Economic reality sharpens future vision for insurance and pandemics

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I have been writing about the potential and now actual insurance effects of COVID-19 since late February, and the discussion has evolved from what might be, to what is, to what is not, and to what is now how the industry must begin taking action on what might be for a next pandemic or other systemic risk. 

It’s no longer sufficient to allow coverage gaps to exist for global-effect occurrences, even if another like outbreak may not occur for years or decades- the economic shock presented by being unprepared is simply too great.

 

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’.

The historic pattern is clear in how global economies react to systemic risk events- wailing, gnashing of teeth, rending of garments and governments stepping in to backstop the losses.  For the U.S. and elsewhere the needed government action is due to the outcome of businesses expecting their insurance policies to help cover economic losses due to the mandated shutdowns, and insurance companies never expecting BI losses to be part of insurance coverage.

As of this article’s writing the effect of COVID-19 is exemplified in the U.S. 2020 Q1 GDP results-   -4.8% on an annualized basis, coming on two months of growth and one COVID-19 affected March.  A similar result for Q2 would be unexpected as April and May could produce even less robust results.  Percents and projections, resulting in real-world declines of a few trillion dollars, and mirrored results in other countries.

Can a first step in planning be an understanding of the vagaries of business insurance and business interruption cover?  Not having easy access to policy forms for carriers outside the U.S. market we’ll just have to use the U.S. policies as exemplars.

Description of BI (Business Income or Business Interruption) coverage per U.S. carrier websites:

  • Carrier A– “Helps replace lost income and helps pay for extra expenses if a business is affected by a covered peril.” Lost income being described as revenues minus ongoing expenses.
  • Carrier N– “Helps you pay bills, replace lost income and cover payroll when a covered peril forces you to close temporarily.”
  • Carrier TH– “Can help replace any income your business loses if you can’t open for a time after a covered loss.” Income being total revenues less business expenses, operating costs.
  • Carrier H– “Will pay you the income your company would have made during the period it’s out of action due to a covered loss…including normal operating expenses incurred…most of employee payroll.” Income being revenue less normal operating expenses.
  • Carrier T- “Helps replace income and expenses.”
  • Or per ISO form CP 00 30 04 02
    • Business Income means the:
      • Net Income (net profit or loss before income taxes) that would have been earned or incurred; and
      • Continuing normal operating expenses incurred, including payroll.
      • Must be caused by direct physical loss of or damage to property…in the Declarations.

The carriers’ descriptions of BI cover seem similar, but each has its unique wording and intention.

To highlight varying benefits across the spectrum of the carriers noted above, consider a small business scenario as follows:

  • Monthly revenue- $25,000
  • Payroll- $15,000
  • Rent- $2500
  • Utilities/other expenses- $3500
  • Taxes- $2000
  • Net income- $2000

A one month disruption of the business due to physical damage to a covered loss, insured unable to conduct any business, payroll and expenses are continued, provides the following estimation of the BI cover outcomes:

chart

$2000 BI cover, or $25,000?

Of course the devil is in the details of the policy coverage verbiage, but the tendency is clear- policies differ, there’s a significant variance between policies that cover loss of income alone versus policies that cover loss of revenue and ongoing expenses, or policies that cover ongoing expenses and loss of income.  What is uniform is that BI cover stems from, 1) a cause of loss a policy covers, 2) physical damage to covered property, and 3) no exclusions to coverage applying. Unfortunately, with COVID-19 the drivers of cover are not present in most BOPs and the BI costs are not covered.

That good first step in grasping the gravity of the coverage problem starts with the scenario noted above, and the economic effects extended to the U. S. business economy at large.

There are by estimation anywhere from thirty two to forty million businesses in the U.S., 99.9% being small/medium businesses, with an estimated thirty million being insured by business owner’s policies (BOP), and all being affected by COVID-19 shut down effect- some more than others but the majority affected entirely with full business interruption.

The potential BI data are stark:

  • Thirty million policies with a modest coverage limit of $50,000 would represent a probable maximum loss in a similar pandemic of $1.5 trillion.
  • Thirty million businesses claiming BI damages for one month- even if the claims average $20,000- equates to $600 billion.
  • Thirty million BI claims constitute an estimated $22.8 billion in adjusting expense.
  • Thirty million BI claims would require 600 million man hours to prepare, and
  • 300 million man hours to adjust, or ten man weeks for every claim staffer employed in the U.S. P&C insurance industry.

The U.S. is two months into a shut down, so the potential BI loss cost grows to $600 billion plus LAE (loss adjustment expense).  Want to guess what the entire amount of available cash and investable assets are for U.S. P&C carriers?  $1.75 trillion.  Considering these numbers- having business interruption cost financed by traditional indemnity insurance cover is as carriers have known- untenable.

However, insurance carriers cannot be blind to the economic effects of COVID-19 because they affect the viability of a large segment of the carriers’ business base- the SMEs. Economic pressures from legislators and litigation are presenting potential ex post facto cover, and if the outcomes pass constitutional muster the end effects are enormous in implication.  The inability of the industry to deal with the logistics of handling the claim demands are clear.

There must be plans to shift expectations from no response to some response, indemnity investigation to parametric,  avoidance of customer responsibility by all to collaborative and shared responsibility by insureds, insurers, the capital markets, reinsurers, and government.  Early efforts in the UK in devising a fund in parallel with Pool Re, France working on an insurance backstop for pandemics, and early U.S. efforts to craft a similar plan as the terrorism TRIA fund are meaningful, but absent serious consideration of parametric options not meant to solve the BI cover problem but to take a big edge off of it will carry the industry to a similar place as now.

There are additional efforts being made to build discussion; Lloyd’s Lab is sponsoring varied innovation programs focused on COVID-19 matters, and insTech London is in the midst of its sponsored podcast series on pandemics and what might come next for insurance (yours truly participating with Dr. Marcus Schmalbach , Laurie Miles and Matthew Grant in the 5/05/20 session).  These efforts as well as those of the nascent Ten C’s Project (more to come) are the counter to having no insurance response, or inconsistent, impractical indemnity programs that cannot apply as designed.

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Travel Credit Cards Are Dead. Will Fintech Invent What Comes Next?

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

For years the lure of certain credit cards has been their tie ups with frequent flyer programs. While most of us don’t like credit, for some the risk/reward trade-off for the odd free return trip and/or upgrade to business class is worth it.

But what happens when literally overnight, your credit card’s frequent flyer points become temporarily worthless? As an Amex Velocity card holder, I was one of thousands of credit card holders in Australia that found themselves in that very situation after Virgin Australia went into voluntary administration. While their loyalty arm is separate to their core business, and isn’t in administration, redemptions have been frozen.

So I put in a call to Amex to find out what they would do for me. Largely speaking, it was nothing. No transfer of points to an alternative program, or refund of annual fee. Nada.

Many credit cards, like Amex have hitched their wagon to the travel industry. And while it’s almost a certainty that travel will resume at some point, will we really have an appetite to do it, like we did before?

Cashed up boomers who are most at risk of catching the virus won’t be too keen to jump on the next flight to coronavirus hotspots New York or London. Millennials staring down the barrel of unemployment will list travel last on their spending wish list (rent and food will be coming first for a while). Families struggling to pay mortgages and meet rising food costs won’t have fat in the budget for that annual Bali trip. All of this against a backdrop of mercurial border restrictions throws serious cold water on the travel industry.

And by extension, the credit card industry.

So where to next? Well, if credit cards are to survive, they need to find another reason to exist, and not put all their eggs in the travel basket. There is lots of opportunity here for fintechs that package up consumer rewards in other domains, to find a ready ear at the strategy workshops of the schemes.

When I went hunting for a new credit (yes, it’s time to kiss goodbye to the Amex), my first thought went to where the vast majority of my spend goes now – groceries. Next I thought of internet, my mobile plan spend, and then my electricity and gas.

Luxuries like travel aren’t that interesting in the new economy we’re entering into. What matters most is being able to pay the bills. The necessities. If someone can give me a credit card that allows me to do that for less, then maybe I’ll get sucked into the credit vortex again…

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Stablecoin News for week ending Tuesday 28 April 2020

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Payments are still the big Use Case.

 

Here is our pick of the 3 most important Stablecoin news stories during the week:

What is the big Use Case for Crypto?  Is it as a Safe Haven, a non correlated asset that you can run to when everything else goes to hell in a handbasket, or an Alternative Investment in which you can earn outsized returns or finally, is it (or will it) be a key component of our daily “earn and pay” infrastructure?

Well this week we saw real movement on the Payments use case front with Facebook making a large strategic investment into India.  This is important from both a product perspective, as it gives them that important “last mile” linkage and also from a political perspective as they gain a powerful local ally. 

Interestingly, we also got an authoritative study from the Economist Intelligence Unit on the acceptability of all the different types of payment methods and Crypto did surprisingly well.  People are not terrified by all the scam and hack stories with 20% saying they expect to use Crypto as a payment method within the next 12 months. 

Finally, we continue to see investment going into the space.  Investment flow is the most important indicator as it is a real “Skin in the Game” measure of the future prospects.

 

  1. Facebook’s $5.7bn bet on India’s richest man Mukesh Ambani.  The social media giant becomes a shareholder in cut-price Indian mobile internet company Reliance Jio.  Facebook’s largest foreign investment gives it a foothold in rural India and a powerful local ally.  Read in BBC News: https://apple.news/AV37YgpACThOLu1jGljcVmw
  2. 20% of people said they don’t currently use them but plan to in the next year, higher than any other payment method studied in research, a trend that may accelerate as a result of #covid19. Read report  https://econ.st/2z5SkYm (Via @cryptocom)
  3. This Bloomberg report highlights another entrepreneur from a  traditional Financial infrastructure background launching into the new  Ex-Deutsche Banker’s FXcoin to Offer Bitcoin Transactions

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All rather positive in a time when there is a lot of negative news about in other areas.

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Real-time market data is still not consumed via the cloud

nasdaq tower

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. 

Stock Exchanges are data and software businesses. Nasdaq specifically, has had a significant software infrastructure business that provides technology solutions to over 100 organizations, like exchanges, clearinghouses, Central securities depositories, and regulators in over 50 countries.

This past week Nasdaq announced that they have partnered with AWS to offer real-time market data via the Cloud. So, why is this important in the 3rd decade of the 21st century? Wasn’t Nasdaq and other exchanges delivering market data via the cloud already?

My research released that Cloud adoption for primary market data from the source, is decent But like often is the case, the devil is in the details.

First, it seems that cloud adoption of market data directly from the source is about 2-3yrs old. Fintech Xignite always comes to my mind when I think of the early disruption in this market as a classic example of a Thomson Reuters disruptor (now Refinitiv).

Xignite – a wind intensifying the Fintech fireworks was one of my blog posts during my first quarter writing on Daily Fintech in May 2015! I am getting close to 270 blog posts as we speak.

APIs and the Cloud are the couple that `Open` up business possibilities that were not viable before. Be it in banking or in asset management and capital markets.

Only in late 2018, did Refinitiv start offering historical tick data to its clients via the Cloud in partnership with Google. They had to spend resources to convince their customers to stop deploying trucks full of tapes with the valuable historical tick data and storage rooms to process the data on the tapes. Their selling points included cost savings and efficiency gains in the Search for Alpha. See details here

Screen Shot 2020-04-27 at 10.56.11

Image from Refinitiv, October 2018

Nasdaq has been offering historical market data of all sorts much earlier always in collaboration with AWS. Their collaborations started in 2008 with certain data-on-demand offerings! Since then, they have also collaborated with Xignite for certain on-demand data sets (as early as 2011 see here).

Their recent cloud offering, the Nasdaq Cloud Data Service (NCDS), is bringing real-time data (not delayed or historical) via the cloud. It starts with real-time data for Nasdaq TotalViewNasdaq BasicNasdaq Last SaleNasdaq Global Index Data Service (GIDS) and Nasdaq Fund Network.

One would think that real-time data via the cloud would only benefit HFT trading businesses that profit from latencies in market data. But that is not actually the case. There are several benefits to access real-time data via cloud beyond the obvious cost optimization (reduction in costs and paying for what you consume). These include real-time risk management and search for alpha, as there is not `hoping on and off` the cloud between all the departments that collaborate to monitor portfolios and the markets. Traders, middle office, and back office, can attain real-time sync with real-time access via the cloud and into the variety of applications each one of them uses.

To make this simple and clear: A trader usually has access to real-time market data (if not via the cloud, then he-she is overpaying because no one uses all the data since a trader will be focused in one area or instrument). The middle, back office and risk management do not have access to real-time data and therefore, they run their dozens of applications out of sync.

This market is clearly behind.

A recent report by Xignite and Greenwich Associates quantifies the market appetite for market data feeds via the cloud.

Screen Shot 2020-04-27 at 11.18.45

The survey shows that the market for accessing market data via cloud is ripe. However, the misconception that real-time data is not so suitable for the Cloud and for those trading (but not HFT) has not been overcome. The way I see this evolving is through realizing the benefits of Stream processing. Technologies that allow us to compute directly on data, are here and their adoption will unlock more benefits and value.

The CME Group, the global leader in derivatives market, became the first derivatives marketplace to offer real-time futures and options market data on Google Cloud Platform just this past November. Stay tuned.

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A great oracle is the one with the right data

coinbase_defi_oracle

In a world of decentralized apps, with $1 billion in assets actively pooled in DeFi protocols, there is a lot at stake and we cannot risk exposure to any grey or black swan events. Trust is of the utmost importance. At the heart of DeFi is the desire to automate the majority of tasks in the financial industry, cutting out the middlemen. To make it happen, DeFi uses Ethereum’s smart-contract powers. Smart contracts are lines of code that execute, when they are fed with data. But smart contracts aren’t as “smart” as they sound. Anyone that has ever written a line of code has heard of the term “garbage in, garbage out”, used to express the idea that incorrect or poor-quality input will produce useless output. This idea applies even more today, as we move to automated and decentralize the way we do things. The reliability of the data we feed smart contracts is paramount and this is where “oracles” come into the picture.

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

A few days ago, Coinbase announced an oracle service, which will provide reliable and verified price data for two trading pairs, BTC/USD and ETH/USD.

The new oracle is compatible with Open Oracle, which Compound Finance developed to enable different sources of oracle price data to work together. Coinbase will sign all oracle data with its private key. Users of the oracle can publish prices on-chain and verify their authenticity, with Coinbase’s price oracle public key. The Coinbase oracle will filter data points that significantly vary from the expected volatility for an asset. The oracle’s data comes from the Coinbase Pro exchange and will be updated every 60 seconds.

In ancient Greece, people consulted the Oracle at Delphi in an attempt to get a glimpse of the future. The Pythia offered several prophecies, most of the time vague, misleading and in some cases true.

Price oracles come in a variety of shapes and sizes, some more centralized, some more decentralized, but the general idea is that price oracles provide a price for a given asset. When we talk about price oracles, in fact we are talking about tools that allow blockchains to learn about something that happened in the past. Oracles do not make predictions about the future. Oracles report.

Applications that run on public blockchains require a signal to trigger the predefined actions of the smart contract. Oracles feed dApps with the information they need to work correctly. Imagine automating things like sending Bitcoin to someone when the stock market drops, when the weather changes, or if a post reaches a certain number of likes?

Generally, there are two types of oracles, machines and users. Machine oracles are sensors that generate and send digital information in a smart-contract-readable format. User oracles, are thousands of people reporting on event outcomes and being rewarded in cryptocurrency or tokens.

Oracles are already used by blockchain platforms, like Augur and Gnosis. Both of these platforms use oracles to monitor stock markets with more precision.

For those of you that are familiar with Dr. Strangelove, you can understand the what it means, when a smart contract goes haywire, because of the wrong data. Dr Strangelove is a film about immutable smart contracts that cannot be altered by human agency, once they’re in motion.

One of the many criticisms of smart contracts is the “Oracle Problem”. Simply put, a smart contract has no knowledge of reality, so it relies on a truth source, “an oracle” for it to receive external data.

But, building a reliable price oracle is not something simple.

Oracle trustworthiness has been a difficult problem to crack, while trying to maintain a balance with decentralization. You can publish price data from a centralized exchanges, but trusting them to provide accurate data and keep the signing key safe, is another story.

There are many cryptocurrency exchanges around the world, but the reliability of their trade data is a big issue. In a presentation to the SEC in 2019, Bitwise Asset Management described the problem as “the vast majority of this reported volume is fake and/or non-economic wash trading.”

Alternatively, there are decentralized oracles. Plenty of projects that are trying to solve the problem. Decentralized oracles such as Band Protocol, ChainLink, Tellor, Witnet and UMA Project all differ and cover different attack vectors.

The most notable is Chainlink, which incentivizes accurate feeds with the LINK token. The Chainlink network, bridges blockchain to real-world applications and data. It securely connects smart contracts on Ethereum with external data sources, APIs, and payment systems. Their token price reflects everyone’s interest in DeFi. Chainlink’s link token has outperformed Bitcoin by leaps and bounds, as the oracle is in hot demand. In the first quarter of this year, LINK rose by 31 percent, with its price hovering today, around $3.78.

Oracle manipulation is the root cause for most of the DeFi attacks. The two recent flash loans on the DeFi platform Bzx, started a fierce debate about the subject of using uncollateralized loans in a quick trade. In February, an attacker exploited the oracle dependency on Kyber’s decentralized exchange (DEX) price feed in the bZx smart contract. The scheme was used to exploit funds from the Bzx twice, as the hackers gathered around $954,000 in a matter of four days from well-executed flash loans.

There are three real problems right now. There’s a connectivity problem, there’s privacy and there’s scalability. Oracles don’t fully solve any of these problems. What they do is they contribute to solving them. Also, oracles create centralized points of trust, in systems that are meant to be decentralized. Because they control the input for a smart contract, they control the entire operation of the smart contract. This is a huge vulnerability. A compromised oracle essentially means the entire smart contract is compromised. Decentralized applications that use oracles need to use multiple oracles for any data point, reconciling data when there is conflicting information.

The Coinbase Oracle is important for the growing DeFi ecosystem. Coinbase is the most trusted and secure company in the space and uniquely positioned to provide oracle prices. The Coinbase Oracle will also help Coinbase solidify its position in the DeFi ecosystem and take the first step up the ladder ,towards Chainlink’s market position. The real challenge for Coinbase is to get dApps to trust the accuracy and timeliness of a single source of data, hardly a decentralized solution.

Price Oracles, that are reliable and timely are key for DeFi’s continued growth. To build fair and self-sustaining financial markets, we need price oracles that are accurate, fast, unbiased, and resistant to price manipulation.

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This Week in Fintech ending 24 April 2020

this week in Fintech V2.001

This weekly summary from our 7 experts, brings you insights based on their experience as investors, entrepreneurs & executives.

To continue receiving This Week in Fintech, you can either become a paying Member for $143 per year (and receive all our content in addition to this weekly summary) by clicking here.  If you just want to receive This Week in Fintech for free, you will need to fill in this form

Your Editor is Bernard Lunn. He is also the CEO of Daily Fintech and author of The Blockchain Economy and occasional opinion columnist.

Monday Ilias Hatzis our Greece-based crypto entrepreneur (Founder & CEO at Mercato Blockchain Corporation AG and Weekly Columnist at Daily Fintech) @iliashatzis wrote Rise and rise again, until Libras become Lions

After months of criticism, the Libra cryptocurrency project is pivoting. To appease skeptical regulators, Libra is shifting gears from a new global financial system to a more traditional payment network, with digital coins backed by individual fiat currencies, very similar to PayPal. When the Libra Association announced the cryptocurrency last June, it intended to create a single global digital currency that would be pegged by a basket of fiat currencies from different countries. Politicians, regulators and central bankers everywhere were rattled and feared that Libra could undermine their power, control and threaten monetary sovereignty.

Editor note: The Libra pivot looks like bad news for banks and credit card networks and good news for Bitcoin as the only decentralized stateless digital currency.

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Tuesday Efi Pylarinou @efipm our Swiss-based Fintech Adviser,  founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019 wrote Digitization in the brokerage business is shrewd – Motif investing is closing

MOTIF Investing, one of the earliest innovators in the digital investing space in the US, is shutting down. Apparently, the communication hasn’t been that great, as some advisors found out from a tweet. Motif portfolios will be moved over to Folio Investing that has been competing with Motif.

Editor note: Sad news. Their fatal flaw, from my perspective when I looked at them over 5 years ago, was that there was not enough incentive for the creator. 

Alan Scott Managing Director EMEA at 24 Exchange @Alan_SmartMoney wrote Stablecoin News for week ending Tuesday 21 April 2020

This weekly snapshot is the news that matters in the Stablecoin market, which is getting a lot of attention again because of recent moves by Facebook re Libra.

Wednesday Jessica Ellerm @jessicaellerm, our Australia-based Fintech entrepreneur and thought leader specializing in Small Business and the Gig Economy & CEO/Co-Founder of Zuper, a new superannuation startup in Australia wrote Should Google To Pay Us To Use Their Rumoured Debit Card?

If the rumours that Google will be releasing a debit card in the near future are true, which, let’s be honest, it feels incredibly likely, then this would significantly change the fintech game, and in more ways than Apple’s previous announcement.

Many of us have allowed the slow but sure creep of Google into our lives, so it seems logical we’d eventually accept Google as a financial brand. However while there are lots of reasons why Google would want us to use their debit card (better predictive analysis for ad targeting, new revenue streams etc etc), there will need to be a strong reason for consumers to buy in.

Editor note: The Big Tech entry into Fintech, from Facebook to Apple to Google is happening during strange times in the global economy, forcing some outside the box thinking.

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Thursday Patrick Kelahan @insuranceeleph1, our US based Insurtech expert (a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners who also serves the insurance and Fintech world as the ‘Insurance Elephant’) wrote Insurance- the great water balloon- squeeze here, bulges there

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?

Editor note: this is a great overview of all the lines of insurance and how they are impacted by COVID-19, a must read for senior executives in Insurance who are figuring out how to navigate through this.

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Friday  Sheldon Freedman, Fintech lawyer at Hassans International Law Firm wrote: Security Token news for Week ending 24 April 2020

Editor note: This weekly snapshot is the news that matters in the Security Token market.

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Security Token news for Week ending 24 April 2020

Security Token news for Week Ending Friday 17 April 2020Security Token news for Week Ending Friday 17 April 2020Security Token news for Week Ending Friday 17 April 2020

Security Token news for Week Ending Friday 17 April 2020

Here is our pick of the 3 most important Security Tokens news stories during the week:

Space MMO Infinite Fleet Launching Security Token Sale

Shanghai game studio, Pixelmatic, is working on a science fiction MMORPG Infinite Fleet and is launching a security token offering to raise funding. The company is working with venture capital platform Stokr to raise money for its upcoming game.

Why It Matters:

Video gaming and cryptoasset technology are natural marriage partners, both in technology and culturally. Pixelmatic claims Infinite Fleet will be the first world-class video game to genuinely bring together gaming and cryptoassets. Interest in blockchain tech from global game publishers has been increasing, especially considering that a number of blockchain-based games have recorded rising numbers of users due to the ongoing COVID-19 pandemic.

Infinite Fleet players defeat alien threats by building fleets, securing territories, and moving into space.  Players earn reward tokens that will be tradeable and hold promise of increasing value.  The breakthrough here is Pixelmatic attempting to sell equity funding by an issuance of equity tokens – one could say to boldly go where no gaming man has gone before. We’ll soon discover if it can find strange new life in the security token capital market.  

Blockchain Association Creates New Security Token Working Group

US trade associaition, The Blockchain Association, has created a Security Token Working Group to collaborate with industry participants, policymakers and regulators. The group will be co-chaired by Georgia Quinn, General Counsel of CoinList, and Alex Levine, Chief Legal Officer of TokenSoft, two primary issuance platforms that are regulatory compliant. The objective is to help create “clear regulations” for the emerging security token sector of Fintech.

Why it Matters:

The Blockchain Association is organizing to lobby Congress, the SEC, FINRA, other US regulators and the broader industry to promote the adoption and regulation of security tokens in the United States. Many industry followers believe digital securities will launch a new era of securities while opening up markets further to a wider audience.  In Japan, The Japan Security Token Offering Association (JSTOA) recently published self-regulatory guidelines which cover how to separately manage client assets and digital record transfer rights and obligations.

TokenGX Gets Greenlight to Develop Secondary Trading Platform for Canadian Market

This week, the Ontario Securities Commission greenlighted the tokenization startup TokenGX to begin development on a secondary trading platform for tokenized securities. The new platform, dubbed FreedomX, will allow Canadian investors to leverage blockchain technology in the local financial sector. As such, the news represents a major milestone for the entire North American market.

…Importantly, FreedomX incorporates advanced smart contract technology to ensure full compliance with Canadian securities regulations. These self encoded restrictions will allow developers to gradually introduce the exchange to users based on their geolocation. At first, developers intend to restrict access to only Ontario residents and an exclusive group of invited whitelisted investors who already met all financial and kyc requirements.

Why It Matters:

FreedomX will be one of the first secondary trading platforms for Canadian-based digital assets and should play a major role in the digitization of the Canadian financial sector.

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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

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Should Google To Pay Us To Use Their Rumoured Debit Card?

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

If the rumours that Google will be releasing a debit card in the near future are true, which, let’s be honest, it feels incredibly likely, then this would significantly change the fintech game, and in more ways than Apple’s previous announcement.

Many of us have allowed the slow but sure creep of Google into our lives, so it seems logical we’d eventually accept Google as a financial brand. However while there are lots of reasons why Google would want us to use their debit card (better predictive analysis for ad targeting, new revenue streams etc etc), there will need to be a strong reason for consumers to buy in.

It’s one thing letting Google Home into your living room, let along letting the search giant know what you spend on. Mind you, Google’s predictive engines are getting so powerful, the ability for them to probably figure out what we spend on now, without even looking at our bank accounts, is probably pretty good.

So what could Google offer us, to entice us away from our Revolut’s, Monzo’s and other snazzy fintech apps?

Well, quite simply, they could make it absolutely free, or pay us to use them.

The world is entering into a very strange time. Millions of workers are unemployed, and industries, which have died overnight, will face a significant uphill battle restarting (travel, anyone?). Never before have we cared so much about tightening our purse strings, and getting savvier with our money.

How we spend and the data that goes along with that is valuable. Of course, no tech giants want to pay us for it, but perhaps consumer sentiment towards this is changing?

This week, in Australia, the treasurer, Josh Frydenberg has spearheaded a push to force global media businesses, like Google and Facebook to share advertising revenue with Australian media companies, who it says drive significant traffic to the advertisers while realising none of the benefits. It is an absolute watershed moment for the industry, and many are watching very closely. The tech giants had, as one can imagine, argued against this strongly. In the end, they were forced.

These publishers know the value of what they are creating, and how tech giants are monetising it. And now they will have a slice of the pie.

Faced with a shiny new financial toy from Google, will we be as savvy?

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Stablecoin News for week ending Tuesday 21 April 2020

Is Regulation a necessary barrier to Innovation?

Stablecoins.001

Here is our pick of the 3 most important Domain news stories during the Period:

The big news of the week was the release of Facebook’s Libra revised whitepaper

In it they have significantly wound back the innovation levels to satisfy Regulatory concerns.  Is this good? Are Regulators just being cautious  because of the sheer scale that Facebook/Libra will operate at?  Would Regulators be proportionate with a normal start-up that starts small and develops over time be able to innovate freely or are they at risk of retrospective action?

Clearly some politicians and regulators believe that innovation and money should never be seen even in the same room.  Or if it does it should be the state that does all the innovating. Is that even possible? Well we are about to find out as the People’s Bank of China (PBOK) this week made good on the tantalising snippets and puffs of white smoke we have been seeing and announced their MVP is preparing for it’s first trail run.

The other interesting geopolitical point is that we are clearly seeing some coordination happening.  Out of the ashes of the 2008 Financial crisis the G20 established the Financial Stability Board (FSB) to promote the reform of international financial regulation and supervision. The differences in State approach are highlighted in the table from the Bloomberg article linked below which outlines the PBoC approach and progress.

The week began with the FSB outlining it’s position and requesting feedback 

Addressing the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements: Consultative document

The FSB’s recommendations call for regulation, supervision and oversight that is proportionate to the risks, and stress the need for flexible, efficient, inclusive, and multi-sectoral cross-border cooperation, coordination and information sharing that take into account the evolution of “global stablecoin” arrangements and the risks they may pose over time. They apply the principle of ‘same business – same risks – same rules’, independent of the underlying technology.

Responses to this consultative document should be sent to fsb@fsb.org by Wednesday 15 July 2020.  So set your clocks, soon after this date projects will start delivering (Libra says it’s on track to be live and licenced by December).

  1.  G20 sets ground rules ahead of Facebook’s Libra stablecoin  The world’s leading economies need to plug gaps in their rulebooks to avoid digital currencies like Facebook’s planned Libra stablecoin from undermining financial stability, the Group of 20 Economies’ (G20) regulatory watchdog (FSB).  Read here from Reuters 
  2. China’s Central Bank to Run Simulations of Digital Currency Use.  PBOC has given the green light for some commercial lenders to run trials of its digital currency, according to people familiar with the matter, bringing it a step closer to becoming the world’s first major monetary authority to issue its own digital tender.  Read here in Bloomberg 
  3. Demand for Stablecoins has increased dramatically.  The big thing on Wall Street after the last 30 days, is that everyone is overweight in cash.  They have sold heavily and now are looking to selectively re-enter the market. Crypto has done the same and maybe with some of that same money (don’t know but we will see).  That fits our hypotheses that stablecoins are not a competitor to Crypto but a necessary add-on allowing people to sit on the sidelines for a while before re-entering the market. This article from Coindesk explores the topic further: Money Reimagined: Stablecoin Demand Foreshadows Financial Disruption

So this week, many questions, some answers, but it is also clear the train will soon be leaving the station.  Hopefully, you have found something interesting, new and of value in this weekly summary. In the meantime, stay safe and sane!  

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