjusted?  BI cases are difficult to wrangle and often are simply negotiated.

If that handling were to occur say, in the U.S. for all the COVID-19’s affected insured businesses, the twenty-five million or so claims would need to be adjusted throughout the decade, would result in indemnity amounting to  two to three trillion dollar total severity, would make all commercial carriers insolvent, and result in a consequential insurance catastrophe of loss of the industry.

There is no retrofit that would have the expected effect the insureds would need.  Take for example the intention the New Jersey Assembly has in Assembly Bill 3844.  The NJ Assembly proposes the insurance industry provide BI coverage to NJ businesses with full knowledge that BI cover does not apply and is excluded from cover.  NJ would like carriers to pay the cover through legislated changes to the insurance policies’ contractual intentions, with NJ then reimbursing the carriers in the future for all or part of the payments.  Just that one state’s businesses may have BI claims that exceed $100 billion!  That is not a reasonable nor a legal option (would surely be challenged if enacted) and would challenge the solvency of the state’s carriers.    Ex post legislation is not an answer.

Firms have already initiated legislation in the U.S. for breach of contract, and while most in the industry agree that BI cover is a long shot, the irony is that the claims being made trigger the need for loss and expense reserves, and the initiation of litigation will- absent cases being considered unworthy by courts- require that the respective carriers recognize worst case scenario reserves being placed on their balance sheets- a profitability hit that could be significant due to the volume of potential claims (think asbestos.)

Truly there is not a practical answer to the enormity of the question, so the industry and businesses must be forward looking in anticipation of another like occurrence, whether it’s a viral outbreak, cyber outbreak, or regional natural disaster.  Systemic risk effects will occur again, and mitigative actions need to be considered now.

 

I considered one of many scenarios of systemic risk in the recent article published in InsurTech360, “Rethinking excluded pandemic (and other) risks.  The article discusses just one of many loss occurrences- events and conferences, and considers the many aspects of planning, response, potential cover, admin of the response and potential payments for what is for an indemnity product an excluded peril.  Future cover cannot be full reimbursement as we have discussed- the indemnity factors are troublesome to adjust.  Parametric approaches to shared risk are discussed in the article as is planning and segmentation of the loss layers.

Insurance veteran Mark Geoghegan recently recorded a ‘solo podcast’ on the Voice of Insurance that addressed the topic in depth, and touched on the many issues of BI claims and COVID-19.  The ‘selfie’ podcast, unfair-punishment-and-pandemic-re editorialized on the two-edged sword that BI handling by carriers will produce- 1) carriers cannot reimburse insureds for BI claims in that there is no policy cover, and there are not sufficient resources within the industry to do so, and 2) the carriers will still be left as the parties with record levels of capital that will not be applied to the situation, not a good view for the insured public to consider.  Mr. Geoghegan walked through some efforts that could be put into place going forward, and some collective global actions that would distribute future systemic risk that would have similar effects as COVID-19.  He clearly agrees with the writer that BI indemnity cover remains unreachable, but parametric hybrid products might be a compromise, if there is sufficient global participation by carriers, insureds, and governments.  The industry knows that government subsidized products such as the U.S. NFIP flood program are not the answer.  In fact there are some influential insurance persons who suggest private parametric plans supported by alternate risk sources are the most effective and stable answer, and not government backing as is found in the U.S. Terrorism Risk Insurance Act (see Dr. Marcus Schmalbach’s article, implement-pandemic-perils-into-tria-no-a-free-market-solution-is-needed ).  Dr. Marcus is a knowledgeable proponent of capital markets being a primary force in financing these unique risks.

Mr. Geoghegan suggests that cooperative programs such as might be gained through premium contributions to a global pool of insurance backing for systemic risk response built over years is an option to consider.  The pool would also help fund an important initiative going forward- research into causes of pandemic outbreaks, anticipating new viruses, be prepared to respond with strategic supplies, and with several years of global contributions, a substantial response fund that is not indemnity-based and available to all.  However, what does that mean?  Participation by all countries, carriers, and governments, a daunting task for the best of motivations.  And as Mark reminded the listener- memories are short, and large sums of money are attractive targets for raids by cash-short governments.  The concepts are provocative and if actionable in small part a sure improvement.

The author had a related thought-provoking discussion this week with  Thomas Verduzco-Weisel, Director Central Europe at Symbility – Mobile Claims,  a colleague in Germany who has seen the effects of disappointed customers; the chat focused on any actions that might be taken to respond to customer concerns- now.

We settled nothing categorically but did consider some options carriers can take to mitigate the effects of the constant drum beat in the press coming from businesses that have experienced or anticipate substantial BI losses:

  • Reduce or suspend premiums based on companies’ reduced operations.
  • Coordinate with other carriers in establishing a response fund that can provide direct cash benefits to business customers.
  • Extend coverage for risks that are solely associated with COVID-19 actions, e.g., forward-looking coverage for credit risk, health risk.
  • Partner with government regarding establishing captives- immediately- for mutual sharing of risk within affinity groups
  • Establish help centers for staff to assist in navigating insurance and finance issues
  • Look for coverage within policies that were in force at the inception of the pandemic, e.g., cover for civil authority actions in temp closures.  Don’t wait for a claim to be initiated, create the claim and contact the insureds proactively
  • Know how your product lines will evolve going forward- parametric options, review and retest exclusions, etc. The efforts must be uniform for all like insureds, and reproducible for similar perils.  Not taking any action is going backwards.

Plenty of discussion of a problem that has grown into a multi trillion dollar beast, and a challenge for the industry and its customers, and not to forget, governments. Systemic risk from pandemics can no longer simply be a line in the exclusion section of insurance policies, but by the same token cannot be relegated to macro government response.  For COVID-19 all players have been guilty of the oldest of risk management dodges- moral hazard.  Why bother insuring the outcome if someone else will cover the effects?  Well, that time is now gone.

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Technology helping governments & citizens, one line of code at a time

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Moral hazard issues are endemic in financial crises, as we all know from the most recent GFC triggered from subprime mortgages. As we are witnessing a bazooka round of government aid ready to hit the market, the moral hazards are being revisited.

I will attempt to stay on topic and not comment on social & political issues around the current stimulus policy decisions in each country. I will focus on how technology can be used to make things better in these circumstances.

In America the government, the states, the municipalities, the cities are far from being Digital, let alone having technology that allows them to track flows of the money flows allocated in the economy.

A “stimulus package to the American worker” is underway that practically means a check of $1,000 or $1200 to pay rent, bills or buy groceries. The details of who and how this check can be claimed are going to be announced soon.

Americans will receive by traditional mail, a check and will have to be creative on spending it as bank branches are unable to service these deposit needs. American may countersign the check to their landlord or create a community secondary market of checks that is facilitated by those that have cash from ATMs (good for grocery shopping).

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

 

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Juxtapose this with the Digitization in Singapore. In 2016, Singapore announced the launch of the Government Tech Agency

Here’s how Singapore plans to make its services as easy as Facebook Connect.

A long-term plan to digitize the functions of governance and public life.

I pick the Singaporean example of GovTech led digitalization (there are other well-publicized ones, like Estonia) because in these `never seen before` circumstances they were able swiftly to launch three services

TraceTogether A community-driven contact tracing app to help during the COVID19 spread. Own your data and use Bluetooth P2P communications to share your close contacts. Give permission to the Ministry of Health to quickly reach out to your close contacts if you are a COVID-19 patient. TraceTogether aims to protect families and communities, and stop the spread of COVID-19.

MaskGowhere An app to use your zip code and get info on mask distribution points

FluGowhere An app to facilitate the following: If diagnosed with any respiratory illness (even just a cold) you get full subsidy for medical treatment

Now imagine if America or state by state had built a GovTech ecosystem that would allow to not easily channel each of this one off payments but also to transparently trace that they are used accordingly.

Transparency of money flows would be a blessing in this situation. It would save the government and the citizens from all the moral hazards that were experienced during the GFC. One of the most eye-popping examples were banks that were eligible for favorable loans with subsidies which they subsequently used for share buybacks.

The digitalization of municipalities, states and governments is not only about operational savings but also about Transparency that can allocate capital and manage risks in a fairway.

So much to learn from other Smart nations, states, or cities.

Singapore has two kinds of IDs …

CorpPass, a digital identity to do business efficiently and safely online with the government.

MyInfo simplifies banking transactions by eliminating the need to re-produce documents for verification.

And on and on…

The Technology is available and inexpensive, the people to customize it for each country, state, city, are available, and the Need is screaming. Come on America, Switzerland, United Kingdom, Germany, ….

Come on New York State, Canton de Vaud, England, Bavaria,…

A boom in GovTech initiatives should be one of the positive side effects of this crisis. And since I am a BIG DREAMER, maybe we will finally get a Decentralized Digital Identity so that it can serve as a way to act collectively in similar situations that we all have the same interests and risks.

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What do you want a post #Coronavirus world to look like?

Shiva Coronavirus.001We are learning what words like disruption, creative destruction and viral really mean. They are not just words on a pitch-deck any more. 

The Greatest Generation were tested in the Second World War. Baby Boomers (like me) had it easy thanks to their bravery & sacrifice. Now we are being tested (more than other generations because this virus is worst for older people).

This too shall pass.

In our Coronavirus series, we started with a description of the destruction to the financial system – the destructive part of creative destruction

This post envisages what a post #Coronavirus world could look like – if we make it happen. 

If you want data about the spread of the disease or what you can do to avoid getting it or how to boost your immune system (all good subjects), this post is not for you.

Nor is this about politics or public health policy. These matter and we may have strong opinions, but that is not the subject today.

If you simply want to look at cat videos to escape this damn subject, that is cool too.

Future posts in this series will look at tech and media solutions.  The world is awash in amazing tech & media solutions.  The more urgent question is what do we want to do with what is on offer? What is a positive future that we can envisage?

A post Coronavirus world based on 10 core principles will help create a better world:

1. The end of our obsession with growth at all costs. If we only see this as an interruption to business as usual, Coronavirus will be all destruction and no creation.

2. A more sustainable planet. As a Gen Z person put it to me recently, “this stopped us talking about Climate Change”. Pictures from space showing reduction of pollution in China & Italy are inspiring – if we can end our obsession with growth at all costs.

3. Truth matters however uncomfortable it is. We can go online to have every crazy opinion validated, but a virus does not care a damn about our opinion.  An amazing thing is happening – we are searching for people who tell the truth. For example, Dr. Anthony Fauci, is somebody who I believe, but I also think technology will give us new ways to aggregate facts in a way that is not opinion-driven or controlled by institutions that may be controlled by people who do not have our best interests at heart,

4. We are all in this together.  That mantra used to come with moral or spiritual overtones. Coronavirus makes this totally practical. If I have a huge stockpile of hand sanitizer, so that you have none – I will get the virus from you.

5. Use communications tools to communicate not to isolate or brag. Communication can mean singing from balconies or using FaceTime to communicate with distant loved ones or remote yoga or passing true information (or cat videos) around to loved ones. 

6. The power of love needs to replace the love of power. That is an old hippy mantra (aka boomer in their younger idealistic phase). Without that, fear mongering fascists will seize power because the Coronavirus certainly inspires fear that they can exploit.

7. Hyperlocal means loving the one you are with. That can mean in your home or in your neighborhood or your country depending on the current extent of the restrictions. Working from home can either be isolating or a powerful motivation to build strong local relationships depending on how you approach it.

8. Billions of people making a living is more important than a few people making billions. If billions of people cannot make a living they will back revolutionary leaders who will seize power (and use that power for selfish ends rather than helping the people). We need to get rid of our obsession with growth at all costs, but there are still billions of people who need to make a living without destroying the planet

9. We are all the same under our skin. A virus doesn’t care about our skin color, nationality, religion, sex or sexual preference. Neither should we.

10. Human-powered emergent solutions driven by decentralized technology. This is where already today we can see people changing their behaviour when faced with the awful reality of Coronavirus. In the future we see this behaviour going mass scale, powered by  decentralized technology.

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COVID-19 supplants InsurTech – moving lower on Maslow’s Hierarchy of Business Needs

Maslow biz

Staff working from home.

Premium growth or reduction?

Staff being repurposed or subject to RIF.

Claims- virtual handling or on-site assessment?

Innovation efforts underway- suspend or continue?

Customers with reduced access to the firm or agents.

Supplies- how much to stock, if the supplies can be found?

Start ups- traction had been tough, now there is no friction.

VC’s and funding orgs- how can we support any investment?

Coverage determination for pandemic or microbial infestation.

Vendor partners- how to maintain relationships or leverage their skills?

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’.

InsurTech funding efforts produced $6.6 billion globally in 2019, and plans for 2020 suggested a similar level of interest for this year.  That was until a few weeks ago, when coronavirus caused insurance companies to radically shift focus from growth, innovation, partnerships, and lowering performance ratios to a focus on cash conservation, staff support, changes in customer contact protocols, and concerns about pandemic coverage, maintaining policies in force, and stability.

The outbreak is a seismic strategic change event.  Not just issues, but fundamental concerns that suggest fundamental responses by the insurance industry, although I’ll admit there are too many ramifications to fully organize and upon which to comment.

Without question insurance incumbents and startups will feel the effects of Covid-19 on how business has been conducted in the industry during the past several years.  The relationships and collaborations between incumbent/InsurTech will be tested in significant ways, including:

  • Will financial support for innovation contract substantially as carriers move to protect liquid assets?
  • Will personnel investment in carriers’ efforts in effecting change be altered to better focus on customer needs and staffing challenges brought by the simple acts of existing in an uncertain world?
  • Startups that have not yet come close to revenue generation- will they be left to wither on the development vine as VCs reconsider asset allocations and reduced confidence in profitable scale up.
  • Will incumbents temporarily abandon new projects/innovations in order to concentrate on core functions?

It’s clear that in the current economy organizations will be moving down the business version of Maslow’s Hierarchy of Needs, from the optional to the basics, from discretionary spending to conservation of customer base.

These and other strategy thoughts found their way across my feed during the past week (with the author’s observations added):

  • Coverage for effects of pandemics have in general been excluded from cover for personal lines and commercial policies, physical, business interruption and liability covers. Simply too broad of a risk (akin to flood) for carriers to underwrite, and typically not direct physical damage.    Put the effects into a global context that affects almost every business and there will be push back.  Arbitrary actions on the part of carriers to afford coverage where there isn’t any has ramifications in uniform claim handling and fair practices- shouldn’t do for one that you can’t for all.  Unfortunately the insurance industry will be seen as the ‘bad guys’  for avoiding cover.  There will be efforts that are ‘fashionable’ to force coverage, for example the US state of New Jersey is considering suggested legislation that will require carriers in the state to provide coverage for the effects of the crisis.  Not the insurance commissioner, the legislature.  Not amending a condition like California’s commissioner did requiring full replacement payment for contents instead of actual cash value, but altering terms of the insurance contract after the fact, and outside the privity of contract.  No one wants customers to have unexpected costs of risk, but the legislators’ suggestion is fraught with many cascading consequences.  Those broad brush benefits reside within the legislature’s grasp, but not using insurance carriers as the delivery pool.

 

  • John Neal’s Lloyd’s of London office put out a request to its member firms for estimates of potential current and final losses from coronavirus. Certainly, that is good information to know, but it’s due time for Lloyd’s to be able to access those data with a few clicks of a mouse or database query.  Surely the firm’s exposure to probable maximum loss for a peril is a strategic data point to have at arm’s reach, and the unique nature of pandemic cover would suggest PML for any policies in force.  It seems the integration of Blueprint One cannot come soon enough for Lime Street.

 

  • Worldbank’s Pandemic bonds are on the verge of being triggered to benefit the poorest countries in the world. The primary criteria for triggering have been met, with proof of economic growth among the beneficiary countries remaining to be confirmed.  These bonds provide quick response finds for the countries, and have proven to be a successful alternate risk funding vehicle for capital markets.  This bond type and other cat bonds/ILS are a significant future source of risk financing, with reinsurers and bonding companies working in concert.

 

  • How insurers work has been shaken with the almost universal shift to remote work (work from home, WFH). Insurance consultant Alan Walker composed a fine list of questions within an article posted this week, “Covid-19: Implications for Insurers.” :
    • How will we plug the service gaps that will arise if a large proportion of staff falls ill at the same time?
    • How long will remote working be required?
    • Do any of our product wordings need to be changed to deal with the return of Covid-19 in future years, or possible future pandemics? (author’s note- perhaps it’s time for parametric cover to take a leading role in dealing with effects of broad effect perils/covers)
    • Do we need to reduce our reliance on people being co-located… and the degree of “remote working as standard?
  • Rosenblatt Securities published a short analysis of the Implications of COVID-19 and Market Disruption on Private Fintech, and while the report included many important concepts, there was a historic treatment in graphical form of the Correlation of S&P performance and private capital investment in the U.S. that caught the author’s eye:

S&P

This chart from the 2008-10 market recovery period indicates a six-month lag between market recovery and investment level recovery; the current outbreak is of such broad spectrum and probable duration that investment recovery will take longer than that.  Consider the outbreak disruption to last several months and investment confidence to take an even longer period to come back, and strategy decisions made now are even more important than in 2008.

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Niche Fintech Could Catch The Coronavirus Bug

Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a neowealth disruptor in Australia

After being the darlings of the fintech space for so long, startups in the payments space have been some of the first stocks to feel the full force of the economic punch that is the coronavirus.

Around the world retail, hospitality and tourism are coming to a screeching halt, faced with a combination of forced lock down and pure consumer avoidance. With jobs on the line across multiple industries, discretionary spending is basically dead for the foreseeable future.

Of course, for many large incumbent payment platforms and acquirers, a drop in payments volume in one area can usually be set-off an uptick in another (i.e. we buy less shoes, but we buy more canned food). If anything, we’ll be more inclined to tap our phones than handle dirty, germ ridden cash, right? Coronavirus could longterm be good for business!

So, with a diversified customer base, a payments business should be expected to weather a black swan event like the coronavirus relatively well, all things considered.

But fintechs aren’t often that diversified. In fact, for many, their strength comes from their niche approach. Take the multitude of buy now, pay later businesses, that have emerged across the world. Many are firmly entrenched in retail and fashion, and cater to those who don’t have the capital to pay for goods up front – casual, young workers. Those same workers that could be the first to get laid off. It’s a perfect storm.

Money that used to go on another pair of Adidas shoes will now need to be redirected to plug lost wages, or saved for future medical expenses.

In Australia, buy now, pay later fintech Afterpay, has shed over half its value in 5 days, dropping from AU$26.22 on the 12th of March to just under $13 today at the close of trade today. The business was trading close to the $40 mark only a few weeks ago.

But it’s not just buy now, pay later that is feeling the corona chills. Niche fintech acquirers like Tyro, that specialise in small businesses payments, are also exposed. The company is trading at AU$1.415, down from a high of $4.49 on the 11th of Feb.

It must be said, much of the market is in ‘panic’ mode, rather than ‘rational’ mode. Good businesses will survive. One thing is for sure though, never before have the realities of supply chain dependencies and diversification of revenue been more front of mind than now, no matter what business you’re in.

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XBRL news for Week Ending Tuesday 17 March 2020

Announcing the Daily Fintech curated news on XBRL

Here is our pick of the 3 most important XBRL news stories for the week.

One. New digital tool launched by Government to simplify SECR reporting

The taxonomy will enable businesses to report using the XBRL global framework commonly used in business accounts. It marks the first time the format has been utilised so businesses can capture environmental data in annual reports.

Curator’s Note:  Streamlined Energy and Carbon Reporting (SECR) is important for those who like this planet. XBRL helps ensure reporting accuracy and this tool from the UK Government makes that accurate reporting easier to create.

Two. MSRB Proposal to Enhance the Transparency of the Timing of Issuers’ Financial Disclosures on the EMMA® Website

The proposed feature would provide a new informational box on the Security Details pages of EMMA including:

  • A link to the disclosure of annual financial information and/or an audited financial statement for the most recent fiscal period;
  • The end date of the financial period detailed in that disclosure, such as the fiscal year end date; • The date the disclosure was posted to the EMMA website; and
  • A static calculation of the number days between the posting of the first disclosure for that fiscal period and the end date of the financial period detailed in that disclosure

Curator’s Note: The Municipal Securities Rulemaking Board, (MSRB), is a regulatory body which creates rules and policies for investment firms and banks that  issue municipal securities aka “muni bonds”. Their Electronic Municipal Market Access (EMMA®) website is critical to this $3.8 trillion market, particularly for retail investors who rely on the free information. The calculator they are announcing does not require any new data to be submitted by issuers. However note that this a proposal that the SEC has to approve.

Three. SEC Adopts Investor Disclosure Improvements for Variable Annuities and Variable Life Insurance Contracts

In addition, the Commission adopted amendments to require the use of the Inline eXtensible Business Reporting Language (Inline XBRL) format for the submission of certain required disclosures in the variable contract statutory prospectus.

Curator’s Note: The SEC change makes it easier for retail investors to understand offerings in plain language.

We have a self-imposed constraint of 3 news stories each week because we serve busy senior leaders in Fintech who need just enough information to get on with their job.

For context on XBRL please read this introduction to our XBRL Week in 2016 and read articles tagged XBRL in our archives. 

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Time to check US Consumer debt, delinquencies, and refinancing applications

Bad-Credit-Student-Loan-Consolidation

It was only a month ago that economists were talking about interest payments on debt for individuals in the US (the top G7 indebted country on a personal basis) being low and manageable as the job market was strong.

Fast forward to today and the same numbers have to be interpreted differently. The global economy is taking a hit and both businesses and individuals are at risk. We need to look at the facts & figures and then see what can be done by banks or fintechs.

`Consumer debt was approaching $14-trillion after the second quarter of 2019, according to the New York Federal Reserve. It was the 20th consecutive quarter for an increase.`

Debt.org

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

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Americans love credit cards and even if we get rid of the physical cards, credit card debt isn’t close to being shaken out of the system.

NPR’s Chris Arnold and Lucia Dunn professor from Ohio State University reported that close to 10% of credit card debt is over 90-days delinquent. These are levels approaching those of the great recession and could be sounding an alarm in a weak economy.

These delinquencies are concentrated in the 18-29yr old age group, which, unfortunately, also the age group with significant amounts of student debt too.

Student debt has 20% of double 90-days delinquencies, double that of credit card debt.

In other words, young people are overloaded with debt and delinquency rates have been increasing to dangerous levels. These are numbers before COVID19 and its impact.

The FRED reports that credit card debt has grown to $1 trillion (from debt.org) and another $1.6 trillion of student debt loans.

Screen Shot 2020-03-16 at 11.35.00

Personal loans have also been growing faster than student and credit card debt. CNBC reported $300billion as of Q2 2019 which represented an 11% yoy increase.

The black hole of consumer debt (homes, auto, student, credit card, …) is getting bigger and bigger. Low and down trending rates helped support an entire Fintech Refinancing and consolidation subsector that served consumers in great ways. However, none of these non-bank lending fintechs has helped reduce the outstanding debt and this is a Big issue now that the `shit hit the fan` (pardon my French).

More facts to keep in mind as we navigate through these unchartered waters

 As the Fed stepping in with two emergency rate cuts already bringing rates down to zero, that does not mean that these have already trickled down to consumers. Everybody (including Fintechs) is not immediately lowering mortgage rates or other rates. Refinancing applications of all sorts are spiking.

Anthony Sherman, CEO and cofounder of Simplist, a fintech digital mortgage marketplace, reported facts and figures around the mortgage market and the current Refi potential.

`$10 trillion of mortgage backed securities debt are outstanding in the US market.

80% roughly is refinance-able`

Beware, lenders cannot handle this, simply because it will generate sudden accumulated losses and the origination capacity is no more than one third the demand.

Figure Technologies, the blockchain-powered lender that I covered last month, reported a 300% spike in applications for new mortgages and refinancing of HELOCs and student loans. And this was after the first Fed cut. HELOC holders are demanding more cash in hand, already.

Already homeowners have been taking out huge amounts from cash-out refinances. Black Knight reported that 600,000 homeowners withdrew about $41 billion in equity from their homes via cash-out refinances in Q4 2019. This was the largest quarterly volume since mid-2009.

Non-bank lenders are at great risk in these absurd market conditions and so are consumers.

These are also the conditions that alternative credit scoring will be stress tested.

Sources – NPR: U.S. Credit Card Debt Hits All-Time High, And Overdue Payments Rise For Young People Feb 13, 2020

Low mortgage rates driving cash-out refinance to 11-year high

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A Bug Is Crashing The Financial System And Decentralization Is The Best Way To Fix It

coronavirus

Yes that is a play on words. Software programmers borrowed a medical word – bug – to describe an error that could crash their software systems.

Now a bug from Wuhan is crashing the financial system. Yes global finance is a system and systems are vulnerable to bugs.

For light relief, watch this parody of sounds of silence:

In this post I look at:

  • What happens when the real economy meets the financial system

 

  • How Bill Gates warned us about this 4 years ago

 

  • We cannot manage complex non-linear systems with linear thinking

 

  • This too shall pass

What happens when the real economy meets the financial system

For years we got used to the mantra that the financial system (stock markets etc) was totally disconnected from the real economy (jobs, shops, restaurants etc). The reality of the real economy is now hitting the financial system. Take just two simple examples:

  • Revenue drives the E in Price Earnings (PE). Financial analysts deal with normal recessions by looking at Cyclically Adjusted Price Earnings (CAPE); they look at valuation over a cycle that includes a recession. The problem is that this Coronavirus recession is not a normal recession. Think about the revenue impact of a total lock down. That is not about cutting back. It is about stopping totally.
  • Revenue drives the cash flows that are used to repay Debt. In the past,  company managers could keep bond holders happy by pulling the lever called reduce dividends. That would simply decimate equity prices.However a total lock down, after years of stock buybacks enabled by Debt, creates a more existential threat; there is very little spare cash for emergencies.

Company managers know how to pull cost levers. It is much harder to pull revenue levers -and  almost impossible in a lockdown.

Don’t panic. It does not help. This too shall pass. Before we can get to that, let’s analyse the problem a bit more.

How Bill Gates warned us about this 4 years ago

Bill Gates become the richest man in the world by creating software with a lot of bugs. Then he applied that ferocious intellect and his massive wealth and his humanity to making the lives of billions of people better. So we can forgive him for all those Windows bugs that messed with our productivity. 

So Bill Gates knows what he is talking about and we should have listened when he warned us about this 4 years ago.

Did people in power pay attention? No. The reason people in power did not pay attention is that getting politicians to pay attention to even basic facts and 20th century science is difficult enough as this dark and prescient British humour from the 1970s illustrates so well:

So forget about getting politicians to understand 21st century complexity science to understand that we cannot manage complex non-linear systems with linear thinking

We cannot manage complex non-linear systems with linear thinking

The science of the 21st Century is Complexity Science. Complex systems have many different components that interact with each other in ways that are hard to predict. They are characterized by the phrase “a butterfly flapping its wings in China can create a hurricane inn Florida.”. This “butterfly effect” is a bit of popularized science that suggests that minor perturbations can set off a string of escalating events that can lead to something significant.

Understanding one complex system is bad enough. The Coronacrash means also understanding how multiple multiple complex systems interact:

  • the financial system
  • the real global economy
  • the weather system (ahem remember climate change?)
  • our human immune system
  • software with thousands of components
  • social interactions
  • political systems 

Good luck with that. We are in uncharted waters and our compass is broken.

This Too shall pass

The 1918 influenza pandemic commonly called the “Spanish flu” infected 500 million people around the world (about 27% of a global population of less than 1.9 billion at the time) and is estimated to have killed between 17 to 50 million people. Nobody is suggesting COVID 19 will be that bad; health in 1918, after 4 years of war was terrible.

Yet even that passed.

Future posts will focus on the more hopeful scenarios – the good things that can be brought by this very ill wind. My fundamental thesis, explored in earlier posts before the crisis, is that decentralization is better than centralized systems.

Only via decentralized emergent systems can we get to the good combination of hyperlocal and global.

Decentralization is the only long term fix for the bug crashing all our systems.

That does not mean I am suggesting buying Bitcoin. Bitcoin suffers from the same debt (leverage in finance speak) as all other assets traded in the financial system. Using 100x leverage to trade an asset that often moves 10% in a day – what can possibly go wrong?

However Bitcoin is more than just another asset to trade in the financial system.

Bitcoin and other Blockchain based systems illustrate that decentralization is feasible. However decentralization is a much bigger story that will also play out in the social and political spheres.

Image Source

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Parametrics, alternate risk for outbreaks, and a Heartbeat in the Fog

It’s not often that a nexus of insurance/finance, and tech factors rises in prominence and promise, but seems the time is now.  Blockchain- parametric- captives- business interruption – AI/ML- coverage gaps- ILS- front and center!  Supply chain disruption due to collapse of integral parts of the pre-existing arrangements has rippled strongly through the global economy, and clever, innovative risk management and financing programs are now available for application, however from a previously under-utilized area of insurance.  
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his …

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