Iraq contracts 0.5 percent under pressure from ISIS | Video

The Islamic State of Iraq and the Levant, the jihadist group know as ISIL or the IS, will lead Iraq’s oil dependent economy to contract by 0.5 percent this year, according to IMF predictions. World Finance speaks to Baroness Nicholson about the country’s prospects after “40 years or more of massive horror”.

World Finance: Baroness Nicholson, 0.5 percent doesn’t actually sound that bad, and it’s not as high as initially predicted. So why have predictions changed?

Baroness Nicholson: Predictions have really changed because of the fall in the oil prices globally, and naturally Iraq as one of the key oil producers internationally is automatically affected. The massive invasion of what I would prefer to call the Daesh, the Arab term for ISIL, meaning the so-called Islamic State, has naturally had a great impact on the whole region.

The Daesh invasion has had a terrific impact on the poor city of Mosul and its inhabitants. Recall that Mosul was once, pre-Saddam really, the most booming city in the whole of Iraq, bar Basra, for trade and industry because of its unequalled access to the northern region, to Turkey, and of course in that sense to Iran when Iran is open for business again, and right up further with the Caspian Sea. So the loss of Mosul is drastic.

World Finance: What’s the economic situation on the ground today in Iraq in terms of figures?

Baroness Nicholson: Iraq as a whole has a very large income indeed, but the ministries are not yet able to offer the public services to the level of competence that the population has a right to deserve, so this is quite a gap in time and in actuality between the enormity of the funding pouring into the coffers of the federal government and its capacity to actually use it constructively.

If you think that Iraq has more or less been at war for 30 years, that is not surprising. So it’s taking Iraq time to get back on her feet in terms of services for her people. So I suggest that the enormity of the income, Iraq is the second biggest per capita, theoretically, income in the globe, and the government’s own capacity through the ministries to be able to deliver the services that money should allow them to deliver them to the same standard as other countries with developed economies, that is still lacking. That is the same throughout all 18 governorates.

World Finance: Well Al Jazeera reported that Iraq’s financial sector is facing recession. Did it ever actually recover from the US invasion?

Baroness Nicholson: Iraq has been at war for at least 30 years. Before that, the destruction of the head of government, the royal family, and the destruction of the whole system, which Saddam himself engineered, Iraq has been drastically unstable since then, ruled by terror and ruled by dictatorship. You look at the impact that the Daesh ISIL have had, their dictatorship, Saddam wasn’t very far off that in his last decade at least.

If you just look at health, Iraq had a really good health system, which it took off the British National Health Service system, and then that of course collapsed completely with the amount of war, civil war, invasions. No health system could have survived, and it hasn’t.
That’s why it’s very very difficult to pinpoint one single thing. It isn’t a single thing, it’s 40 years or more of massive horror, which has got worse and worse at particular moments.

World Finance: Well let’s look at oil production now. This is of course at the heart of Iraq’s economy, but OPEC has said that it’s not going to limit production, which means the oil prices are falling through the floor. So what sort of impact will this have on Iraq’s economy?

Baroness Nicholson: 80 percent of Iraq’s oil is produced by I think Shell and BP. But you see the enormity of the income that Iraq has already got, and will still be pouring in, and the federal government’s relative inadequacy in terms of expenditure systems, frankly if they earn a small proportion of that, the country would be much better off in terms of service provision and the population would have all the electricity they needed, and so on.

World Finance: And how are other industries faring?

Baroness Nicholson: Very open for bids and contracts is construction and infrastructure. After this four decades of destruction, my goodness, building is needed. This problem with the jihadists is not going to go away tomorrow. This is going to take quite a long time. So housing is needed. Schools are needed. Many of this deserted population is living in schools, and many buildings are needed as fast as possible, but they must be well done.

World Finance: What can be done to attract private investment, and do the rewards actually outweigh the risks?

Baroness Nicholson: The trade industry, professional services are sorely needed, and it is essential to get in there and do it. It makes business sense, it makes commercial sense, and it makes huge sense for the population of Iraq and thus for the shareholders of the companies in question.

World Finance: How does it make business sense?

Baroness Nicholson: Because Iraq has such a huge possibility of business, and industry. Probably one of the biggest unexplored major energy countries of the globe. Risk is a part of life, risk is with us always everywhere. In that sense, I’m sorry to say that most energy countries do now offer quite a significant degree of risk. Perhaps they always did but we just didn’t notice it so clearly. Libya, Nigeria, and so on, sadly there is risk everywhere.

World Finance: Well the World Bank ranks Iraq 156th out of 189 countries in its ease of doing business report. So what can be done to make it better on this scale?

Baroness Nicholson: It is never easy to do business in a country that has come out of dictatorship. Because dictatorship stops people not just taking risks, but actually making decisions. So people are scared stiff to make decisions in a post-dictatorship country.

World Finance: So how do you see Iraq developing in the future?

Baroness Nicholson: Iraq will undoubtedly develop, and I believe that business and industry, particularly form the West, with the standards that we have adopted in the West with the anti-briberies act here and in the USA, with the World Bank standards, I believe we can transform Iraq for both her people and her businesses and her industries.

All the ethics that come in with a good business, those are the things that can ground a population and can assist a government in starting to recognise what it should do, and how it can do those things. So business and industry and professional services are the key to success.

Britam expands its insurance services across Africa

Kenya’s insurance market has been growing at a rapid rate in recent years. According to the Association of Kenya Insurers’ Annual Insurance Report, the market recorded a significant increase in the number of written premiums between 2012 and 2013, and a marked increase of over 16 percent in gross earnings. Despite this rapid growth and the jump in profits, there is plenty of room to grow within the industry.

British-American Investments Company (Britam) is a diversified financial services group listed on the Nairobi securities exchange, with interests stretching across East Africa. Over the years, the company has carved out a real space for itself in the Kenyan financial services industry, offering a vast array of services. “Britam’s life insurance business has become one of the key drivers of business growth in the group,” explains Stephen Wandera, the company’s Regional Director of Insurance. According to the company’s half-year results for the period ending June 2014, the insurance business recorded a 23.2 percent growth in profits, with a revenue growth of KSH 5.3bn shillings against KSH 4.3bn last year, whereas the life business accounted for KSH 3.1bn shillings, excluding KSH 1bn in pension contributions. While the numbers are impressive, this performance has been consistent over the last few years.

An evolving business
Britam offers a wide range of financial products and services in insurance, asset management, banking and property. From life, health and general insurance to pensions, unit trusts, investment planning, wealth management, offshore investments, retirement planning, discretionary portfolio management, property development and private equity. “As Britam approaches its golden jubilee in 2015, we are proud of the company’s development and achievements over the last 49 years which can aptly be described as a journey of evolution, growth and innovation,” says Wandera. “In the process of growth over the years, Britam has left an indelible mark in the insurance sector in Kenya and distinguished itself in the East Africa region.”

Close to 50 percent of the population have limited or no access to insurance, mainly due to
their diminished economic status

Britam is a strategy and innovation driven company whose mantra squarely lies in customer satisfaction offered through market driven products and services. According to Wandera “the cornerstone of Britam’s success is it’s over 1,700 financial advisers and employees who the company’s greatest brand ambassadors. The effective management of this channel has earned the company the industry’s top award for the last seven years.”

Insurance plays a vital role in Kenya’s growing economy. Unfortunately, research shows that close to 50 percent of the population have limited or no access to insurance, mainly due to their diminished economic status. As a result, loss of property, sickness, accidents and death become calamities from which most families never recover. Hence, the enormous need to develop micro insurance products to address these challenges.

While there has been a marked increase in the number of people taking up insurance in Kenya and the wider region, more still needs to be done to bring a greater amount of the population under insurance, and to mobilise savings. In 2013, insurance premiums accounted for only 3.4 percent of GDP, a modest 0.3 percent increase from 2012, but still significantly low, which is why fostering innovation is one of the key priorities for
companies like Britam.

It has invested heavily in technology and human resource development, as these are key aspects that transform the customer experience and help change perceptions about the industry. “Britam has been in the frontline of using innovation and technology to develop micro insurance products that seek to meet the ever growing needs of the market and further deepen insurance in the bottom of the pyramid,” explains Wandera. These policies, designed especially to help individuals with low-incomes to get protection against loss of property, sickness, death and accidents, are gaining ground in Kenya, where a vast proportion of the population would otherwise not have any access to insurance.

Today, there are about 19 million mobile phone users in Kenya and many of them are using smart phones. By offering insurance products through digital apps, the reliance on intermediaries is reduced and awareness of the benefits to insurance is growing, with particular reference to micro insurance products. The focus on technology has been a defining factor in the success of Britam’s micro insurance products, as it significantly reduces the costs of providing insurance to lower-income demographics.

“Micro insurance opens up insurance to a broader cross-section of the population, building awareness, and in turn increasing the customer base,” says Wandera. “In an ever-changing and competitive marketplace it is the convenience offered by technology, and an understanding of how it can be used to improve the everyday lives of Kenyans that will ultimately drive penetration.”

Last year, Britam partnered with Safaricom and Changamka to jointly launch a revolutionary and affordable micro insurance health cover meant to widen the bracket of the population with access to medical insurance. The health insurance product, known as Linda Jamii, is an affordable and comprehensive medical cover that targets the lower income bracket (see Fig. 1). “The launch of Linda Jamii is in line with Britam’s focus on the use of available technology to change the face of insurance in the region,” says Wandera.

Linda Jamii
Source: World Health Organisation. Notes: 2013 figures

Britam also has one of the strongest actuarial departments in the industry in Kenya that is able to provide technical knowledge in the business. The financial advisors undergo a rigorous training programme to advance their skills and abilities. With this knowledge and experience they are able to constantly engage with clients and meet their everyday needs. “Our financial advisors are supported by Britam’s countrywide distribution channels including franchise agencies to ensure that service reach every corner of the country,” says Wandera.

Local knowledge proves vital
It may not be a surprise that Britam has been successful with its innovative insurance products, given its history. The company has been in Kenya since 1965, and has grown tremendously over the past decade, cementing its position as one of the biggest financial services providers in Kenya. Having won several awards and accolades in the insurance sector, it is testament to the fact that the company has been able to cut a niche for itself, emerging as a force to reckon with in the competitive business of life insurance in Kenya.

“Last year, Britam was named the best insurance company in Kenya by Capital Finance International for its innovative micro-life insurance product that has increased insurance penetration in Kenya,” says Wandera. “The award recognised the company’s commitment to delivering innovative products and services that meet global standards, reaffirming Britam’s brand promise of ‘your journey is our journey’.” For the last eight years, Britam has won Association of Kenya Insurers (AKI) Company of the Year Award due to the performance of its life insurance agents. The awards recognise the volume and quality of business sold measured in terms of annualised premium income, number of policies sold and persistency.

Britam has been subject to an impressive growth trajectory in the last five years, thanks to its innovative approach to insurance, financial services and management strategy. As the market leader in the country’s life insurance sector, Britam’s industry expertise, coupled with its technical proficiency and local knowledge, should see the company continue to gain traction in the booming Kenyan insurance market and capitalise on what opportunities exist.

A history of banking regulation

Since 2008, the regulation of banks can be measured by the value of fines levied against them. By latest estimates, total financial penalties could reach $250bn by 2020. But the fines tell a bigger story, as regulators now believe they are on the brink of taming the giant banks once and for all

Horrified at the mayhem bankers had left behind while still pocketing bonuses that would keep Midas happy, regulators set about addressing what they called ‘imprudent remuneration’. Though it took a while, results were eventually seen – particularly in Europe. For example, the UK banned the payment of bonuses for three years, and regulators clawed them back for up to seven years in cases of misconduct and/or
bad management.

President Barack Obama signs into law the biggest overhaul of Wall Street since the Great Depression of the 1930s. Coming in at 848 pages, its full title is the Dodd-Frank Wall Street Reform and Consumer Protection Act, and it lands with a crash on the desks of the US’ financial sector chief executives. Those executives had been spending $1m a day on lobbyists to try and convince congress this door-stopper wasn’t needed, but to no avail.

The Bank for International Settlements begins working on new prudential standards during many late-night sessions in Basel, Switzerland. Created to serve central banks in their pursuit of financial stability, it orders giant international firms to beef up their capital – and to do so in a hurry. It seems the boffins in Basel were just in time. Judged by the safer prudential requirements, central banks had an alarming collective shortfall in aggregate capital of $142.5bn.

In the US, the implementation of the so-called Volcker Rule turns into a nightmare. Introduced late in the piece by the Dodd-Frank lawmakers, it is the brainchild of Paul Volcker, former head of the US Federal Reserve, who believed government-insured, deposit-taking banks should not also run high-risk investment divisions – proprietary trading – at the taxpayers’ expense. The cost to US banks of implementing the rule is up to $10bn a year.

Since being ordered to put more money in the vault, the big boys of the banking world have raised a staggering $123.7bn in new capital. These institutions now held between seven and 10 times more capital than they had before the crisis. However, in the meantime, many businesses (particularly in Europe) have been starved of credit, and the eurozone enters recession. This causes conflict between companies wanting to up their credit.

Early 2014
The Bank of England finalises work on a simple leverage ratio for all those financial institutions that came under its wing. Although the ratios vary, no regulated lender would ever again be able to engage in brinkmanship: no longer would they be allowed to leverge 40 to 50 dollars for every depositor’s dollar. It is hoped this will keep the industry out of severe danger. Other countries are expected to follow suit over the next few years.

October 2014
Some bankers never learn. Just two years after global regulators cracked the LIBOR-rigging racket, six banks are fined a total of $3.3bn for further misconduct in the foreign exchange markets. As the Bank of England’s Governor Mark Carney scathingly pointed out, this was no longer about a few bad apples: “The issue is with the barrels in which they are stored.” He warns bankers they should give up more of their pay in cases of wrongdoing.

November 2014
The latest G20 leaders’ summit in Brisbane puts the finishing touches on a furious five years of regulation. Mark Carney explains: “The system is safer, simpler and fairer.” The final breakthrough comes in proposals that will allow ‘globally systemic’ banks to collapse without consuming taxpayers’ funds, or bringing the whole financial system down on our heads. But it will still be a long time before regulators are able to trust banks again.

Rimac Seguros provides catalyst for change in Peru’s insurance market

The Peruvian insurance industry has undergone a series of major changes of late, leaving local firms with a number of new challenges and opportunities to contend with before they capitalise on a much-changed marketplace. Despite the country being host to one of the most undeveloped insurance sectors in the region, it’s growth potential is without compare.

World Finance spoke to Rafael Venegas Vidaurre, CEO of Rimac Seguros, about the company’s position in the national insurance market, and the leading role it has played in some of the industry’s most significant advances.

What is the local insurance industry currently like and what is Rimac Seguros’ role in the market?
The insurance market in Peru has a huge growth potential, as insurance penetration in our country corresponds to only 1.67 percent of the national GDP, which is below neighbouring Chile, Brazil and Colombia. Even with this low penetration, the insurance market in Peru has posted sustained growth and by the end of July 2014 the total volume of premiums totalled $2.04bn, up five percent on the previous period.

We have recently achieved important objectives by insuring the principal investment projects in Peru. For example, we will be the insurance company for the expansion and remodelling of the Talara Refinery, Line 2 of the Lima Metro Transportation System and provide coverage for the Pampilla Refinery expansion project. Involvement in these areas shows that we are still the leading insurance company in the protection of the country’s leading infrastructure projects.

[W]e have maintained a responsible and sustained growth line, focusing on innovation in customer service and operational efficiency

How has Rimac Seguros developed in the past year?
Throughout the course of the last year, the insurance market had to face several challenges, not least a complicated global economic-financial scenario and high local claims. However, we are pleased with our 2013 results, during which, despite a complex scenario, we reached our goals and thus consolidated our status as the undisputed market leader for a 10th consecutive year. During these years we have maintained a responsible and sustained growth line, focusing on innovation in customer service and operational efficiency but without changing our strict risk and cost controls. These guidelines are supported with timely and adequate investment for modernising the company and to always be up to date on changes in the market and industry.

Thanks to the diversification of our investment portfolio, soundness and profitability of the business and sustained leadership in the Peruvian market for 10 consecutive years, Moody’s Investors Service, one of the most renowned risk rating agencies worldwide, raised Rimac Seguros’ rating to Baa2 with a stable perspective.

How is this reflected in growth, financial results and customer numbers?
Rimac posted an 11 percent growth rate for last year, sales of $1.1bn and occupied a 33 percent share of the country’s insurance market. With regards to efficiency, Rimac stood out as the insurance company with the best ratio in the market.

The company operates in all insurance branches and provides integral solutions for its customers. Thus, it is the company with the largest number of both personal as well as corporate customers, at over 1.5 million and 51,000 respectively.

In 2013, we paid compensation worth $594m in total and provided more than 420,000 medical care services and others through our Aló Rimac emergency call centre, which stands as a prime example of the company’s soundness and response capacity.

How does this coincide with the Peruvian insurance market?
In 2013, the Peruvian insurance market faced several challenges, including greater competition and important regulatory changes, beginning with the adaptation of the new NIIF accounting framework, as well as an unusual increase in claims compared with the last five years.

In the regulatory scope, there were a series of important changes to take into account, including the new Law on Insurance Contracts, the Regulation on Information Transparency and Insurance Contracting, the Regulation on Management and Payment of Claims, and greater powers for the new National Health Superintendence.


The insurance sector’s share of Peru’s GDP


Total volumes of premiums in Peru, 2014

Are particular insurance products and services in increasing demand in Peru and how is your firm living up to this demand?
According to our estimates, we cover between 35 percent and 40 percent of the people insurance market (mainly life, health, vehicle insurance policies). As a result of stimulus in the economy, health, life and accident insurance policies as well as travel are growing at more than 20 percent per year.

Rimac is a brand that has been with Peruvians for more than 118 years and has consistently been able to reinvent itself to accommodate for changing consumer demands.

At Rimac, we are also aware that the insurance category is technically complicated and that Peruvians tend to block this category in their minds due to cultural issues. As a result, insurance penetration rates in Peru are the lowest in the region. Therefore, as leaders, we have assumed the responsibility of reaching all Peruvians as clearly and concisely as possible to create awareness about the importance of having insurance.

At the same time, we have set ourselves the goal of taking simple products and services to the market that correspond to consumers’ needs and lifestyles through a wide variety of available channels.

How is the firm looking to develop in the coming years?
Rimac Seguros is a leading insurance company and we know how to adapt our strategy accordingly. In this respect, we introduced the Director’s Plan three years ago, with the intention of giving the company a basic technological platform to focus on matters apart from branches and business lines and become a company focused on prospecting, selling, delivery services and measuring ourselves against our customers.

How does Rimac Seguros compare to other local firms?
Rimac Seguros is the company with the most experience in the Peruvian insurance market, with more than 118 years of experience in all insurance and reinsurance branches. We are part of the Breca Group, one of the soundest economic groups in Peru, and we have the support of the largest and most important reinsurance companies in the world.

Apart from our products, one of our principal advantages lies in our technological platform, which is essential for the future of insurance in Peru. We are aware that the management demands of the business are ever-changing and we are already selling insurance through our virtual channels, so having a virtual platform is vital for us to extend our coverage.

At present we sell SOAT (Obligatory Insurance Policy for Traffic Accidents), travel and vehicle insurance policies through Facebook and we also have applications for tablets and smartphones, through which our sales force can make quotations and even close deals for certain products.

One of our principal challenges is to develop an insurance culture in our country, taking into account the market’s huge growth potential

We are extremely optimistic about our technological improvements and, in doing so, want to go beyond our local market and see what there is abroad. We want to first compete against the principal regional insurance companies and then against the best international companies.

One matter that we believe requires special attention is social responsibility, which can be seen in more detail in our second annual sustainability report. In this respect, we have disseminated our educational programme through the portal, which has enabled us to provide training in prevention matters to more than 48,000 teachers, students and parents nationwide.

What role has leadership played in your company’s business developments?
One of our principal challenges is to develop an insurance culture in our country, taking into account the market’s huge growth potential. For Rimac one of the most important changes in management is to go from having an approach focused on the product to focusing above all on the customer, requiring far greater knowledge of their demands and expectations.

In this sense, we have a project called Rimac Habla Claro, through which we have simplified the language of our products in order to make them more accessible and more easily understood by our customers.

Another major challenge for us is the speed at which technological change is occurring. As previously stated, the number of consumers willing to buy over the internet is growing, but it’s about more than just a payment gateway and requires that we take our processes to the cloud.

What are your goals for the near future?
In 2011, the strategic plan, which ends this year, asked that we reached total sales -between Rimac Seguros and Rimac EPS – of $1.5bn. To reach this goal, we had to ensure we achieved sustained growth of between 12 percent and 13 percent. Right now we are defining the goals for the next period through 2015 to 2018, which will no doubt be similarly ambitious ones.

We assign our forecast with the same care we give to our technical results and, by disseminating our various efficiency plans, we hope this will favourably influence our results up to the end of 2014.

Now is the time for Nordic pension innovation, says Nordea Liv

The pensions industry in Norway has experienced a rapid surge in recent years, thanks in large part to the healthy economic performance of a country bolstered by a vast amount of oil. Although Norwegians enjoy a generous provision of pensions compared to their Nordic and European neighbours, there are a number of companies vying for the attention of the country’s citizens.

One firm has established itself as the market leader in the country’s pensions market in recent years, with a dramatic surge in its market share (see Fig. 1) Nordea Liv, a subsidiary of the country’s leading financial services firm, Nordea Bank, is now the leading provider in Norway of pensions. World Finance spoke to the company’s CEO, Jørund Vandvik, about how it is leading the way in innovation, the challenges facing the industry and what the future holds for pensions providers in Norway.

Our key differentiator is a focus on creating value for everyone – customers, advisors and ourselves

How has Nordea Liv grown its market share so dramatically in recent years?
Dedication to bank assurance is the main reason for our growth. Our mission is to provide our partners’ customers with the best possible life and pension offering, and provide best in class sales support for the sellers and advisors. We have adapted our products, sales processes, service models and operating model to match their needs. As a result, we are being perceived as an important contributor to their success and they focus on our products more than before.

What sets the company apart from its competitors, and why is it the leading provider in Norway?
Our key differentiator is a focus on creating value for everyone – customers, advisors and ourselves. We always start with customer value, it has to be positive. In providing value for advisors, we focus on ease to understand products, swift processes and no after work. Products are simplified and standardised so we can automate. Add a customer oriented organisation that works well across functions and always wants to improve, excellent sales support and fun to the equation, and you have a flavour of our distinctness.

How does Nordea Liv work with Nordea Bank and Tryg to offer a unique product?
We shall be the best product provider to our partners. To succeed we need to be extremely dedicated, integrated and supportive – we aim to know them better than they know themselves. At the same time, our aim is to challenge the existing thinking to be able to develop unique and innovative offerings based on the strength of our distributors.

What are the benefits of being part of the Nordea Group?
Nordea is the largest banking group and asset manager in the Nordic countries. There are several synergies being a part of it, both in scale and scope. The most obvious is that we utilise their distribution channels and customer base to drive volumes. But there are benefits in other areas as well, for example access to Nordea’s vast asset management and risk management competence. Another example is that we are incorporating Nordea’s excellent global asset allocation strategy in our investment products, securing the customers with actively managed portfolios reflecting Nordea’s strategic advice.

Nordea Liv market share graph
Source: Finans Norge. Notes: Market return products

In what ways is the company innovating in the pensions market?
We are innovating by simplifying. A pension is perceived to be a complex area for most people, our ambition is to make it easy. Our focus is on the advisors – it has to be easy for them. If it is easy for them, it is easier for them to take it to their customers. Another benefit from this approach is that simplicity for advisors provides simplicity for the customers. If it is easy and understandable for customers, they will buy our products.

An example of how we innovate is our iPad sales tool. In one of our sales channels, we developed an app-based sales tool on iPad for the sales force. It was very well received for its user-friendly interface, off-line usage and easy to use electronic signature feature. Since launch in January, sales are up 60 percent.

What are the challenges facing the industry at the moment in Norway?
The main challenge at the moment is the introduction of Solvency II and the impact on the guaranteed products. All sales of guaranteed products are closed, but it is a long-tailed business. Our strategy is to reduce the relative size of guaranteed products by strong growth in market return and life products.

Are there areas that Nordea Liv wants to expand into?
The market is moving, gradually, away from physical channels to online channels. Over the past years, we have eliminated paper processes in the sales processes. In addition, we have moved to electronic customer dialogues with portals and electronic newsletters, and leverage Lync and web-meetings with distributors and customers. The next step is to establish online sales solutions for all products, integrated with our partners’ online offering.

Where do you see the company in two years time?
Two years from now, we will still be the largest pension company, adding even more value to our partners and their customers.

What can we expect from Davos 2015?

It’s the event of the year: from January 21 to 24, over 2,500 of the world’s most influential figures from business, politics, academia and the arts will gather in the mile-high alpine resort of Davos to address the world’s most pressing concerns in a variety of workshops, panels and conferences.

Founded in 1971 by professor and economist Klaus Schwab, the concept for the World Economic Forum (WEF) was to bring together global leaders to discuss how the state of the world could be improved upon. In its 44 years, almost everything about the conference has grown, including the controversy surrounding it. Philanthropy has been on the rise for some time now, glamorised somewhat by high-profile celebrities’ involvement in charity and humanitarian work in recent decades. If Oprah Winfrey and Bill Gates have taught us anything, it’s that helping others is in, and the list of those looking to get a finger in the WEF pie is ever-growing. The total number of attendees, once a humble 444, stood at 2,633 in 2014.

However, anti-globalisation protestors continue to crash the party every year, setting up camp in sub-zero temperatures for the duration of the conference. The idea that the problems of 99 percent of the world can be suitably discussed and solved by the wealthiest, most powerful one percent is a widely criticised model. The term ‘Davos Man’, first coined by political scientist Samuel P Huntington, is now a universally recognised concept synonymous with those in attendance.

How much did it cost to attend Davos?

(Excluding the $30,000 ticket cost per person)


Annual membership with the WEF


Industry associate with the WEF


Industry partnership with the WEF


Strategic partnership with the WEF


Total attendees

A member of the global elite with little regard for those he allegedly represents, the Davos Man views national governments as “residues from the past whose only useful function is to facilitate the elite’s global operations”. This criticism is somewhat unfair when considering the major political and social developments to have emerged from the idyllic resort over the years.

On the list
Aside from acting as host to the most important economic, political and social decision-making in the world, Davos has plenty more to offer its attendees. The world-class winter sports resort and an endless list of private parties organised by major global corporations bring the secondary motive for attending Davos – networking – into focus. Failing to receive an invitation to one of these events – the Google party is said to be highly coveted – instils a sense of rejection in even the hardiest attendee.

In fact, the forum is reminiscent of a high school setting, down to a colour-coded lanyard system denoting the importance, and therefore influence, of every guest. Unofficial cliques are established early on, conversations are often halted prematurely when a higher ranked individual enters the room and greeting other attendees with a sweeping up-down look is standard Davos protocol.

The forum’s annual meeting has long been the site of major global social and political developments – for example, when Greece and Turkey agreed to turn back from the brink of war by signing the Davos Declaration in 1988. Or, in 2005, when the forum served as a platform for the launch of then-UK Prime Minister Tony Blair’s G8 policy on addressing climate change and poverty in Africa.

The hundreds of workshops, panels and discussions on offer over the course of the week range from the groundbreaking – ‘A day in the life of a refugee: exploring solutions for Syria’ (2014) to the somewhat trivial – ‘All you ever wanted to know about relationships, but were afraid to ask’ (2006). The latter was in fact the most popular session of the whole week that year.

This year, an invitation carries a minimum $71,000 price tag, but even that won’t deter the fat cats from playing in the snow, as Bono famously described the event back in 2006. “From a very corporate point of view, we would have at Davos something like 70 executives and C-level players from different companies. That’s almost impossible to replicate anywhere else in that period of time. So there’s real value for a corporation like ours to have that number of meetings,” Mark Spelman, Managing Director at Accenture Strategy, told World Finance.

Last year’s theme was ‘The reshaping of the world: the consequences for society, politics and business’, which Founder Schwab claimed “speaks to the need for leaders to fundamentally reassess how the tectonic plates of the world are shifting against each other, so they can predict and respond more effectively to the earthquakes that we know are coming”.
Attendees by gender

The 2014 guest list featured 288 government officials, 48 representatives from international organisations, 196 academics and 2,101 people from the public sector, of which 734 hold the job title ‘chief executive’. Disappointingly, just 16 percent of all 2,633 in attendance last year were women, down from 17 percent in 2013. Notable attendees included Hassan Rouhani, the first Iranian president at the forum in 10 years, Marissa Mayer and Christine Lagarde, plus regulars David Cameron, Bill Gates and Bono.

There was a heavy focus on health and wellbeing, which is expected to grow with each year, and many mindfulness meditation sessions featured on the programme, including one hosted by actress Goldie Hawn. However the conference was last year dominated by the technology sector, with many sessions spent discussing whether advances in technology would lead to a loss of jobs. Google’s Chief Executive Eric Schmidt surprised the audience by agreeing that while technological advancements are a positive development on a larger scale, they will ultimately result in job cuts. Growing tensios between China and Japan were also at the forefront of discussions, with Japanese Prime Minister Shinzō Abe chillingly comparing the relationship between the two to that of Britain and Germany in the lead-up to WWI.

Every year, speakers from politics and business take to the Davos stage to share their wisdom. In a speech on increasing UK exports and attracting inward investment, UK Prime Minister David Cameron celebrated both the globalisation so many have come to negatively associate with the forum, and the opportunities of shale gas. “Just look at what shale gas has done for America – for American firms and American jobs. It has reduced industrial gas prices in America to about one quarter of those in Europe, and it’s set to create a million more manufacturing jobs as firms build new factories,” he told the audience. “Act now to seize the opportunities of re-shoring.”

Davos 2015: The new global context
This January will be no different. More than 2,500 invitations to the resort will be extended to the global elite: key world leaders, intellectuals and heads of the world’s most successful businesses and international organisations. This year’s theme aims to “reflect the period of profound political, economic, social and technological change that the world has entered, which has the potential to end the era of economic integration and international partnership that began in 1989”, according to the WEF.

Ebola is likely to take centre stage at many sessions, along with the usual topics: oil, nuclear weapons and climate change. Last year was plagued by conflict and the global threat this discord poses will be discussed at length, such as the growing presence of Iraqi jihadists Isis and the Israeli-Palestinian war in Gaza. Also likely to be touched upon is Russia and Ukraine, who remain at loggerheads with each other, and Nigerian militant Islamist group Boko Haram, to name but a few.Attendees by profession

According to an executive summary posted by the WEF, key areas of focus will be addressing deepening geopolitical fault-lines, the normalisation of monetary policy through the reduction of quantitative easing and a rise in interest rates, and the continuing erosion of trust in public and private sector institutions.

Also on the list is “the ecological, societal and business repercussions of unabated climate change, youth unemployment and income inequality”, and the breadth and velocity of scientific and technological advances – namely the juxtaposition of opinions that they are both inspiring and ominous.

Final areas of focus mentioned are “the generational shift from societies sharing common values to those that are primarily interest-driven and the related rise of sectarianism, populism, nationalism and statism”, and the difficulty faced in improving governance of “critical global commons” –natural resources and cyberspace in particular.

An event of this calibre is always going to draw criticism, but one of the main issues is the secrecy of the whole affair. Many argue that if the most pressing global issues which concern everyone in the world are being addressed and discussed, then these discussions should at the very least be shared with the people they are affecting. This year, that fact has evidently been kept in mind – a brief summary of the 2015 agenda on the WEF’s website reads: “This programme will be more open to the public than ever before, with over 20 televised sessions and an expanded multilingual webcast capability covering 60 sessions.”

Whatever your view on the Davos Man, 2,500 of the world’s most powerful people all in one place simply cannot be ignored. The power they pose as a group is unfathomable, and many will eagerly anticipate the ideas, solutions and concepts to emerge from such an occasion.

History of the World Economic Forum

Founded by a group of European business leaders held in Davos, Switzerland

The second annual meeting drew 300 participants and was a modest event

The Forum expands its series of round table discussions to seven events

The Forum welcomed its first delegation from a non-European country – Mexico

A membership system is introduced, allowing 1,000 of the leading global companies to join

The Forum’s well known index of competitiveness was introduced

The US participated regularly at Davos after Regan sent a live message to the event

The Davos Declaration was signed by Greece and Turkey, turning them away from war

Its 1,000th member was welcomed, followed by a cap on membership to 1,000

The annual meeting launched the G8 agenda on global climate change and poverty

An online community called WELCOM was formed for business and government use

Henry Kissinger spoke out on the US and Russia to cooperate on ending the crisis in Syria

Will volatility return to the markets in 2015?

World Finance: To what extent do you think volatility will return to the markets in 2015?
Steen Jakobsen: I don’t normally issue any guarantees, but I will guarantee you in 2015, volatility will increase. The geopolitical risk, I don’t need to go through the list of those, but if you look at the credit spreads they are trading in spread terms below the default rate, we have a zero interest rate policy around the world, even high-yielding economies like Australia are heading towards zero percent. We have China with no growth, we Europe with no growth, we have disinflation, we have a violation of every single inflation target in the world. If that doesn’t create volatility I will resign and go back to school and become a professor in agriculture.

KIB facilitates investment in Kuwait

The Kuwaiti banking sector represents a unique opportunity for the global banking industry. Flushed with liquidity, the industry enjoys both an above-average capitalisation and formidable support from a government that so often succeeds in posting a yearly budget surplus in excess of $30bn. What’s more, by implementing a $100bn national development plan, the government’s strategy to stimulate the economy and diversify away from hydrocarbon revenue is leading the country’s financial services sector on to greater things.

Kuwait’s banking sector is a tightly regulated market, and with the central bank having recently introduced new governance standards, based primarily on the Basel III agreements, the regulatory stringency compares favourably even with more developed western markets. For Kuwait’s Islamic banks, however, complying with new regulatory standards is seen as a relatively straightforward process, given that the Islamic banking model requires strict adherence to sound financial principles, effectively putting them one step ahead of their conventional counterparts.

The establishment of the Capital Markets Authority also represents a crucial step in better stabilising the Kuwait Stock Exchange – the GCC’s oldest stock market – and in bolstering the country’s financial services sector. When combined, these developments have not only created a stable environment conductive to expansion, but also signalled that Kuwait is a serious contender on the world stage and an emerging financial hub. Loai Muqames, CEO of Kuwait International Bank (KIB), chosen by World Finance as 2014s Best Islamic Bank in Kuwait, believes that the time is ripe for Kuwaiti Islamic banks to strengthen cooperation with foreign institutions, in light of the country’s unique local banking environment and accommodating government.

There is a unique opportunity now for all parties to benefit from the developments currently taking place in Kuwait

“There is a unique opportunity now for all parties to benefit from the developments currently taking place in Kuwait. The local banking sector is closely tied to the national development plan, which also requires the participation of foreign institutions in order to bear fruit,” says Muqames. “Additionally, Kuwaiti banks are eager to offer their financial services to international firms in part because the local credit market has become saturated and the low-risk environment created by the government’s dual regulation-protection role. This has been a keen understanding at KIB for a long time, and we have structured the bank accordingly.”

Going global
KIB has invested heavily in a dedicated international banking department, focused primarily on correspondent financial services, syndication, multinational corporations, commodity trade finance, treasury services, corporate banking and investment. The department feeds off of KIB’s core traits as a champion in market research and a trusted partner of numerous local governmental and commercial entities. “We have the systems, asset base and long-standing trust from the government to accommodate the full spectrum of needs in a flexible and sound manner that is not easy to imitate,” says Muqames.

Incorporated in 1973, where it was originally known as Kuwait Real Estate Bank, KIB first started operations according to Islamic law in 2007 and has since extended its influence to all reaches of the nation. With a four-pronged business philosophy pertaining to operational excellence, customer focus, innovative products and outstanding service, KIB today boasts a network of 26 branches and is fast-emerging as a key constituent of the country’s banking industry and national economy.

The bank is transparent in making known its commitment to keeping the highest level of ethical standards in all transactions, preserving professional integrity with all customers, complying with the provisions of sharia law, and adhering to the appropriate regulatory framework. These commitments combined mean that KIB has made a name for itself as a responsible corporate player in the national economy and a vital cog in the machine that is the Kuwaiti banking sector.

KIB also enjoys an additional competitive advantage in that it is flexible, adaptable and free to mold its strategy in step with the rapidly changing landscape. The bank’s structure enables it to accommodate specific client needs in a way that other banks have difficulty doing. With a management team consisting of eminent and distinguished individuals, each with many years of experience in banking, Islamic or otherwise, KIB’s ability to accommodate for sudden market changes is unmatched the country over.

Islamic banking
A prime example of KIB’s agility could be seen in its swift 2007 transformation from a conventional real estate bank to a full-fledged Islamic bank, operating in full compliance with sharia law. The event marked a world’s first, and became a case study for others looking to adopt the Islamic banking model. Moreover, it was testament to KIB’s ability to react to perceived market opportunities with decisive action, and testament to the bank’s commitment to its customers. “KIB, with its Islamic banking model, was able to gain wide market traction because in our system, funds only flow in direct support of real underlying economic activities,” says Muqames. “Therefore, investors only approach us when they have genuine needs, and in this sense, KIB and Islamic banking can be seen as superior to traditional financial models.”

The prudent and flexible nature of Islamic banking is something that has benefitted the financial development of Kuwait, and something that has played a decisive part in bringing the country’s financial services sector up to speed with international developments. Compliance with Islamic banking principles ensures lower debt ratios and minimal use of leverage, meaning there is less chance of exposing the business and its customers to irresponsible risk-taking. These attributes mean that projects financed through sharia-compliant methods are seen as less risky by investors, which has understandably appealed to cautious investors in this post-crisis world. Moreover, Islamic banking has a wealth of tools available to meet the needs of Kuwait’s development plan and usher the economy onto greater heights.

With a sizeable presence in Kuwait, the Islamic banking industry today represents a central pillar of the country’s banking landscape and a major growth engine. By taking advantage of what opportunities have presented themselves in recent months and years, KIB is in many ways representative of what can be achieved in a burgeoning Islamic banking sector.

In this respect, KIB has targeted energy sector penetration as a core component of its diversification strategy. This sector represents a major portion of the national development plan and the government has announced plans to partner with the private sector institutions to finance its projects. In this sense, such projects will no longer be 100 percent conventionally financed by the government and will undoubtedly contain an Islamic tranche. Therefore, KIB has already begun leveraging its resources towards securing agreements with key governmental entities tasked with implementing these projects.

Government plans
Muqames says that KIB’s deepening penetration in the energy sector yields a two-fold advantage for the bank. On one hand, KIB is directly benefiting from a monumental government-funded development plan, while simultaneously offering new opportunities to foreign clients who require local support to enter this area. The energy sector in Kuwait represents glowing opportunity for international investors; however, without the local know-how to match the finances, many investments are simply not worth making.

The $100bn Kuwait Development Plan, originally laid down by the government in 2010, has accelerated demand for measures to assess the country’s infrastructural challenges, despite 15 consecutive years of budgetary surplus. However, it is not the money that is lacking, but the expertise in ensuring these projects go ahead as planned.

The rise of key names such as KIB has given inhabitants and investors alike cause for optimism moving forwards now that there are businesses capable of leading the much-needed multi-billion dollar projects and acclimatising to constant market changes. With a population of some 3.5 million and proven oil reserves of over 100 billion barrels, it’s fair to say that the country is capable of much greater things. And with the likes of KIB leading the ranks in the banking industry, the country’s aspirations to become a major financial hub looks only to be a matter of time.

Indeed, KIB and the broader banking sector are increasingly playing a key role in Kuwait’s long-term development plan, and the financial sector underpins Kuwait’s emerging private sector by serving as a pillar in the state’s overall economy, second only to oil and gas.

Regulations have changed Sri Lankan insurance market for better, says SLICL

Recent regulatory changes have had a positive effect on the insurance market, including a stringent risk-based capital regime and the increase in minimum regulatory capital and public listings. According to Fitch, the outlook for the industry is stable, and in actuality, these factors have contributed to the creation of a robust insurance market with plenty of potential for premium growth. “Fitch expects moderate top-line growth to continue, supported by low penetration and a steady flow in vehicle insurance related to rising car ownership,” the ratings agency says in its 2014 Outlook for the Sri Lanka Insurance Sector. That is excellent news for local players like the Sri Lanka Insurance Corporation (SLICL), which has been working tireless to develop the market and increase penetration across the island nation.

“SLICL is the undisputed market leader in the general insurance segment of Sri Lanka with an annual gross written premium of 12.95bn rupees ($10m) as reported for the financial year ended 31 December 2013,” says Piyadasa Kudabalage, the Managing Director at SLICL. “Our space in the general insurance market represents around one quarter of the total premiums written in Sri Lanka, and the balance is taken by 22 competitors of whom five are international insurers. This in itself demonstrates our strength, capability and the deep density created in our reach to the Sri Lankan nation.”

Sri Lanka is, admittedly, a market subject to stringent regulatory requirements and principles of good governance with specific accountabilities on capital adequacy, solvency and adherence to IFRS standards in financial reporting. “I have contributed personally in creating a robust insurance market with plenty of room for premium growth,” says Kudabalage. “Indeed, I am proud to announce that our corporation has consistently met all benchmarked parameters and is the only insurer to have an ‘AA(lka)’ rating from FITCH Ratings and AAA by RAM Ratings.”

Sri Lanka in figures


Population growth rate


Birth rate per 1,000 population


Men’s life expectancy at birth


Women’s life expectancy at birth


Health expenditures 2011

Source: Index Mundi. Notes: Includes estimated 2014 figures

Regulated market
SLICL has derived its strength from its rich history – which spans over half a century and created multifaceted distribution platforms and maintain a deep diversity in our product range and offerings. “SLICL believes firmly in the use of technology to maintain optimum efficiency and to gain and create value in a fast developing economy in which the insurance sector plays a pivotal role”, explains the managing director.

The assets of the general insurance business of SLICL as at end 2013 stands at a value of 57.7bn rupees ($443m) with a market standing of one third of the total available assets in the country’s general insurance sector (see Fig. 1). The reported gap between the corporation and its immediate competitor stands at 33bn rupees ($253m). “This shows the standing of our corporation in the Sri Lankan market space for general insurance,” says Kudabalage. “The professionally skilled and academically qualified work force of SLICL has been a strategic pillar and the driving force of our success. SLICL is regarded as an equal opportunity employer that creates no barriers for engagement or progression on grounds of race, religion or gender. Balanced gender diversity is maintained in the work place that spans over 127 branches including the head office. The staff retention rate of 95 percent speaks of the acceptance and conducive nature at the workplace.”

SLICL is committed to change for betterment of the corporation and industry. The life and general business section of the market are subject to specific regulations and the companies are expected to maintain a high level of independence in managing the respective businesses. The market is presently moving towards substantial changes in regulations whereby the following key changes are to be implemented in beginning the 2015/16 financial year.

In terms of the new laws, the composite companies are required to be segregated into two specific entities through different shareholding and the management structures dealings separately with life and general insurance business. “Our corporation has made all arrangements to comply with the new criteria beginning the year 2015,” says the managing director. “Accordingly, all general insurance business currently handled by SLICL will be transferred to a new entity; namely ‘Sri Lanka Insurance Corporation General Limited’. Therefore, all renewals as well as new business forming part of general business will from the year 2015 be handled by Sri Lanka Insurance Corporation General Limited.”

Another important regulatory change will be the adoption of risk based capital framework effective from 2016. This represents a significant change in managing the businesses of life and general insurance. SLICL has accomplished to the satisfaction of the regulatory authority the stipulated criteria and is more than prepared to meet the new change. “On the basis of the results of a parallel reporting mechanism organised by the insurance regulator, the Board of Directors of SLICL is absolutely confident that the company will be able to demonstrate the required efficiencies and criteria in the new regulatory framework associated with RBC,” says Kudabalage.

Investing in Sri Lanka
The current market structure in the general insurance sector in Sri Lanka consists of 22 Insurance companies along with 52 brokers and over 20,000 agents tied to traditional insurance companies. Brokers are also tightly regulated and agents are subject to a professional competency assessment at the point of enrolment. These regulations have helped make the market safe and resilient and in no small part contributed to the steady growth of the industry.

As at end 2013, the Sri Lankan market has recorded approximately $726m in gross written premiums. Out of the premiums, 85 percent has been generated by the use of direct sales and agency forces. The remaining 15 percent has been contributed by the brokers – mainly the local brokers other than in the case of a few who represent international franchises handling global accounts in Sri Lanka. “On the spilt of SLICL’s main business by lines, it is noteworthy to mention that of the of four main lines 56.61 percent is accounted by motor insurance, 26.06 percent by miscellaneous insurance which also include the health and medical lines of business, 14.42 percent by the fire and engineering lines and 2.91 percent by marine line of business,” explains the managing director.

Source: SLICL
Source: SLICL

In 2013 the market reported a nine percent growth over the previous year, and the average rate of growth in general insurance business over the previous three years has been around 10 percent a year. Within the current regulatory framework, the insurance regulator has permitted the conduct of bancassurance business and proposes to permit Institutional agencies. “The placement of reinsurance is also an area which is highly regulated,” explains Kudabalage. “All reinsurance providers must carry a rating above ‘BBB’ from S&P or its equivalent or maintain a sovereign rating acceptable to the insurance regulator.

“The insurance board verifies details of compliance on a quarterly basis and corrective measures are mandated against any party found violating. A salient feature in financial reporting is the new requirement to prepare and present financials based on IFRS standards. These have been adopted to ensure uniform financial reporting relevant to regulatory and supervising purposes,” he adds.

The market outlook for trade and industries in Sri Lanka looks extremely positive and the insurance sector is likely to be a key beneficiary as a result of the expansions underway on socioeconomic factors. These, together with current market space and the new regulatory framework, will pave the way for greater market stability, consolidation and mergers of insurance business in the near future. “Rates are expected to harden and the loss ratios are expected to improve in the backdrop of proposed RBC framework,” adds Kudabalage.

“SLICL is on sound and firm footing with necessary systems and human resources to support the key functions of underwriting and claims management in general insurance.

“This will add great value to key stakeholders including our reinsurance partners. Hence we offer solid platforms for reinsurers to support SLICL and mutually benefit from contracts we underwrite.”

Bonus Banca de Inversion on the future of infrastructure developments

As large-scale infrastructure projects increasingly become semi- and fully-privatised, the middlemen paving roads in these deals are rising in prominence. World Finance speaks to Emmanuel Cáceres, Managing Director at Bonus Banca de Inversion, about the global trends around this industry.

World Finance: Tell me about some of the infrastructure projects that you’ve helped to financially structure.
Emmanuel Cáceres: Over the last 10 years we’ve been developing and participating in almost every PPP programme in Colombia. This year we’ve participated in the Magdalena River PPP programme; it was a $740m programme.

We’ve also participated in the Prosperity Highway programme. It was a huge programme of $7.2bn, which we had to split into nine sub-projects in order to be able to get it to the market.

We’ve successfully awarded five of those projects for $4.7bn this year, and hopefully next year we will be able to get into the market the remaining four projects, to complete this huge programme.

Over the last 10 years we’ve been developing and participating in almost every PPP programme in Colombia

World Finance: So do you think that infrastructure projects are best dealt with through the private structuring deals that a company like yours affords?
Emmanuel Cáceres: These infrastructure projects are mainly a risk distribution contract. So we need, as a financial advisor, to really be able to measure and evaluate these risks that the guarantor will be giving and the sponsor assuming, so that the contract and the financial structure will be able to remunerate and to pay this private player for its involvement in these kind of projects.

World Finance: Now, you are dealing with deals in the hundreds of millions of US dollars; tell me about some of the challenges that you have had to address in striking these deals.
Emmanuel Cáceres: The most interesting challenges have been really to understand what each player is looking for. You need to understand what the banks are looking for; what they’re looking for in each of the projects, and the size of the ticket that they’re willing to give for the project.

You need to understand what the insurance companies are looking for; you need to understand what the government is looking for. So you really need to see what each of these actors and players are interested in, to be able to get a fair project to the market.

World Finance: Since these deals are semi-private – sometimes wholly-private – whose responsibility is it to maintain them, once they’re struck, completed, and people are using these projects? Would it go to government coffers, or are you expecting the private entities that put the deal together to take over that responsibility in the long term?
Emmanuel Cáceres: Well in Colombia, the new PPP law says that we can’t pay for the infrastructure. In all of these projects we need to be able to structure a service that will be provided. And therefore, yes: we will ask the private player to build the infrastructure, but to maintain and operate the infrastructure over the remaining 10 or 20 years – it depends on each programme.

The Magdalena River is a 13 year programme, but the highways are probably more like 30 year programmes. So it depends. But yes: we will always ask them to give the operation and maintenance of the project.

This year we’ve participated in the Magdalena River PPP programme; it was a $740m programme

World Finance: Very interesting; now Emmanuel, tell me about some of the other projects you have in the works?
Emmanuel Cáceres: Yes; actually in the last month we’ve been awarded with a new project in the upper north part of the country. It’s going to be a dam that will produce both energy and water for the region. And the water will be used for both the aqueduct systems, and the irrigation of all the agriculture in the area.

It’s going to be a very interesting project, that we’re hopefully going to be putting into the market next year.

World Finance: Exciting times ahead; Emmanuel, thank you so much for joining me today.
Emmanuel Cáceres: Thank you.

Why are commodity prices falling?

Oil prices have plummeted 40 percent since June – good news for oil-importing countries, but bad news for Russia, Venezuela, Nigeria, and other oil exporters. Some attribute the price drop to the US shale-energy boom. Others cite OPEC’s failure to agree on supply restrictions.

But that is not the whole story. The price of iron ore is down, too. So are gold, silver, and platinum prices. And the same is true of sugar, cotton, and soybean prices. In fact, most dollar commodity prices have fallen since the first half of the year. Though a host of sector-specific factors affect the price of each commodity, the fact that the downswing is so broad – as is often the case with big price swings – suggests that macroeconomic factors are at work.

So, what macroeconomic factors could be driving down commodity prices? Perhaps it is deflation. But, though inflation is very low, and even negative in a few countries, something more must be going on, because commodity prices are falling relative to the overall price level. In other words, real commodity prices are falling.

Monetary tightening is widely anticipated in the US, with the Federal Reserve having ended quantitative easing in October

The most common explanation is the global economic slowdown, which has diminished demand for energy, minerals, and agricultural products. Indeed, growth has slowed and GDP forecasts have been revised downward since mid-year in most countries.

But the United States is a major exception. The American expansion seems increasingly well established, with estimated annual growth exceeding four percent over the last two quarters. And yet it is particularly in the US that commodity prices have been falling. The Economist’s euro-denominated Commodity Price Index, for example, has actually risen over the last year; it is only the Index in terms of dollars – which is what gets all of the attention – that is down.

That brings us to monetary policy, the importance of which as a determinant of commodity prices is often forgotten. Monetary tightening is widely anticipated in the US, with the Federal Reserve having ended quantitative easing in October and likely to raise short-term interest rates sometime in the coming year.

This recalls a familiar historical pattern. Falling real (inflation-adjusted) interest rates in the 1970s, 2002-2004, and 2007 -2008 were accompanied by rising real commodity prices; sharp increases in US real interest rates in the 1980s sent dollar commodity prices tumbling.

There is something intuitive about the idea that when the Fed “prints money,” the money flows into commodities, among other places, and so bids their prices up – and thus that prices fall when interest rates rise. But, what, exactly, is the causal mechanism?

In fact, there are four channels through which the real interest rate affects real commodity prices (aside from whatever effect it has via the level of economic activity). First, high interest rates reduce the price of storable commodities by increasing the incentive for extraction today rather than tomorrow, thereby boosting the pace at which oil is pumped, gold is mined, or forests are logged. Second, high rates also decrease firms’ desire to carry inventories (think of oil held in tanks).

Third, portfolio managers respond to a rise in interest rates by shifting out of commodity contracts (which are now an “asset class”) and into treasury bills. Finally, high interest rates strengthen the domestic currency, thereby reducing the price of internationally traded commodities in domestic terms (even if the price has not fallen in foreign-currency terms).

US interest rates did not really rise in 2014, so most of these mechanisms are not yet directly at work. But speculators are thinking ahead and shifting out of commodities today in anticipation of future higher interest rates in 2015; the result has been to bring next year’s price increase forward to today.

The fourth of the channels, the exchange rate, has already been functioning. The prospect of US monetary tightening coincides with moves by the European Central Bank and the Bank of Japan toward enhanced monetary stimulus. The result has been an appreciation of the dollar against the euro and the yen. The euro is down eight percent against the dollar since the first half of the year and the yen is down 14 percent. That explains how so many commodity prices can be down in terms of dollars and up in terms of other currencies.

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.

© Project Syndicate 1995–2014

Kuwaiti insurance group GIG expands across the Gulf

Kuwait has long been the less flashy nation in the Gulf but that does not mean it has been any less successful. It has a burgeoning economy, which grew 2.3 percent in 2013. While non-petroleum sectors accounted for only 10 percent of that growth, they are expanding rapidly – and that is especially true of the insurance industry.

The Gulf Insurance Group (GIG) is the largest insurance network in Kuwait, in terms of written and retained premiums within life and non-life segments. As such the group has been a beacon, guiding the growth of this nascent industry. Khalid Saoud Al Hassan, the Group Chief Executive Officer of GIG, spoke to us about the trials and rewards of operating in a market such as Kuwait and why GIG is a company to watch.

How has the Kuwaiti insurance market developed over the years?
In line with the rest of the financial services sector in Kuwait, the insurance industry remains largely underdeveloped. However, the sector has experienced a steady expansion over the last few years, which resulted in a steady increase in life insurance business as well.

Despite this, there is intense competition between companies and prices, which leads to a lowering of premiums and slow market growth. The absence of an independent body to oversee the local insurance market and the development of regulatory controls, and the lack of comprehensive information about the sector are also major challenges for the industry. Kuwait suffers from a lack of community awareness of the importance of insurance and additionally some of the rules and regulations can be limiting.

Kuwait suffers from a lack of community awareness of the importance of insurance

How does the insurance market in Kuwait interact with the emerging Islamic finance market?
We believe the Islamic finance industry will be much more developed in the near future, particularly after reviewing the new regulations of Basel III, which may offer an opportunity for the industry to strengthen its capitalisation and liquidity management. On the other hand, the insurance market has not yet managed to achieve a satisfactory scale in Kuwait.

Takaful insurance is still an emerging business in Kuwait and it will take some years to develop this type of business in this small market. However, the increasing need for Takaful in both life and casualty insurance – in addition to the new Islamic finance market – means there is potential for growth.

What significant innovations have allowed Gulf Insurance Group to succeed?
Gulf Insurance achieved the first giant leap of unifying and bringing all of its subsidiaries under one globally recognised brand name: GIG. This included unifying all the IT platforms, distribution channels, reporting systems, HR and management expertise. This has enabled the company to maintain a leadership position in Kuwait for the 13th consecutive year, with very strong leadership positions through the MENA region.

GIG has also excelled in the innovation processes of its e-services platform: it was the first insurance company in Kuwait to launch iPhone and Android apps.

New branches and a new kiosk setup have also contributed to our successes, including regional expansion.

What are Gulf Insurance Group’s plans for the future?
GIG’s consolidated gross written premiums are well diversified among several business lines. In 2013, medical was the group’s most significant line, followed by motor and property.

Currently we have 10 subsidiaries and four affiliate companies, and a strong presence in Kuwait and neighbouring countries. We are in the final process of entering into Algeria, to explore their insurance market both in life and non-life.

We are developing GIG-wide common products, accelerating bank assurance services from our major subsidiary companies outside Kuwait. We are also in the final stages of rebranding our corporate and sub brands, which has really helped us to make a big difference in our existence in the local market and in the region.

Nigeria to slash 2015 budget as oil prices slump

Slumping oil prices have left Nigeria’s finance minister Ngozi Ikonjo-Iweala with no option but to slash the country’s 2015 budget by $3bn, while also forcing the government to reset its expectations of what the economy will achieve in the coming year. With oil-related revenues responsible for more than 75 percent of the government’s balance sheet and 95 percent of foreign reserves, the finance minister announced that GDP growth will come in at a lower rate than previously stated.

The country could face further problems if the price of oil falls short of its predictions for 2015

Less than two months ahead of a February 14 presidential election, the revision comes at a less-than-ideal time for President Goodluck Jonathan, who is preparing for one of the most closely contested elections in the country’s history. The revision means that government spending should total $23.3bn, however, the country could face further problems if the price of oil falls short of its predictions for 2015.

“This budget is based on a few key indicators, $65 a barrel benchmark and we are going to stick to it for now, in spite of the decline in prices, because we feel the average price next year will be around $65 to $70”, said Okonjo-Iweala. “The production level is 2.27 million barrels per day. We’ve revised the growth rate based on the new parameters for the country, down from 6.35 percent to 5.5 percent next year. But that is still one of the fastest growth rates we’re experiencing in the world today.”

Although the country has taken pains to diversify away from oil, the fact remains that the West African economy is dangerously exposed to any sudden price shocks, and with the commodity having lost almost half of its value in 2014, Nigeria’s outlook has taken a turn for the worse.

The government has stressed repeatedly that those concerned should take comfort from a thriving non-oil sector, which the Director-General of the Budget Office of the Federation, Bright Okogu, said was responsible for 86 percent of growth after the country’s rebasing. No doubt, this focus on the non-oil sector is something that will feature heavily in the weeks to come, as the president looks to secure a greater number of votes come February.

Unemployment special: can France escape a vicious circle?

When President Francois Hollande came to power in May 2012, the unemployment rate in France was 9.8 percent. It’s now at 10.5 percent despite various efforts from his government to remedy the situation, and political tension as a result of this is rife. The French economy’s ‘sickness’ has impacted the President’s popularity to such an extent – in November, his approval rating stood at a measly 12 percent – that he has vowed not to run for re-election if he fails to cut unemployment by 2017.

With the unemployment rate sitting uncomfortably at 10.5 percent, it’s unsurprising that economic growth has ground to a halt in the past two quarters. France’s GDP growth has fallen significantly short of the OECD average consistently since 2012, and is predicted to chug along at a slow pace well into 2015, increasing by 0.8 percent over the year. If people aren’t working, they aren’t spending, and if businesses aren’t selling, they aren’t hiring. This vicious cycle will continue until drastic government reforms, which create jobs and revitalise the economy, are implemented.

While the OECD predicts that unemployment will fall to 10.1 percent in 2015, analysts at EY seem to have less faith in Hollande’s promised reforms, with their forecast seeing it rise to 10.5 percent. Neither see it falling below 10 percent until 2016 at the earliest, corresponding with a forecast from the European Commission – which has also put France ‘under surveillance’ for exceeding recommended deficit limits.


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The government’s answer to its economic woes was the so-called Responsibility Pact, introduced in January 2014. Criticised for its austerity, it consisted of tax breaks for businesses totalling €40bn, on the condition that employers commit fully to the creation of jobs in return. But almost a year on, unemployment has continued to rise, causing the plan to be branded a failure by a top economic minister, and Hollande’s government has been left scrabbling for the next solution.

That next solution came in early December, in the form of a new bundle of policies aimed at loosening France’s inflexible labour regulations. Dubbed ‘Macron’s Law’ after the economy minister who presented it, the new policies include relaxing Sunday and evening retail opening hours, lifting restrictions on new bus lines to increase the competition with national rail operator SNCF, and an overhaul of legal professions, intended to make the process of starting a new firm easier.

Of course, changes are never going to please everyone, and thousands took to the streets in protest after Macron outlined his plans. A former Rothschild investment banker, he is the youngest member of Hollande’s government at 36, and many were quick to voice their doubts about his unexpected appointment in August. A poll published by French business daily Les Echos in August found that nine out of 10 French people disapprove of the government’s economic policy. In 2015, it’s possible that these mounting political tensions could deter foreign investors and further exacerbate the country’s economic woes.

If Macron and Hollande’s attempts at solving the unemployment problem are unsuccessful and job prospects continue to worsen, French voluntary diaspora could become an increasingly likely possibility. The country’s EU membership makes it easy for its citizens to work and live elsewhere, but a migration of talent would be the final nail in the coffin for its economy.

With the country already under close surveillance by the European Commission, it’s clear that disapproval of its government’s economic policies is a view shared by many more than just its citizens. France is already dragging down economic results for the region, and until growth picks up, there’s an increasing risk that the sickness could spread to infect other Eurozone countries. Perhaps pressure from the EC will give the government the push it needs to act more boldly and make real changes to improve employment prospects, but if not, it’s doubtful that many will protest to Hollande’s retreat from presidency in 2017.

Fubon Life becomes leader in the Taiwanese life insurance field

Fubon Life has been the leader among Taiwanese life insurers in terms of profitability for the past five years, and has led the industry in recruitment three years in a row. In 2013, Fubon achieved a first year premium (FYP) income of TWD 212.8bn (19 percent of market share), making it the number one life insurance company in the country. Earnings after tax last year reached a record high of TWD 19.13bn, marking an astonishing annual growth of 48 percent. Moody’s has confirmed Fubon Life’s credit rating status as A3, and upgraded its outlook to stable, which again is the best credit rating and outlook among all market players in Taiwan. The return on investment of Fubon Life over the past three years is part of the reason Fubon Life has achieved these ratings and outlooks from Moody’s (see Fig. 1).

This year marked a dramatic change in the life insurance market in Taiwan. The mainstream product has shifted to the field of long-term care due to the government’s amendment of the ‘Long-Term Care Service Act’. Online insurance policy subscription will also be allowed. As the leader in life insurance industry, Fubon Life will continue to promote its retirement planning programme, as well as strengthening its digital competitiveness, in order to contribute to the development of the life insurance market in Taiwan.

An ageing population
Taiwan’s population is an ageing one, meaning long-term care and health insurance policies will continue to be the mainstream products in the market. Long-term care – required most commonly as a result of chronic illness or disability – usually requires a significant amount of medical expenditure. Fubon has led the industry in launching long-term care insurance policies focusing on specific injuries and diseases that are the main catalysts for long-term care, to reduce the cost burden and fulfil the needs of policyholders. This year, Fubon Life introduced the concept of four major accounts for retirement planning: the ‘annuity and entertainment account’, ‘medical insurance account’, ‘long-term care account’ and ‘day care account’. These four accounts are intended to educate the general public to take advantage of various long-term care and health care insurance products and prepare for a future of lower birth rates and ageing society.

TWD 1.22trn

Taiwan insurance premium income (H1, 2013)

Digitisation, meanwhile, has become one of the most important trends in life insurance. Fubon Life draws on the latest digital technology to interact with its customers. It has developed the most comprehensive mobile insurance service in Taiwan and constructed the most extensive mobile/digital service network. Fubon Life has:

  • Introduced the m-Application system. Fubon fully digitises the proposal form processing service. Its 15,000 agents can process proposal forms in 10 minutes with their tablet computers anytime, anywhere. Currently, one out of every two new policies of Fubon Life is processed in the digital format.
  • Led the industry by introducing a photo claim service, which allows the claim application to be approved in as soon as 30 minutes.
  • Developed an intelligent, image-based process management system to enhance operational efficiency, strengthen internal/external training and education on underwriting procedures, and build a strong and professional underwriting team. Through the intelligent system and the improvement of underwriting expertise, Fubon Life is able to enhance the speed and efficiency of proposal form processing. Currently, 80 percent of non-physical proposal forms can finish the underwriting procedures within one day.
  • Introduced online internal training and marketing platforms. This year Fubon upgraded its internal training platform to the ‘Fubon New Vision Cloud Platform’ and allowed busy agents to access the training resources with their mobile devices anytime, anywhere. This not only improves the expertise of the agents, but also enhances service efficiency by offering clients a comprehensive service.

Last but not least, Fubon Life’s online policy subscription service has witnessed the beginning of the era of online insurance policy subscription in Taiwan.

Recruiting the best
During this period of economic recovery, another focus in Taiwan’s life insurance industry is the war of recruiting. Fubon Life has recruited more new agents over the course of the past three years than anyone else, and is expanding its recruitment activities from metropolitan areas to other cities and townships. The elite agents it recruited over the past few years have achieved impressive results and become the driving force of the organisational expansion.

Fubon Life Insurance
Source: Fubon Life Insurance

The reason Fubon Life enjoys the leadership in new agent recruiting is due to its internal entrepreneurship system, which allows agents to focus not only on meeting sales targets, but also assume to a managerial role in leading his or her own sales organisation. The attractive career prospects and compensation plan have made Fubon Life Taiwan’s favourite employer among college graduates majoring in finance and insurance for four years running.

Fubon Life has introduced a ‘No Boundary’ recruiting programme, and plans to recruit 5,000 new agents from cities and townships around the island. In addition to expanding its service network, this programme is also intended to create job opportunities for young, talented people in their hometowns. Over the next three years, Fubon Life will continue to expand its reach and develop human resources. Its goal is to achieve a net growth of 10,000 agents to maintain its market leadership.

Fubon Life has been finding new ways to provide innovative and premium services to its clients, including forming a healthcare service team with a group of employees with medical backgrounds to provide health consultation services to the customers suffering from critical illnesses. The team provides customised health education material, a physician’s second opinion, and referrals to social welfare resources.

Fubon Life is the first in the country to offer the health education service to customers. It will send staff to visit its customers when they check into hospitals and offer them a ‘health tips folder’ that includes a variety of healthcare information for the policyholders. This consultation service has served a total of 36,421 policyholders and 18,790 copies of the health tips folder have been distributed to date.

Leading the industry
While Fubon Life’s competitors tend to outsource their emergency hotline to overseas, third-party entities, Fubon Life leads the industry by having its own staff to answer a toll-free overseas emergency hotline, offering policyholders medical advice and travel-related support without time difference and language barriers, and regardless of the amount of premium they have paid. Fubon Life also monitors major disasters and accidents home and aboard 24/7 to actively initiate the claim settlement or overseas emergency relief mechanism when needed. Its emergency relief task force helps the families of policyholders to handle relevant issues.

The Taipei Marathon, for which Fubon Life has acted as title sponsor for 11 years
The Taipei Marathon, for which Fubon Life has acted as title sponsor for 11 years

This year, Fubon Life launched the ‘Senior Policyholder Hotline’, which policyholders over 65 can call to make inquiries regarding their policies. It runs a 24/7 service available in different dialects. Policyholders do not have to listen to recordings and are served by real people. Fubon will even send agents to policyholders’ homes to provide services for senior policyholders if necessary.

Fubon also goes the extra mile to add a personal touch to its services, for example by designing greetings cards for children under 12 so that their parents can write messages to them. It is this kind of dedication to detail that saw Fubon Life receive the Best Service Award in the life insurance category by Commonwealth Magazine in Taiwan, and World Finance’s award for Best Insurance Company in Taiwan, 2014 – the first Taiwanese insurer to win the award on three separate occasions.