2014 | World Finance

Ceylinco Life promotes rapid growth in Sri Lanka’s insurance market

Posted on December 1, 2014November 10, 2014 by Ashton Wenborn

The internal conflict that plagued Sri Lanka through most of the 1980s and the 1990s ended in 2009. Since then, the country has embarked on a programme of accelerated development. Throughout the civil war, Sri Lanka maintained some enviably high socio-economic indicators; according to the Sri Lankan Board of Investment, 50 percent of university graduates have studied technical or business disciplines, making the Sri Lankan workforce one of the most competitive in market terms.

Since then, the Sri Lankan government has been diligently ensuring the rest of the world knows that not only are the hard civil war days over, but that the island is open for business too. Finance is among the fastest-growing industries and foreign direct investment rose in 2013, from $1.38bn to $1.42bn, as the economy continues to grow. Over the last four years, while most of the world saw slow growth, Sri Lanka grew by an average of 7.3 percent annually. What’s more, the signs are looking very positive for 2014.

Insurance was nationalised in Sri Lanka in 1962 and remained a state-owned monopoly for 26 years

Continued improvements
This renewed interest for foreign investment, especially in sectors such as infrastructure development and hospitality has been positive for the finance industry. For life insurers, another important development has been the improved access to the northern and eastern provinces of the country. These were the areas worst affected by the conflict, and companies found it difficult to recruit and run offices in many parts of these provinces during this time.

Penetration of life insurance was, as a result, even lower than in the rest of the country. Since the conflict ended there has been rapid growth in sales of life insurance in these regions, and as a leading insurance provider in Sri Lanka, the accolades Ceylinco Life has earned throughout the years are in recognition of its diverse functions and innovative products in a country that has struggled with internal strife. With one of the highest solvency ratios in Sri Lanka, Ceylinco Life promotes and supports local development as well as advocating teamwork and diversity as an integral part of its business.

Key to its success is the firm’s efficiency in providing insurance to customers, as well as contributing actively to the economic wellbeing of the country through its products and initiatives. Some of the Ceylinco Life’s branches in the north and eastern provinces are among the best performing in the country. The increase in per capita income in recent years has also helped insurance and other businesses.

Insurance was nationalised in Sri Lanka in 1962 and remained a state-owned monopoly for 26 years. When the private sector was permitted to re-enter the market in 1988, the new players had to compete with two state giants, the Sri Lanka Insurance Corporation and the National Insurance Corporation. The new companies had to establish themselves, build public trust and confidence and develop new products to undermine the market dominance of these two entities.

Life Policies Table — Source: Insurance Board of Sri Lanka, Annual Report. Note: 2012 figures

“State entities continued to patronise the state corporations, and there wasn’t a level playing field at the beginning. However, penetration of life insurance was very low, so the market potential was high. By 2004, 16 years after it commenced operations, my company, Ceylinco Life, became the market leader in life insurance and has maintained this position since,” said R. Renganathan, the Managing Director and CEO of Ceylinco Life.

Today, the life insurance market is extremely competitive with 15 players including three international companies. According to the industry regulator, the Insurance Board of Sri Lanka, Gross Written Premium of the life insurance sector stood at $6.1m at the end of 2012, while total assets of the life insurance companies amounted to $3bn.

Increasing priorities
In this respect, life insurance is still a growing market in Sri Lanka with relatively low penetration levels. Four large players currently dominate the market and the products offered cater to different market segments based on levels of affluence, meaning there’s still significant room for growth and product diversification. Disposable income in many population segments is relatively low, which has generally made life insurance a low priority despite the high level of education and literacy in the country.

Awareness of the importance of life insurance is also lower than in more developed markets. But as the population becomes increasingly wealthier, delivery channels such as bancassurance and online insurance are growing in popularity and show major potential for development. “The penetration of life insurance as a percentage of the population is 12.1 percent, according to the 2012 Annual Report of the Insurance Board of Sri Lanka. When computed as a percentage of the work force, the figure is 29.1 percent, and as a percentage of GDP it’s 0.5 percent. This means that a substantial share of the potential market is still untapped. Life insurers will have to develop affordable products and innovative channels to increase penetration,” argued Renganathan, when offering perspective on the potential in Sri Lanka’s insurance market.

In order to promote the importance of life insurance and long-term savings products such as pensions, Ceylinco Life has developed two annual activities that are intended specifically to address the issue of inadequate awareness of the importance of life insurance and retirement planning. This includes the Life Insurance Week conducted in February every year, during which more than 4,000 sales personnel are deployed countrywide on a door-to-door campaign to speak to people and conduct a need analysis and explain about life insurance. The other promotional activity is the Retirement Planning Month conducted in May every year, which with a similar approach, focuses on the need for planning and investing in retirement plans. Both activities are supported by mass media advertising and events at branch level that directly engage the community.

Ceylinco Life also conducts possibly the largest and logistically most challenging customer promotion in Sri Lanka’s corporate sector annually, to reward and engage with policyholders and their families. Called the Ceylinco Life Family Savari, the promotion rewards more than 2,200 people every year with an all-expenses-paid, conducted overseas holidays to multiple destinations and a day-long excursion to a local theme park. Overseas holiday destinations have included Singapore, China, Paris and Japan, and the next edition will see policyholders and their families visiting Switzerland and Dubai. To date, more than 15,000 people have benefitted from the promotion.

Ceylinco Life invests majorly in the local community in order to cement the fact that the insurance industry is key to both Sri Lankans and the company’s future

Another promotional project is its educational tour of the city of Colombo, Sri Lanka’s commercial capital, for children of policyholders, conducted annually in conjunction with the distribution of school timetables to children across the country at the start of the academic year. All this contributes to overall awareness of life insurance and retirement planning products, improving sales.

“Our most popular products are the Anticipated Endowment Plan and our Medical Plans; which include a critical illness policy covering 36 major illnesses; Ceylinco Life Major Surgery, covering 526 types of surgeries; and Family Hospital Cash, which makes a cash payment for every day a policyholder is hospitalised. Our retirement plans branded as Flexi Plans offer many flexibilities and are also very popular,” said Renganathan.

Constantly evolving
Looking ahead, the firm said that it’s also currently in the process of developing new products that will cater to the needs of Sri Lanka’s ageing population. One of the biggest challenges that the young insurance market faces is the lack of a sufficient talent pool in Sri Lanka. Recruitment and retention of sales agents is not easy, as insurance is not one of the preferred professions and this has made the fight for talent a key focus. “Ceylinco Life, has led the way with many programmes to improve the image of the life insurance salesman by promoting international training programmes and qualifications and through mass media campaigns,” explained Renganathan.

According to the firm, another challenge is the high incidence of policies lapsing, due to a combination of factors, including low disposable incomes, inadequate understanding of products, incorrect selling, and the existing commission structure, which makes it more profitable for an agent to sell a new policy rather than follow-up on overdue premium incomes. A lot of these issues come down to a lack of awareness regarding life insurance.

This is why Ceylinco Life invests majorly in the local community in order to cement the fact that the insurance industry is key to both Sri Lankans and the company’s future. Among this portfolio of value additions for policyholders is the annual Ceylinco Life Pranama scholarships programme that rewards the academic and extracurricular achievements policyholders’ children, and an annual Cash Bonus pay-out during the national new year season.

In total, the company to date has issued 1,770 scholarships, and when the next 160 scholarships are presented in February 2015, the cumulative value of the Pranama Scholarships will reach Rs100m. With this year’s cash bonus payments, the cumulative value of cash bonuses paid by Ceylinco Life every April over the past 11 years exceeds $1.6m.

‘The biggest trend now is innovation’: Bank of the West on its proactive approach

Posted on December 1, 2014February 2, 2015 by Ashton Wenborn

Since the 2008 recession, the US commercial banking sector has faced a dramatic number of changes – particularly in regards to cyber security and regulations. World Finance speaks to Jean-Marc Torre, SEVP and Commercial Banking Group Head at Bank of the West, to find out how his organisation is helping companies navigate the labyrinth of new rules to stay competitive.

World Finance: Now Jean-Marc, you have a number of commercial banking clients; can you tell me about some of the trends you’re seeing among them?
Jean-Marc Torre: The biggest trend now is innovation. Innovation that transforms and sometimes disrupts the business landscape.

The other trend is cyber security. Everybody now recognises that cyber-crime is a very important risk for businesses.

Another trend is probably that companies have to be more capable than ever to deal with uncertainty. Uncertainty with an environment that is changing a lot.

[C]ompanies have to be more capable than ever to deal with uncertainty

And I guess the last thing I’d like to mention is regulation. Regulation has increased, and its impact is now – particularly in the financial sector – a very important aspect.

World Finance: Now, can you tell me how companies are able to stay competitive in the ever-growing, ever-changing global marketplace?
Jean-Marc Torre: Globalisation is not a new thing. But it’s fair to say that now it has different features.

One important feature now is the fact that all companies, because of their investments, their markets, their supply chain; they are international. And again, international is also uncertainties and change. It’s a changing environment.

So, companies have to recognise the change. Sometimes new difficulties, but also have to be quick to grasp opportunities. So I guess they try better to understand the markets, and keep their global view, but at the same time a local understanding. And this is where new challenges, as much as new opportunities, can be identified.

This dialogue, this understanding we have of the complexity of the world our customers have to operate in, is I think, critical. As much as it is for them to make sure that they have a strong support and understanding of the various countries and markets they are in.

World Finance: Now cyber-crime of course is a present issue in the marketplace; can you tell me how companies are addressing it?
Jean-Marc Torre: To address cyber-crime is the same as to address the international uncertainty. Some studies show that cyber-crime costs to business are about to $444bn, which is almost one percent of global revenues.

And not only is it big, but it’s increasing. I think the increase last year is estimated at 18 percent over the year before. So not only is cyber-crime increasing in intensity, but it’s also more innovative and more diversified in the type of tactics and techniques they use.

So, to prepare for that, you need to look at partnerships. And banks in that instance, and Bank of the West in particular, is trying to support our customers that way.

One way to do it is to talk to customers, to make sure that they understand, and we understand, what are the risks. And the impact on their processes in the data.

[Our clients] appreciate the fact that we take that seriously, and look at that in partnership

It’s also a matter of training. You have cyber-crime techniques such as social engineering: to withstand this kind of attack, you have to have control and protection of data, but also training of your people.

What we do is keep an open communication with law enforcement, in order to be aware of new risks. Communication and cooperation with all players is very important.

Obviously investing in keeping our tools and our systems and our products up to date is important, and we provide of course a wide range of fraud prevention tools. Lastly, if and when some cyber-attack happens and hits, we also try and work on mitigating the impact of it.

World Finance: Can you tell me about how your clients are reacting once these tools have been put in place?
Jean-Marc Torre: They appreciate the fact that we take that seriously, and look at that in partnership.

I think it’s critical to understand, and I think customers appreciate it, that it’s by being together, and looking at things end-to-end, that we are stronger. And as much as we can protect ourselves, finding ways where we are together in this partnership with our customers both stronger, is something which is critical.

I think customers are sensitive to the fact that our goal is to keep our customers financially viable, but also strong, and in the long run.

World Finance: Well many exciting developments; Jean-Marc, thank you for joining me today.
Jean-Marc Torre: Thank you.

Sharjah becomes a hotspot for investment

Posted on November 28, 2014February 2, 2015 by Ashton Wenborn

The third-largest city in the UAE – Sharjah – which has a GDP of over AED 100bn, a massive manufacturing sector, and is a leading centre for arts and culture – is becoming a hotspot for investment. World Finance speaks to Ahmed Obaid Al Qaseer, COO of Sharjah Investment and Development Authority, to find out about developments.

World Finance: Well Sharjah, maybe you can start by telling me, how well developed is the economy and infrastructure in the city, and where are the opportunities?
Ahmed Obaid Al Qaseer: Sharjah has a state of the art infrastructure when it comes to roads, especially telecommunications, which is very well connected with high-speed internet: all required services by businesses.

Talking about opportunities; we have first of all tourism. As you said, Sharjah is a culture and arts hub. We have a lot of museums, a lot of places to visit. So what’s lacking currently and what we’re looking at, is five star hotels, where we have a lack of around 3,000 rooms.

And we’re also looking at food and beverage, which complements the tourism attraction. This is something that we’re looking to develop – we’re looking at restaurants, we’re looking at cafés. And we’re looking at a growth of around AED 1.9bn in this sector over the coming two years.

Sharjah’s well known as an industrial hub; 33 percent of the industries in the whole UAE are in Sharjah

Then we’re looking at another sector, an important sector, which is transportation and logistics. We’re looking here at air carriers, where they can land in Sharjah airport. We’re also looking at the ports. We’re expecting a AED 6.2bn growth by 2016.

Another sector we’re looking at is the healthcare sector. This is a sector where we expect a growth of AED 6.5bn by 2016. And here the government have taken an initiative where they have launched Healthcare City. Healthcare City will be a free zone, focused not only on hospitals, but we’re also talking about clinics, research centres, development centres. Pharmaceuticals is something important as well. So this is another big sector.

The last sector we’re focusing on is environment, where we’re talking about renewable energy and energy efficiencies. This is also something booming in the world, and again Sharjah has taken the lead here. Sharjah by 2015 will have zero waste to landfill.

And here we have a lot of opportunities; we have offers about wood recycling, plastic recycling, and also we’re looking at solar farms.

So these are the four sectors with a lot of opportunities with a return of at least 15 percent.

World Finance: Well how well set up is the business environment in Sharjah for investors, and where are the advantages or favourable regulations?
Ahmed Obaid Al Qaseer: Sharjah’s well established when it comes to businesses. There are two types of companies that can be established in Sharjah.

One is a free zone company, where it’s 100 percent repatriation of profits, plus 100 percent tax free. The other is the inland companies, which are out of the free zones. They have slightly different policies, but still where you can make 100 percent of your repatriation, and still 100 percent tax free.

Sharjah has a diversified economy; none of the sectors contribute more than 20 percent to GDP. And Sharjah’s well known as an industrial hub; 33 percent of the industries in the whole UAE are in Sharjah. And Sharjah has around 21 zones only for industries.

World Finance: Well how does Sharjah compare with other cities in the UAE, such as Dubai?
Ahmed Obaid Al Qaseer: The UAE by itself is a unique country, where we have different emirates. And as the UAE, we all complement each other. Every emirate has its own niche; as I said Sharjah’s diversified, and more focused towards the industrial zones.

World Finance: Well Sharjah of course has a very rich heritage, so how well developed is the tourism sector, and what challenges does it still face?
Ahmed Obaid Al Qaseer: Sharjah’s well known as the cultural capital of the UAE. In 2014 Sharjah was voted the Islamic Cultural Capital. In 2015 we are celebrating the Arab World Tourism Capital.

It’s famous for its arts; we do have the largest arts event in the region, like the Sharjah Art Biennial. We have the Sharjah International Book Fair, which is the fourth-largest in the world. We do have the Formula One boat races. So we do have a lot of activities.

Yes, we do have some challenges, and that’s why we’re promoting the tourism sector. We have a lack of rooms; 3,000 rooms between now and 2016, so there’s a big chance of development of hotels here. Plus we have our own plans in promoting Sharjah as a tourist hub compared with other emirates.

World Finance: Well the Middle East is of course fraught with political instability, so what impact has this had on the city, and is it still a safe place to invest?
Ahmed Obaid Al Qaseer: Well the UAE is a safe country – thank God it’s a safe country. Yes, there are some things happening around, but we are 100 percent safe.

We see a lot of increase in tourism, we see a lot of increase in investments; so yes, I would definitely stress that it’s a safe place to be in. A safe place to live, and a safe place to work.

World Finance: So finally, what are the priorities for your organisation moving forward?
Ahmed Obaid Al Qaseer: As an investment and development authority, for investment side, as an IPA, we are now looking at the market again: updating our studies to focus on where to look for investors from, geographically, and what sectors to emphasise more.

Then again, as a development authority, we do develop projects. Especially in the tourism sector, where currently we’re developing two hotels in Sharjah, which are the Chedi Khorfakkan on the east coast, and we have a great hotel which will be managed by the five star über-luxury brand which comes out of Singapore: GHM, also under the Cheddi brand.

We have a famous destination, which is the waterfront, the Al Majaz waterfront. It has restaurants and cafés that have been successful. We’re now starting phase two, we’re adding more restaurants and cafés. And we’re adding offices into this project.

So yes; we do have a lot of things happening, whether it’s on the development side, or on the investment/attraction side.

Insurance firm ING weathers Greece’s harsh economic conditions

Posted on November 28, 2014November 10, 2014 by Ashton Wenborn

The economic crisis hit Greece hard, and the financial services industry was caught in its wake. But ING, one of the country’s biggest insurance firms, saw the tough climate as a chance to find new opportunities, strengthening its customer focus and paving the way for innovation.

Rene Scholten, ING’s Chief Financial Officer, spoke to World Finance about how the insurance industry is changing, what ING is doing to step up to the challenges and why impeccable customer service is so important if companies want to succeed in the current economic environment.

How difficult has it been to run a financial services company during the financial crisis?
I would prefer to use the word challenging. Running an insurance company during a financial crisis was and still is a big challenge, especially when the overriding priority for a lot of people is to support their families through basic provisions such as food, clothing and education, rather than buying insurance policies. That’s even more evident in Greece, where private insurance is less of a priority than in other northern European countries.

In periods of financial turmoil people change their purchasing habits, and their buying power is much lower. The environment it creates isn’t conducive to helping the industry grow and doesn’t enable insurance companies to provide all of the products they offer. That’s partly as a result of lower interest rates; pension products, for example, don’t appeal to customers because they can’t offer high returns when they mature, even though pension schemes would be the right move for a lot of people, ensuring they have enough money when they retire. The crisis made people realise the importance of having those sufficient funds when they retire, so ING adapted to that, understanding the need to offer relevant insurance plans to customers.

In periods of financial turmoil people change their purchasing habits, and their buying power is
much lower

What have the biggest challenges been for ING in Greece during the last few years?
What we tried to do at ING was improve our offering to customers. We saw that Greek families were struggling to cope and wanted insurance cover for more basic needs. The challenge for us was to adapt to those changes and become more customer-orientated. We focused on improving our services and offering potential customers new products with lower premiums, and we helped existing customers change to new insurance plans that offered better cover at a lower price. We also implemented a corporate social responsibility programme in order to help the community, because ultimately our aim is to take care of people and ensure they can depend on us when they most need our help.

What opportunities have emerged from the crisis?
With every crisis come new opportunities. At ING we witnessed that, and instead of holding back as many other insurance companies did when the crisis struck, we saw the opportunity and changed our strategy. We focused on becoming more customer-focused and making the company more ‘lean and mean’. We underwent a big transformation with regard to our product portfolio, customer service channels and internal procedures.

With the aim of improving our customer service, we developed an online portal in order to give existing clients direct access to our services. That was a huge leap given that Greek insurance companies don’t tend to offer much in the way of online services. We’re separating ING’s insurance and banking sectors so the online approach is also good preparation for that. ING Insurance International is planning a rebranding and we will become NN Group, embracing our heritage by returning to the brand name used prior to becoming ING. That’s good news for us, as NN is still strongly associated with the brand and its values.

How do you see the next few years progressing for Greece’s financial sector?The Greek financial sector will continue to struggle for some time, but it will eventually become healthy and strong again (see Fig. 1). Financial companies and the state are working very hard to bring the sector back and are determined to see it succeed. Although some individual companies may struggle to survive, there’s no doubt ING will recover.

As for any upcoming innovations in the market, I would say that online sales and services are very hot at the moment. Despite direct channels having been present in some countries for a decade, it’s new to Greece but we are catching up quickly.

ING Greece was recently named a National Champion for its customer service in the European Business Awards, which involved 24,000 participants from 28 European countries. That alone shows there is a future for companies in Greece, especially in the financial sector, as long as the next steps are well thought out. That’s important because, despite the fact I’m convinced the worst part has passed, there is still a way to go and we can’t let our guard down now. We need to be extremely careful regarding our next moves, because there are still a lot of challenges ahead of us.

One such challenge is Solvency II, which is fast approaching and which is going to have a direct impact on insurance companies’ reserves. Companies will need to be extremely healthy and have a strong capital base. It will change the market a lot and we expect to see a significant number of consolidations and take-overs, because there are a lot of small companies that won’t be able to adapt quickly enough to the new environment. We think the banking sector is somewhat ahead of the insurance sector in that respect. At ING we have already worked hard and prepared the company for this in order to ensure that we remain strong and healthy for our customers.

Why is ING leading the way in Greece’s insurance industry?
We are customer-driven and our strategy is to invest in creating better services for that customer. There are several projects running at ING Greece and all of them share a common goal – to keep our customer happy and enable us to listen to their needs. There are a lot of controls in place, such as a quality of sales procedure, to ensure that what we offer is of the highest standard.

Source: International Monetary Fund. Notes: Post-2011 figures are IMF estimates

In our first point of contact with a customer we use the Needs Analysis Form in order to understand the needs of the prospective customer, so that we can then offer the relevant insurance product according to those specific needs. In addition to that we conduct a satisfaction survey using the Net Promoter Score (NPS) tool, which is a survey that we email out to any customer who has made a transaction with ING Greece, whether that’s buying a new policy, modifying an existing one or even contacting us to make a complaint. The tool enables us to check whether our service is meeting the standards both we and our customers want. ING Greece isn’t just about selling as much as possible – it’s about providing excellent customer service.

How can companies like ING change customers’ perceptions of financial institutions?
Like every big multinational company, we have a set of business principles that require us to be open, clear and transparent towards our customers. In all our communication and marketing materials we try to be as clear as possible. The best example of that is our new policy book of general terms and conditions, which we made as clear and user-friendly as possible. It has an innovative design and is easy to read through and understand, enabling our customers to quickly find what they’re looking for. As we’re a financial institute that wants to earn the trust of our customers, we’re strict – but not unfairly so.

How is ING engaging with customers?
We take pride from the fact that as a company we have several touch points where our customers can reach us. They can get in touch with us through our customer contact centre, located on the ground floor of our head office in Athens. For those who don’t live in Athens we have more than 50 offices across Greece with over 1,100 sales advisors servicing the clients, and of course our call centre, which is available 24/7.

We also have a big social media presence, with a large community following our Facebook page. We received a Best Practice Award for our contact with customers, and we take a fresh and informative approach that centres on our live well philosophy. We are always quick to respond to customers, with social media providing a constant source of contact.

How the insurance sector found success following disaster in the Philippines

Posted on November 28, 2014November 10, 2014 by Ashton Wenborn

Typhoon Yolanda was one of the strongest cyclones ever recorded. In November 2013, it left a path of destruction through Southeast Asia, causing more than 6,000 deaths and over $2.5bn in damage. The Philippines was the worst hit.

Nevertheless, despite this and several other natural disasters occurring in the same year, the insurance sector in the Philippines posted a 47 percent increase in premiums for the year. Based on preliminary estimates, the combined premiums reached PHP210bn, up PHP67bn from the previous year. Such an upward spiral was primarily driven by strong growth in the life insurance sector.

In the same year, the economy in the Philippines grew by 6.5 percent. This goes to illustrate how strong growth in the economy directly benefits the insurance sector because it allows Filipinos more purchasing power, enabling them to appreciate the value of insurance. This is especially relevant for those who need it the most: those in the middle to low-income households. In fact, the proportion of Filipinos who purchased life insurance jumped to 24.25 percent in 2012, from just 14 percent in 2009. In addition, of the life insurance policies sold in 2013, 23 percent were micro-insurance, a testament that the aggressive marketing campaign for micro-insurance products has paid off.

This stronger appetite for life insurance products has become widely accepted during the recent years, on the back of the prevailing low interest rate environment. However, the growth in the non-life insurance sector was more conservative, primarily as a result of higher claims from catastrophes.

Non-life insurance
The insurance industry saw a steady increase in its penetration rate, measured as the proportion of the total premiums (both life and non-life) versus the country’s GDP, from a paltry 1.02 percent in 2009 to 1.9 percent as of the end of the third quarter 2013. The Philippine Insurance Commissioner attributes this to “the introduction of new products and channels of distribution as well as the improving micro-insurance industry”.

Nonetheless, this is still far below its counterparts within the ASEAN Region. The ambitious goal of the Philippine Insurance Commissioner is to increase penetration rate further, by as much as three percent.

The increasing trend of life and non-life insurance is perceived to continue into 2015, due to the country’s enormous growth potential, which is supported by the positive interplay of developments in both economic and regulatory environments. The recently approved Amended Insurance Code of the Philippines will encourage the further consolidation of the market, tighter regulations, loosening bancassurance restrictions, wider investment outlets, and financial reporting framework more aligned to internationally accepted accounting standards.

Some of the major changes are as follows: the graduated increase in capitalisation reaching PHP1.3bn by 2022 is now based on net-worth rather than paid up capital and the old manner of computing for solvency, previously known as Margin of Solvency (MOS), has been completely deleted from the code and shall now be computed based on internationally accepted solvency frameworks, leaning towards the Risk-Based Capital Requirements (RBC). With the increasing capital requirements, the non-life insurance industry expects more mergers and acquisitions among its members, or at worst, companies deciding to surrender their licenses altogether. To date, there are now 68 non-life insurance companies in the country.

[S]trong growth in the economy directly benefits the insurance sector because it allows Filipinos more purchasing power

These amended provisions are expected to pave the way for a stronger insurance sector, thus making it better prepared for the integration of member economies of the ASEAN in 2015.

The main growth drivers of the non-life insurance industry remain anchored on car and residential purchases – visible signs of continuing growth in disposal income. New car sales reached 181,283 units in 2013, hitting a new record of 16 percent growth from the previous year. Furthermore, based on data from ASEAN Automotive Federation (AAF), vehicle sales increased by 22 percent to 89,335 units in the first five months of 2014, from 72,988 units in the same period in 2013, making it the highest in the region, besting Vietnam, Singapore, Indonesia and Malaysia. This feat is expected to continue for the year with the introduction of new vehicle models and expanded dealerships nationwide.

In the meantime, the property sector remains vibrant too, showing no signs of slowing down, even as the country recuperates from the massive destruction caused by Typhoon Yolanda. Real estate developers continue to acquire and build, the business process outsourcing (BPO) offices continue to grow and prices in Makati central business district have been rising from seven to 12 percent.

Other growth drivers of the industry are expected to come from the many developments in other industries that likewise help drive insurance demand – the construction, BPO sector and IT outsourcing, education, energy, aviation, transportation, tourism and gaming sectors.

Weathering the storm
During a sales conference in 2014, Joel Brazil, Branch Manager of Ormoc Branch and Tacloban Extension Office, told of his own experience when Typhoon Yolanda hit.

At the height of the typhoon, to protect his family from the winds, Brazil held up a mattress over his wife and five children for four hours. After the worst was over, they slowly went out to survey the damage on their home. Upon seeing the extent of damage caused by the storm on his home, which had taken four years to build only to be extensively damaged in the fifth year, he was devastated. Still reeling, he noticed someone rushing up to his home who handed him an urgent letter. The letter was from one of his assured, filing a claim, but with a short note apologising for having to do so at such a time – when all of them were badly affected by the typhoon.

At that moment, he realised that despite his responsibility to his family, he had to face another responsibility in this time of need – the duty of delivering claims service to his clients. Unknown to him, this was the same thought in the minds of employees in Tacloban, an extension office to Ormoc Branch. A few days after the typhoon, they set up a table on front of the Tacloban Extension Office for the purpose of accepting claims.

This light bulb moment embodies the company’s response to natural catastrophes– to be always there for clients, when it is most needed.

Standard Insurance also competently weathered Yolanda and the other natural disasters that occurred in 2013. This feat is attributable to the concerted efforts by the company’s personnel in handling the resulting claims, as well as providing relief to our co-workers affected by these calamities.

[T]he company’s response to natural catastrophes – to be always there for clients, when it is most needed.

Equally important was the company’s internally developed total insurance structure, which has earned a solid reputation of dependability during the weather-related catastrophes of recent years. In fact, the insurance system and structure of the company has demonstrated a good track record of managing catastrophe related losses. This is underpinned by comprehensive risk modelling software and reinsurance protection from highly rated reinsurers, grounded on stringent risk underwriting, as well as visible and extensive infrastructure. This infrastructure includes the most extensive nationwide network of car-dealer business partners and the country’s largest and capable claims and technical adjustment team.

Our reinsurance support is financially strong and has the capability to respond to claims. The company’s reinsurance treaties, all under an excess of loss, are provided by highly rated international reinsurers, which have buffered the company from the impact of high severity losses as a result of disaster.

Integral to the insurance structure is the application of the company’s comprehensive risk modelling software, the internally developed Catastrophe Risk Management System (CRMS) where the Geographic Information System (GIS) or digitalised hazard mapping is applied to the assessment of natural hazards, such as earthquake and flood risks. Risk accumulations are thus controlled.

Therefore, throughout these difficult times, all risks were properly covered by reinsurance treaties with highly rated foreign reinsurance companies, and losses were manageable. More importantly, the company did not have any risk exposures to both Philippine Associated Smelting and Refining (Pasar) and the Philippine Phosphate Fertiliser Corporation (Philphos), supposedly the biggest single losses during Typhoon Yolanda in the Visayas, because of the company’s stringent risk underwriting.

How we handled Yolanda
The first thing the company did was to locate all employees in affected areas, which took a few days as all forms of communication were down. After which, using our Cebu branch as base, the company shipped out basic supplies such as food and emergency needs to Ormoc and other affected areas. Cash assistance was released and sent to the affected employees immediately, and when needed, additional low interest-bearing loans were extended to our people in Yolanda affected areas. After making sure that all employees were safe and provided for, company donations were disseminated to Tacloban, the most damaged area. Subsequently, the following were implemented to facilitate claims from the affected areas:

• We simplified claim document requirements and fast-tracked the adjustment of motorcar and residential claims;
• We deployed our claims and technical team to conduct inspection of damaged properties in Leyte and Panay Island;
• We granted interim payments to assist our clients in rebuilding businesses;
• We rented a yard in Tacloban to provide temporary storage space for flooded vehicles to avoid theft of vehicle parts;
• Our Recovery Management Head led the setting-up and manning of the Insurance Commission-mandated Claims Action Centre to assist claimants with all insurance companies. He likewise personally assisted our Tacloban office in handling claims and subsequent disposal of salvaged vehicles.

It has never been a more challenging time for the non-life insurance industry, nonetheless, the resiliency of the Filipinos once again saw us through one of the worst experiences one can ever imagine.

Nucleus Software Exports heads banking’s technology revolution

Posted on November 27, 2014February 2, 2015 by Ashton Wenborn

Financial services in the digital age, it’s a time when new technology in IT is changing the face of the sector and the customer experience. At the forefront of this revolution is Nucleus Software Exports, which offers software solutions to the banking and financial services industry across the globe. World Finance speaks to its CEO, Vishnu Dusad, to find out more.

World Finance: Well Mr Dusad, how important is the link between the banking sector and IT software services, and how are technologies impacting the banking industry?
Vishnu Dusad: Banks are technology companies in disguise. They are among the heaviest users of information technology today. Against 3-4 percent of the revenues that any other industry sector has, banks spend as much as 7.3 percent of the revenues on information technology.

It is through technology that banks can design and deliver some of the most customised products to their customers, and that is the reason banks are heavy users of technology.

It is through technology that banks can design and deliver some of the most customised products to their customers

World Finance: Well you are of course based in India, but you offer your services globally. So how do you adapt to the different markets, and what technology trends and needs are you seeing in the different countries?
Vishnu Dusad: Our customers are in 50 other countries, and depending upon the technological growth of the specific country, the solutions are varying.

In a country like India, where the technology infrastructure is still coming of age, you have to design solutions which would leverage whatever is available on the ground. Whereas in countries like the US and UK, and in Europe, the technology infrastructure is already a few decades old, and you need to offer solutions which would take the old technology infrastructure, and take it to the next level.

World Finance: Well how are customer demands and expectations changing?
Vishnu Dusad: When an individual approaches a bank, typically he’s expecting – today, while in the past it was different – that the bank will understand his or her needs very specifically, and design products and offer him products which will take care of his needs at a very specific level. This is one of the expectations.

There’s an expectation in terms of the under-banked. The under-banked who have never seen a bank or understood what is a bank, they are also today expecting their accounts to be opened, and services being rendered to them through mobile and through low-cost devices, through branches which are again very low-cost, and things of that nature.

They’re also expecting that, whatever has been the relationship of theirs with the bank, that is put to use while delivering the solution that they are looking for in the future. So these are some of the ways the customers are expecting banks to respond to their needs.

World Finance: Well your core areas of expertise are in lending and transactions, so what cutting edge innovations do you offer in these fields?
Vishnu Dusad: The solutions are very innovative and depending upon the local needs. For example, in Japan, our solutions offer shopping credit, so that when an individual walks into a store and he likes to buy a white good, he can swipe his card and get a loan instantaneously.

In a market like India, there is a lowering of the spectrum in terms of borrowing. You are talking about loans which are as low as £10. Our solutions are able to deliver those loans cost-effectively.

Coming to the transaction banking solutions, our solutions offer our banks collections, payments, liquidity management and financial supply chain solutions.

Banking and the financial services industry can learn from other industries very effectively

World Finance: How important are cross-industry programmes, and what are the advantages of these?
Vishnu Dusad: Banking and the financial services industry can learn from other industries very effectively. The banking and financial industry is learning from the telecom industry and moving very fast forward in terms of mobile payments.

Over the next three to five years we are visualising that a substantial part of our currency will move to mobile, and I visualise over the next ten to twenty years, currency as we know it today in the form of coins and paper will literally vanish completely from the face of the earth.

World Finance: Well finally, considering banking IT is constantly developing, what do you see to be the future challenges and trends?
Vishnu Dusad: Security is clearly the challenge, and customisation is going to be again a very substantial challenge. Because more and more customers are going to look for solutions which are very meaningful to them, which are very specific to them, and banks will have to leverage big data that they have created. The data will have to collected into a meaningful knowledge about the customer, and they will have to respond to the customer’s needs based on this knowledge that they are creating.

Speed of response is something that is going to take place. Today, if you were to apply for a mortgage, it is going to take a minimum of five weeks. The customers are going to expect that this time of five weeks reduces down to three weeks, two weeks, and one week, and if possible days. So these are some of the expectations that the banking industry will have to respond to in years to come, and it is the technology which is going to help them come up these expectations.

World Finance: Mr Dusad, thank you.
Vishnu Dusad: Thank you.

Armeec uses social initiatives to weather Bulgarian insurance crisis

Posted on November 27, 2014November 10, 2014 by Ashton Wenborn

Bulgaria has had a rocky couple of years with political, financial and natural crises shaking the country and affecting its insurance services. Ranking first in Bulgaria’s non-life insurance market, however, Armeec has overcome those challenges and is treating the crises as a learning curve.

Rumen Georgiev, Executive Director and Chairman of the Management Board at Armeec, spoke to World Finance about the changing insurance market in Bulgaria, the importance of corporate responsibility and how Armeec has coped in a volatile few years.

How has Bulgaria’s insurance market performed in recent years?
The Bulgarian insurance market has traditionally been dominated by non-life insurance – it accounted for 82.7 percent of the total premium income at the end of 2013. Bulgaria’s life insurance companies reported a growth of 14 percent from the previous year, but the country’s life insurance market is still among the smallest in Europe.

In 2013, premium revenue from the non-life insurance market increased by 6.5 percent year on year – the first growth since 2009. Motor insurance had the largest share, accounting for 69.6 percent of the market, with premium income generated from third party liability seeing an increase of 10.8 percent over the year. From January to December 2013, motor casco insurance reported a decline of 1.9 percent from the previous year – maintaining the negative trend seen in previous years, mainly due to relatively few new cars being bought. According to data from the European Automobile Manufacturer’s Association, sales in the EU in 2013 were at their lowest since 1995 and dropped 1.7 percent from 2012.

At the end of 2013, property insurance accounted for 18.4 percent of gross premium income, and financial insurance accounted for one percent of total premium revenue at BGN14.6 m, down 2.4 percent from the previous year.

What impact did the recent political crisis in Bulgaria have?
The political instability that began at the start of 2013 and came to a head in early 2014 resulted in slow GDP growth, increased levels of unemployment, and lower levels of consumption and credit demand. Frequent changes damaged the public’s confidence in the government, and the insolvency of one of the largest banks in the country in mid-2014 had a negative impact on financial institutions.

Despite the difficulties [in Bulgaria], premium income from non-life insurance companies has continued to increase

Conflicts in Ukraine and the Middle East, as well as numerous natural disasters, further aggravated Bulgaria’s economic situation.

What challenges are there for the industry as a result?
Despite the difficulties mentioned, premium income from non-life insurance companies has continued to increase, with a year on year rise of 5.94 percent reported at the end of June 2014. Disasters that occurred this year, such as flooding and a hailstorm in Sofia, gave insurers in the country a chance to prove themselves and strengthen customer trust.

How has Armeec established itself in the market this year?
At the end of the 2013 fiscal year, Armeec reported growth in premium income for the 11th consecutive year and the company has continued to perform strongly in 2014. At the end of the first quarter it ranked first in the Bulgarian non-life insurance market, with a share of 13.2 percent, representing a year-on-year growth of around 20 percent.

Motor insurance accounted for the largest share in the company’s portfolio. Armeec ranked first in motor casco with a market share of 24 percent and it has been the leader in voluntary motor insurance since May 2011. In motor third party liability insurance, Armeec had a market share of 10 percent (representing a 28 percent increase from the previous year).

Armeec also ranked first for travel insurance with a market share of 24 percent (up 30 percent from 2013), while the premium income generated by accident insurance increased by 53 percent. Growth in revenue was also reported in liability, property, marine, aviation and cargo insurance.

82.7%

of Bulgarian premium income is non-life insurance

14%

Bulgarian life insurance growth, 2012-13

How has the financial crisis affected Armeec and the industry as a whole?
Lower consumption and reduced credit led to a steady decline in premium income for the general insurance market in Bulgaria. But Armeec still managed to achieve continuous growth by ensuring a sensible pricing policy and strengthening its services.

What are the company’s strengths?
We offer high quality services with a strong customer focus and follow best practice guidelines. The company has a strong network, with more than 60 offices, and some of its products are also available from the Central Cooperative Bank (CCB). Permanent clients make up just over half of our customer base, which shows customers are drawn to our simplified procedures, constantly improving internal regulations and ability to respond to crises such as natural disasters.

Armeec has been carrying out market research through a specialised consulting firm since 2005 to analyse the sector and its individual segments with the economic situation in mind. This allows us to make earlier forecasts concerning customer trends. Regular ‘mystery shopper’ surveys are carried out to further monitor processes, and customer attitudes and satisfaction. Armeec also maintains direct contact with its customers at all stages of the insurance process. Special attention is paid to complaints so we can learn from each case and optimise our processes. Customer confidence is crucial to the company’s success.

Where is the company’s focus for development?
Armeec aims to strengthen its position as a leader in the market by improving operational performance and efficiency through new technology and staff training. The company is also expanding its channels by driving internet and phone sales, and its product portfolio will be adapted by the end of the year to meet current market needs to offer accurate, flexible and innovative policies at competitive prices. The company will continue to develop its network, driving direct sales with the aim of attracting new business. The company will further expand its regional activity and is set to collaborate with companies under Chimimport Holding through joint projects and partnerships.

What is Armeec doing to earn customer trust?
The company’s services are constantly being tailored to meet customer requirements and a new corporate website is currently in the process of being tested. The company has 15 claim-handling centres as well as a 24-hour customer service call centre and staff available who can assist on the spot if an accident occurs. Armeec offers excellent training to its employees to maintain its skilled workforce and has been actively working to simplify procedures and improve internal regulations.

Armeec, together with other leading companies, including those under Chimimport Holding, created the biggest loyalty programme, the Bulgaria CCB Club, which offers customers discounts when they purchase products in the network. The company is involved in various projects, including workshops to help students develop skills and gain professional experience. Armeec also funds and participates in national and international financial and economic forums with the aim of strengthening the financial sector in Bulgaria.

How important is corporate social responsibility to the company?
Armeec believes a company cannot develop a successful business in an unstable environment. It thus actively participates in a number of social initiatives and sponsors various cultural and sporting events.

In 2014 the company launched ‘Patriotism’, a year-long project carried out in cooperation with media and state institutions. It involved printing posters of the Bulgarian ‘Banner of Braila’ and six prominent Bulgarians in national newspapers on important dates in Bulgarian history. These prints are now being framed and donated to the schools, community centres, libraries and universities named after those pictured.

Armeec believes a company cannot develop a successful business in an unstable environment

Since the end of 2012, Armeec has been part of the environmental conservation initiative ‘Let’s bring back the Saker Falcon in Bulgaria’. A percentage of every motor casco policy bought goes to the project.

Armeec is also the main sponsor of the Bulgarian Karate Kyokushin Federation and has partnered with Martin Choy, the country’s most successful motorcyclist. Since 2013 Armeec has been supporting mountaineer Dr Atanas Skatov to climb the seven highest peaks in the world.

In 2013 the company supported ‘Driving is Responsibility’, an initiative that aims to reduce road accidents, and in 2014 it took part in the international conference ‘Catastrophic risks in Bulgaria – a hierarchy of responsibility’ to discuss climate change, the role of insurance in catastrophic events and the potential for an insurance pool.

The company is participating in various other projects in cooperation with the Ministry of Physical Education and Sports.

What does 2015 hold for the firm in terms of projects and growth?
The experience gained in response to natural disasters will be transformed into a systematic anti-crisis action programme to further improve customer service. Our expectations are that in 2015 the majority of Armeec’s advertising and communication will be done via the internet and social networking sites, with customers and partners following our pages. This will allow customers to have daily contact with the company.

Private banking pioneer BBVA Bancomer opens up Mexican market

Posted on November 27, 2014September 28, 2015 by Ashton Wenborn

Latin America is fast emerging as a financial centre for private banking, in light of a new generation of high-net-worth individuals who have taken to the sector as a means of protecting and, ultimately, expanding their wealth. The overwhelming majority of assets under management in the region can be found in either Brazil or Mexico, and while the former is renowned for its size, the latter is arguably the greater of the two for private banking.

Last year’s Private Banking Survey, put together by McKinsey, showed that approximately 67 percent of Latin American assets under management were confined to Brazil and Mexico, with half of the assets invested offshore (see Fig. 1). This geographical trend, coupled with a rising demand for financial advice, means that both Brazil and Mexico have made a name for themselves as fertile grounds for growth in the private banking space.

“The three or four markets that we trade in most are Brazil, Colombia, Peru and Mexico,” says Javier Diez, Head of Affluent and Private Banking for BBVA Bancomer. “Many are of the opinion that Mexico is going to be bigger than Brazil in the ultra-high-net-worth individual sector. You can’t help but think that the size of the Mexican market, compared to others around us, is growing a little bit faster.”

Open for business
Only 10 years on from its beginnings in the private banking space, BBVA Bancomer has cemented its status as the sector’s leading name and as an industry pioneer in Latin American banking. Prior to the bank’s private endeavour, almost all of Bancomer’s efforts were focused on commercial and retail banking, although it soon became apparent that the firm’s high-end clients needed to be attended to in a very different way.

Now, with a 30 percent share in the private banking market and thousands of high-net-worth individuals to its name, the bank is well equipped to capitalise on what opportunities exist in the country’s burgeoning private banking space.

With a fourfold commitment to leadership, customers, risk management and corporate governance, Bancomer “works for a better future for people”, according to the bank’s annual report. As of the end of 2013, the bank had an employee base of more than 37,000, total assets of MXN1.37m, and 1,700 plus branches, which, together, amounts to a controlling share in Mexico’s emerging financial services sector.

“The market has been changing a lot, because Mexico as an economy was a very closed one until recently. In the Mexico of 10 or 15 years ago, you couldn’t invest in any more than three, four or five year-long investments, whereas today you can invest in 30, 40 and 50-year bonds,” says Diez.

Assets Under Management in Latin America 2012 graph — Source: McKinsey

At the same time, Mexico’s business climate has changed almost beyond compare, and asset classes that previously were only available offshore are now just as easily available – if not more so – on home soil. “From around 10 years ago, Mexico started to open up in these areas, and Bancomer’s private banking component started to take advantage of a new open Mexico, and to extend a more appropriate financial solution to our clients.”

For the past decade now, Bancomer has been doing all it can to accommodate for those in the private banking space, and has since become an active – and even path breaking – regional name in hedge funds, mutual funds, fixed-income funds, etc. After making headway in these areas, Bancomer’s private banking division has posted in and around 20-22 percent growth every 12 months for the past six years and is expected to do so again in the years to come.

Overcoming obstacles
Speaking on the biggest challenges for private banking in Mexico, Diez says: “First of all, we had to wait for the Mexican market to open up and grow.” However, once the market was deemed ripe for expansion, the bank was then forced to contend with all manner of related obstacles, not least attracting talent, training, and keeping pace with the latest technological and economic developments from around the world.

Another obvious, though frequently overlooked challenge for banks is the need to demonstrate that the business of the bank is in good shape before clients jump on board. “For that, you must offer good returns for your shareholders,” says Diez. And the bank has succeeded in doing just that, having expanded its balance sheet in the last three years by 100 percent and its base of employees by 35 percent.

“After that, the biggest challenge is to be near to your clients and to be very humble, and that, in itself, is a big challenge for us: to be humble, to hear your clients, to be near them, and really to offer exactly what you’re telling them they’re going to get,” says Diez. By demonstrating to clients time and again that the bank follows through with its ambitious claims, Bancomer has earned a respectable reputation in and beyond Mexico.

You can’t help but think that the size of the Mexican market, compared to others around us, is growing a little bit faster – Javier Diez

Aside from a sound reputation among Mexican consumers, it’s equally important that the bank has an extensive degree of local knowledge if it is to be trusted with client assets and negotiate the always-complex investment market of today. “It is very important to have local knowledge,” says Diez, “and it’s also it’s important to be part of a group that can offer you advice on so many fronts.”

Central to Bancomer’s success in the private banking market is its unique business model, which has really strengthened positive brand associations for the bank. “I think that our model, that we created 10 years ago now, is unique in Mexico and is a very holistic model,” says Diez.

“We are of the opinion that in the long-term we will not only have to deal with financial issues but deal with the families, the individuals, the big operations; and we have developed a model that accommodates for financial and non-financial issues.”

The non-financial component of Bancomer’s model sees the firm deal in areas of health, education, travel and leisure, along with a range of others. The underlying philosophy of the model is that by demonstrating a commitment to clients in non-financial matters, the bank can build loyalty and trust between either party. The strategy brings a competitive advantage for Bancomer over its rival players, in that its contribution to the society at large can more clearly be seen. By focusing more so on local opportunities from a non-financial perspective, Bancomer reinforces to its clients that its roots and its commitments are planted firmly in Mexico.

Regional force
The bank’s success is not due entirely to its client-centric philosophy, however, but also to its comprehensive range of products. The bank ensures that each of its client segments are catered for with the appropriate product, and that it continues to match the rapid rate at which the investment market is evolving in the region and beyond.

Also, as part of Bancomer’s efforts to cater for an increasingly sophisticated client base and a growing international offshore business, the bank has partnered with global names such as Blackrock, Pioneer Investment and Franklin Templeton. The bank’s partnerships and global influence also bring additional advantages for Bancomer when attracting the best managers, traders and most important names in the market in better serving its clients.

“We have so many things to do in Mexico, but we have to take care, first of all, of our clients, to be near each client, to have all the products they need, and that, I think, means we will continue to grow at a rate of between 15-20 percent for the next five years,” says Diez. With a focus on what is fast becoming a key strategic market for those keeping an eye on the latest developments in the private banking market, Bancomer is sure to become an increasingly regional local force.

“The year 2014 will again be one of major transformation, of changing the way we do things, of searching for simplicity in processes, of teamwork and maintaining the commitment to offer a better quality service for our customers,” wrote Vicente Rodero, CEO of Bancomer, in the company’s latest annual report. “Without doubt, it will be a year of many changes for BBVA Bancomer and also for the country, once the scope of the structural reforms approved is more clearly defined; and it will be a year when the country should grow at a faster pace that fosters more vigorous banking activity.”

Western films celebrate communism, not capitalism, says leading economist

Posted on November 27, 2014 by Ashton Wenborn

Author and economist Ryan McMaken surprised the world by arguing in his book Commie Cowboys that the Western film genre celebrates communist culture, rather than capitalism. World Finance speaks to McMaken to ask him how he came to this conclusion, as well as his theories on alternatives to modern capitalism.

World Finance: Ryan, you wrote the book ‘Commie Cowboys,’ a very provocative title. What does it mean exactly?
Ryan McMaken: This was a book that looked at the Western genre, cowboys and Indians and such, and really examined, do these movies really give out the message that people think they do?

If we look at Westerns, they really promote more of a Cold War regulated economy mindset

For decades and decades the Western has been seen as this right-wing genre that promoted good old-fashioned American values and was very pro capitalism, and pro free-enterprise, and I was looking at a lot of Westerns and reading some of the literature about the genre, and came to the conclusion that it wasn’t actually the case at all.

If we look at Westerns, they really promote more of a Cold War regulated economy mindset. At least if we look at the Westerns after World War II. There are other periods that have different messages, but looking at what people mostly think of as the Western, the John Wayne Westerns, it wasn’t all that pro capitalistic at all, and highly authoritarian in many ways. The hero was usually a government employee of some kind, a sheriff.

Actually what these movies often celebrate is government destroying freedom, regulating people, telling people what to do, pushing around people who are disagreeable, and when we look at all those issues the Western doesn’t look quite as pro-American as has been said.

World Finance: So what are your theories on alternatives to modern capitalism?
Ryan McMaken: Those of us who are in favour of genuinely free markets would like to see actually free markets. We of course don’t see anything like that. The money supply is heavily controlled, the banking system is heavily controlled, real estate is heavily controlled.

We look at all of those things and we see that things would be better if we could repeal some of this control, because it’s just been getting more and more heavy-handed since 2008. The banking sector, the too-big-to-fail, all of the bailouts.

[T]hese movies often celebrate is government destroying freedom

What we find ourselves in right now is not of course a truly capitalist system, but something that we would refer to us a mercantilism. A system that the American revolutionaries fought against in the 18th century, that is the idea that we have favoured corporate interests, and we see it as in the interest of the state to favour those special groups that are well connected politically, and we do that.

So when we look around the American economy we see that everywhere, we see certain corporations, certain groups that are favoured, and they receive bailouts, they receive tax payer money, the receive regulatory favours, everybody else is just on their own.

There’s a saying in America that, in our economy, it’s socialism for the rich and it’s free markets for the poor. Meaning that, if you’re rich and well politically connected, then you get tax payer money, then you get favours, but if you’re poor or middle class and you don’t have any political power, well then, you just have to make it on your own.

Hungarian Post takes innovative approach to improving premiums

Posted on November 26, 2014November 10, 2014 by Ashton Wenborn

Compounded when the economic crisis threw the world into financial turmoil, the life insurance market in Hungary has been unpredictable. But, by operating through post offices across the country, the Hungarian Post’s life insurance arm has been able to overcome the problems posed by a difficult and changing market.

The Hungarian Post spoke to World Finance to discuss how it has managed to improve results for 11 successive years in the face of competition from global players, where the company’s headed next and how Hungary’s insurance market shapes up in comparison to the rest of the world.

How has the Hungarian insurance market changed over the past 10 years?
Before the economic crisis hit, the Hungarian insurance market showed features typical of a developing market. It was characterised by growing premium revenues that gave insurers significant opportunity for growth. At that time the life insurance sector made up 40 percent of the total revenue from insurance premiums; that has increased to just over 50 percent today, although that’s still low compared to the levels in Western Europe.

The crisis had a significant impact on the market. 2013 was the first year we started to see actual growth again – the premium revenue was $3.4bn, which is still 13 percent lower than the $3.83m that it reached in 2007 when it peaked. According to some we hit rock bottom in 2012, but this year we can expect growth once again – in line with the predicted economic growth.

What is the size and complexity of the Hungarian market compared to neighbouring countries?
Hungary’s per capita premium revenue is similar to neighbouring countries, and stands at around 30 or 40 percent of that of West European countries. That difference is even bigger in the life insurance market; while in EU countries the average per capita premium revenue was $1,419, in Hungary it was only about $189. When compared with other countries in the region the differences are much smaller, but during the crisis period we fell behind and even the Visegrád countries had higher revenues than us.

In the medium term the Hungarian insurance market has potential for significant growth, with the main driver being the improvement of the nation’s living standards

Austria’s insurance penetration – the ratio of insurers’ premium revenues to GDP – is twice as high as ours. According to last year’s figures, premium revenues in Austria constituted 5.3 percent of the annual GDP, compared to 2.7 percent in Hungary.

What are the biggest challenges and opportunities for Hungarian insurers?
In the medium term the Hungarian insurance market has potential for significant growth, with the main driver being the improvement of the nation’s living standards. As a result, insurance penetration should gradually reach the average level seen in Western Europe.

The predicted GDP growth should enable other areas outside of life insurance to develop. There is a strong correlation between economic growth and the development of the property insurance market, for example. The role of the state is expected to diminish in terms of major pension and health care systems, which means we can expect to see a bigger focus on customers providing for themselves within in the medium and long term – which will affect pension savings, for example. Low interest rates combined with strong competition in the market have a negative impact on the profitability of insurance companies, so there’s a big focus on operating efficiently in order to ensure profitability.

How much of the country’s entire insurance market does life insurance account for?
Over the past few years, life insurance premiums have risen and now account for over 50 percent of total premiums revenue. Of that, single premium life insurance constituted one-third in 2013, with regular premium insurance accounting for the other two-thirds, and the ratio of unit linked insurance to traditional insurance products was 2:1. Overall life and health insurance uptake is low in Hungary compared to in other countries.

Hungary’s GDP improvements

USD, billions

154.234 2008

126.631 2009

128.634 2010

140.303 2011

129.959 2012

142.115 2013

149.21 2014

156.601 2015

164.05 2016

171.693 2017

Source: International Monetary Fund
Notes: Figures post 2013 are IMF estimates

What’s the story behind Hungarian Post Insurance?
The Hungarian Post Life Insurance was established by the Hungarian Post and the German insurance company HDI, which is now called Talanx AG, in 2002. Since then it has faced several kinds of financial, economic, social and environmental challenges but it was the recession and the global financial crisis that had the biggest impact on our operating environment. Given the circumstances, it wouldn’t have been unusual if our results had been in line with the economic downturn.

However, Post Insurance was one of the few Hungarian companies that was, for the most part, able to remain unaffected by domestic and international market trends. That explains how we have managed to consistently improve our results each year since 2002, rather than mirroring the cycles of economic boom and downturn (see Fig. 1).

Many analysts believe our history is one of the most exciting success stories seen in the Hungarian insurance market over the past decade. But when we entered the market 11 years ago, there were very few observers who would have bet on our postal bancassurance model. The insurance market had been saturated and well-reputed, international companies with high market shares had been struggling in the competition. Our results confirmed the expectations of those who had trusted in us right from the beginning. In the 11 years since our launch we have increased our sales revenue by almost twelve times; in 2013 our sales revenue reached $210m. Since the insurance arm was established we have set up more than 400,000 life insurance contracts.

How does your sales model differ from that of rival companies?
Traditionally insurance companies use different sales channels – most notably direct sales through employees, independent insurance brokers and bancassurance. The Post Insurance is a bancassurance company that uses the Hungarian Post’s national sales network rather than a bank. Our target market consists solely of retail customers. Our insurance schemes are much more affordable for wide groups of the population than those of our competitors, offering excellent price to value ratios. In the post offices we offer transparent and low-cost basic insurance policies, enabling our customers to ensure a secure future for themselves and their families at an affordable price.

What results are you proudest of in terms of sales?
We are very proud that we have been able to consistently increase our premium revenues over the past decade despite the economic crisis. In 2013 we were ranked second out of the entire life insurance market, with a market share of 11.7 percent, which was a great achievement. We increased our gross premium revenue by 40 percent from the previous year.

How important is customer satisfaction to the success of your company?
In many cases life insurance contracts cover several decades. That’s just one of the reasons that it’s so important we keep our customers satisfied with our products and services. When they are satisfied it also has a positive effect on our sales representatives working in the post offices. The commitment of sales staff to our products and company is one of the key elements that will guarantee us a successful future. In addition to regular customer satisfaction surveys, we therefore pay a lot of attention to our sales staff and act on their feedback.

In what ways has innovation contributed to your recent progress?
Last year one of our most important developments was the rollout of our MPB online system across all of our post offices. As well as surveying the needs of the customers, the electronic system means that contracts can be managed quickly and accurately. All 2,000 of our post offices across the country were equipped with the online infrastructure by the end of 2013.

The new computerised system has improved the service we provide to customers in the post offices. It also ensures premium calculation errors are avoided when setting up insurance plans, which is a major benefit, and by making contracts available electronically the system speeds up the whole process.

What are the ambitions and objectives of Post Insurance for the future?
In 2014 we want to continue improving our efficiency and product offering, and we aim to optimise processes to further improve the service we provide to customers through the Hungarian Post network. In the medium-term our aim is to rank among the five biggest companies by revenue in the Hungarian insurance market.

How will Colombia move forward economically? | Felaban 2014 | Video

Posted on November 26, 2014November 26, 2014 by Ashton Wenborn

Colombia has faced a tough time trying to convince the international community to give it post-conflict economic support. But could its fortunes be about to change? World Finance travels to the Felaban Conference in Colombia to find out.

World Finance: A spirited reception greeted Colombian President Juan Manuel Santos’ European tour. Yet, despite the fanfare, lackluster support followed his request for post-conflict economic support – aid pegged at $45 billion dollars. German Chancellor Angela Merkel was the only European leader to make any financial commitment.

Vague optimism coloured Treasury Minister Mauricio Cardenas’ statements on how the money would be spent at a recent banking conference in Medellin. Understandably so as peace talks halted in the wake of General Ruben Alzate’s suspected abduction by guerilla opposition group FARC.
Mauricio Cardenas: We are looking at international support for building peace and reconciliation in Colombia. That’s why we think we have to complement our internal funding which is based on taxation of Colombian business and individuals that are contributing to our tax collections.

We are looking at international support for building peace and reconciliation in Colombia

World Finance: It’s a strategy that has allowed the country to outpace its Latin American neighbours as the fastest growing economy. Transcending the end of the ‘easy cash’ booms involved single digit, steady Asian-style growth in the oil and coal sectors. Though socioeconomic disparity and low employment are issues the government continues to grapple with overdue taxation programmes are slowly turning the tide. Now with the end of civil war on the horizon – the government is focused firmly on attracting even more foreign direct investment.
Mauricio Cardenas: We are at the beginning of major initiative to build infrastructure in Colombia which will require more financing from local and international sources, and understanding that the Basel 3 regulations will provide some restrictions from bank financing of infrastructure. We’re ensuring that we will also use pension funds and capital markets to finance infrastructure.

World Finance: Though the president’s global tour focused on Europe, recession-ridden Japan has partly pegged its own growth prospects on stronger relations with the Latin American nation. It’s a relationship this government plans on further exploiting whether peace comes tomorrow or years down the road.
Mauricio Cardenas: We’re considering the possibility of new bond issues for sovereign debt in Japan. Prime Minister Abe was here in Colombia not too long ago and we discussed a special guarantee facility that the (inaudible) can provide to our sovereign deb. So we are considering bond issues in the Japanese market in the future.

World Finance: A future for Colombians, worth getting excited about. Kumutha Ramanathan, reporting in Medellin, Colombia for World Finance.

The importance of data for risk management systems

Posted on November 26, 2014November 10, 2014 by Ashton Wenborn

Many banks have a typically top-down perspective on enterprise risk management (ERM). This approach underestimates the importance of data, the core bottom-up enabler for ERM, and compromises the bigger-picture requirements of a sound ERM framework, including the longer-term strategic advantages of a solid data foundation.

ERM is about timely scrutiny and proactive management of risk across business. Risk assessment might be of the extent to which concentrations are being built up; or whether industry or geography limits are being eroded too fast; or if pricing is too low (for profitability) or too high (for competitive positioning). For an ERM framework to be deemed a success, it must be seen to deliver better informed and timelier decision-making capabilities. Examples of sound ERM practice include the ability to monitor, in near real-time, the combined impact of lending decisions being made by originators in a branch network, or the cumulative effect of trading decisions being made on the trading floor, each day.

Automated, or systemised, and centralised reporting enables these things to be visible at the enterprise-wide level, but only as long as such reporting is informed by granular, bottom-up data. ERM requires the right data capture, feeding automated workflow-type systems, to give operations management access to the data required for daily activity purposes. In turn (via a central data repository), this gives executive management access to the data required for business intelligence purposes.

Profiling risk management
Capturing the correct data at the point of origination can prove critical to ensuring that the right people discuss, monitor and manage the risks appropriate for consideration at each level of the organisation. Origination workflow represents an excellent opportunity to gain both board commitment and business unit engagement on the topic of holistic data capture and data management. For example, business management will have the opportunity to assess whether large deals are meeting the hurdle rates for different risk profiles, while executive management can review whether business for a particular segment or region is meeting its targeted risk-adjusted returns. The ultimate objective – to ensure that unusual, unintended, or unacceptable risks are isolated and proactively managed – can then also be met.

For an ERM framework to be deemed a success, it must be seen to deliver better informed and timelier decision-making capabilities

Deficiencies in raw data are not the only obstacle to achieving this objective. When poor data is combined with the management of risk in silos, ERM is fundamentally undermined. Whether silos are viewed in terms of operational entity, line of business or type of risk, the end result is the separation of data for finance and risk management purposes. As a consequence, data management for the corporate and retail banking groups, or for country ‘A’ and country ‘B’, or for liquidity management and credit risk management, happens on systems that do not communicate with each other.

Silos are perhaps inevitable for day-to-day, local operational purposes, but this approach to management of risks is inadequate for the organisation as a whole. New regulations are driving banks to become more holistic and are forcing a breakdown of the organisational cultures within many banks that perpetuate silos. For example, under Basel II, credit risk was typically managed by the risk department, and liquidity risk was managed by the ALM/treasury department. Now, under Basel III, calculation of liquidity ratios requires data from both entities. The old way is no longer sustainable.

New requirements for enterprise-wide stress testing shine a light on the problems of poor data and data in silos. Typically banks have to throw armies of people and huge technical resources at satisfying each external reporting obligation. These tactical solutions deliver one-off results, leaving the underlying problem unresolved. So the real, untapped, opportunity when it comes to increasing operational effectiveness, is to address the separation of the organisation’s databases.

Once a holistic view of key risk data has been achieved, banks can deliver material improvements in operational efficiency both at the local level as well as at the enterprise level.

To understand how limitations in data availability across the enterprise frustrates the holistic management of individual firms, one only needs look at the recent subprime crisis, which morphed into the liquidity crisis, and then the economic crisis, which in turn led to the wider contagion that we experienced post 2008. Ultimately, banks did not have access to the data needed to enable the robust management of risk across the enterprise.

Tools to do the job
Clearly, banks need the ability to collate raw risk-related data; combine it with non-risk data; model it to transform it into meaningful information; and then further aggregate it for business intelligence purposes. Doing this successfully means that, at the centre of the bank, at the press of a button, management can assess key risk dimensions and drill down in to them. Sustainable performance requires everyday data capture, analysis and reporting capabilities that combine information from multiple databases and models, across different business lines and geographies, while using different technologies.

The point about data being the foundation of all things ERM triggered the Bank for International Settlements’ January 2013 paper on risk data aggregation and risk reporting. This paper set out 14 principles to strengthen risk data management, in four broad categories: overarching governance and infrastructure, risk data aggregation capabilities, risk reporting capabilities, supervisory review, and tools and cooperation. Although the BIS paper was, at face value, a top-down perspective on data aggregation and reporting, it has at its heart the need for bottom-up, granular data flows.

The biggest challenge is to be able to do this across all risk types – not just credit, market and operational risk, but also for liquidity, capital, interest rate, settlement, IT and other risks.

Regulatory stress testing again illustrates the value to banks of getting this right. The heart of a well-functioning stress testing process is a single data repository in which the relevant risk and finance data required for the regulatory stress tests is consolidated and readily available. With the key data layer/datamart element in place, models, workflow tools and reporting modules can be layered on top. Once this structure is in place, banks are afforded a scalable and powerful capability, which enables them to effectively report on a broad array of enterprise-wide stress tests in a timely and cost-efficient manner.

Ultimately, banks did not have access to the data needed to enable the robust management of risk across the enterprise

In addition to supporting stress testing, this same capability offers substantial insight to senior management about a bank’s risk profile for day-to-day business management purposes, across transaction, portfolio, balance sheet and performance management activities. In turn, it facilitates medium-term planning and annual budget rounds, capital allocation and wider enterprise management, consistently, across the organisation. Of course, all this needs to be within a strategic context, with consistent, well-informed policies, and with governance providing the right checks and balances (see Fig. 1).

Regulators are demanding significant enhancements to risk management practices with regularly issued and updated guidelines. In turn, they want extra information and reports, with increasing granularity and frequency. All this, combined with requirements for additional stress tests and even more capital, means that compliance costs for banks, whether in terms of people, systems or capital, are mounting.

No investment in solutions to these pressures will work without good data, which brings us full circle back to the need for data at the bottom end to be looked at and for the ERM framework to be underpinned by increasingly accurate, relevant and timely data. Delivering an enhanced enterprise risk management framework requires considerable planning and substantial investment, but it is well worth the effort. Much of the investment recently made in risk management has been reactive – in response to regulation – rather than proactive. Banks now need to think proactively about improving profitability by better management of risk; by understanding return to risk dynamics of both individual exposures and also portfolio level risks; and by ensuring more efficient use of capital.

The good news is that raising the standard of the firm’s ERM framework is a case of taking advantage of established advances in risk management practices, moving from a siloed approach to a holistic view of risk, and simultaneously increasing the focus on data and its management. Ultimately, such process reengineering is about delivering centrally accessible data, for example risk data, volumes data, performance data, migration data and point-in-time data and trend analysis. Returns of three times the original investment are typical and potentially even understate the benefits. Certainly, when thinking in these terms, process reengineering really does begin to make a compelling business case.

For further information visit moodys.com

ICTSI strengthens cross-border business

Posted on November 25, 2014November 10, 2014 by Ashton Wenborn

Headquartered in the Philippines, International Container Terminal Services (ICTSI), is a global container terminal operator, and has recently launched an innovative loan programme that is the first such structure of its type established by an Asian corporate. The programme serves as a master platform from which other loan type financing instruments can be issued as required.

Harmonising the capital structure of ICTSI, there is a particular regard to the funds available under the programme that will be used for strategic investments and acquisitions, in addition to general corporate purposes.

Flexible financing
ICTSI has achieved much of its growth internationally by participating in government concession schemes for container terminals, and also recently in conjunction with resale opportunities. It can plot its growth path in terms of trend lines, but ultimately has to have flexibility in its finance arrangements to respond to a winning bid or a resale opportunity in a timely way.

The company’s ability to compete for all categories of the project, ranging from the development of a brand new, high capacity, automated container terminal to the acquisition of an existing container terminal also dictates what’s needed for flexibly financing projects. Different categories of opportunity have different financing requirements, the higher end requirement typically being where new infrastructure development is concerned.

This was the case recently in Manzanillo in Mexico where, under a Build Operate Transfer (BOT) concession, ICTSI invested $250m in the 450,000 TEU (20 foot equivalent) per year in the first phase of a new container terminal. The two-berth facility opened for business in mid-2013 and has two further development phases to be implemented as dictated by demand.

Case study: Manila International Container Terminal (MICT)

MICT is ICTSI’s flagship container terminal offering an annual capacity of 2.5 million TEU. ICTSI has more than quadrupled the overall capacity of the terminal since it took over the facility on a concession basis in May 1988.

The latest expansion programme allowed the $200m development of Berth 6 at MICT, which opened for business in 2012. It features a 300m quay line, raising the overall length of quay available at MICT to 1600m, and a 12 hectare yard area raising the total yard area to 75.4 hectares.

At the same time as Berth 6 was in development the foundation works for the next phase of expansion, Berth 7 was also undertaken, facilitating fast track construction triggered by demand. Underlining its versatility, ICTSI’s remit in Manila is not just to operate as a cargo handling company. As part of the operation of MICT, it functions as a fully-fledged port manager undertaking the management of pilotage, tug boats, berthing and overall vessel traffic management within its basin. The company also undertakes full responsibility for the maintenance of the whole terminal facility including the wharf, seawall and the capital and maintenance dredging of the basin.

Similarly, the group has the type of highly automated facility referred to above – a concession for a state-of-the-art container terminal in the port of Melbourne, Australia under development. The infrastructure requirement in this project coupled with the automated handling systems, which comprise full automation of handling processes in the yard area, dictate a high level of investment.

ICTSI will invest $407m in the first phase investment that is expected to come into operation in December 2016, and $101m in the second phase, which will come into operation hot on the heels of phase one in 2017. Under the first phase of development the annual capacity offered will be 350,000 TEU per year over one berth of 330m, and in the second capacity will rise to one million TEU with the addition of a second 330m berth and expansion of landside handling with storage arrangements.

The company won this project via a new concession offered by the Port of Melbourne Corporation. It was secured against stiff competition and is particularly attractive to the company as it will be the only container terminal in Melbourne able to handle the larger vessels that liner operators wish to introduce into Australasian trades.

Managing risk and reward
The latter mature market project is something of a departure for ICTSI; emerging markets have traditionally been the focus of its main interest where it has proved itself highly successful in managing risk versus reward. Further mature market projects may follow if the returns look right. The group’s policy is never to chase volume for volume’s sake. Its focus is fairly and squarely on yield per TEU where it enjoys the status of being one of the highest performing companies in the sector.

Two emerging market projects that ICTSI has committed to recently are the takeover and further development of the container and general cargo operations in Puerto Cortes, Honduras – which it won via a concession process – and the construction of two new berths at Matadi on the Congo River in the Democratic Republic of the Congo (DRC), a venture undertaken in conjunction with local partner Simobile.

ICTSI is developing new container and general cargo facilities in Puerto Cortes that will ultimately realise a terminal with 1100m of quay for container traffic, 400m for general cargo, which occupies a 62.2-hectare site. There will be 12 ship-to-shore container gantries employed and the terminal, at full development, will provide an annual container throughput capacity of 1.8m TEU. Draught alongside the quay will be 14m, with the possibility to increase this to 15m. The terminal therefore has the ability to not only attract mainline carriers serving Honduras and surrounding countries such as El Salvador and Nicaragua, but also to play a regional transhipment role. ICTSI won the 30-year Puerto Cortes concession with a winning bid comprising an investment package of 624m over 10 years.

ICTSI will invest $407m in the first phase investment that is expected to come into operation in
December 2016

Matadi is the main port of the DRC and the capital of the country’s Bas Congo province. It is situated on the left bank of the Congo River 148km from its mouth and eight kilometres from the point where rapids make the river impassable. It is an established gateway to serve Kinshasa, the capital of the DRC, which possesses one of the world’s fastest growing populations.

In 2005 the population of Kinshasa was around 7.5 million, and by 2015 it is estimated to be 12 million. The two berths under development at Matadi will offer an annual throughput capacity equivalent to 120,000 TEU and 350,000 tonnes per year. Capital expenditure is $100m. A phase two development, adding two more berths could double capacity overall.

Another project ICTSI has on the starting blocks in West Africa is at the new Lekki port in Nigeria, located 60km east of metropolitan Lagos.

On 10 August 2012, ICTSI entered into a sub-concession agreement with Lekki Port LFTZ Enterprise – the promoter of the Lekki Port, to develop and operate a container terminal there for a period of 21 years on an exclusive basis. The project is scheduled to be operational in 2017, and when fully developed will possess a 1200m quay line served by 14 post-Panamax cranes. The terminal is configured to serve the larger dimension vessels expected to enter the West African trades, and to provide modern capacity to meet Nigeria’s burgeoning international trade requirements.

Operating vast challenges
The company is recognised as an international terminal operator with the skill-set necessary to effectively develop and bring into operation highly efficient marine terminal facilities in the most challenging environments. Indicative of this is its container terminal in Toamasina, Madagascar, which has received praise from the World Bank and IFC with regard to the quality of the operation established here from very rudimentary beginnings. ICTSI won the 20-year concession for the operation, management, financing, rehabilitation and development of the container terminal at Toamasina with the transaction formally closed in May 2005.

Subsequent to this, ICTSI implemented an initial $30m investment programme with this including strengthening of the quay, the acquisition of comprehensive new container handling systems for quayside and yard operations as well as the installation of state-of-the-art IT systems. At the same time, safety, security and organisational policies for yard and marine operations were extensively upgraded, a proper entry/exit gate and allied billing operation put into operation and extensive manpower orientation and training was undertaken. Further regular investments have been put in place that has recently culminated in the second phase of development for the terminal.

Now widely acclaimed as one of the most efficient in Africa, the terminal is a testament to what can be achieved in a public private partnership despite the most challenging of environments. There is one further project in the ICTSI portfolio with 29 terminals in 21 countries that is notable – the Pakistan International Container Terminal (PICT), Karachi, Pakistan.

In October 2012, ICTSI, through ICTSI Mauritius (ICTSIML), signed a share purchase agreement with PICT, a publicly listed company on the Karachi stock exchange, to acquire 35 percent of its outstanding shares. ICTSIML then purchased additional PICT shares in November and December 2012, raising its shareholding to 63.59 percent and thereby effectively giving ICTSI control of PICT’s 21-year concession that commenced in 2002. Significant investments are planned for PICT once the Karachi Port Trust grants the extension of PICT’s concession term.

The cross-section of recent projects clearly demonstrates that in forging a path of international expansion there are varying financial requirements according to the different categories of projects involved. One further example of this is highlighted in conjunction with ICTSI’s flagship Manila International Container Terminal (MICT), which now handles in excess of two million TEU per annum (see box-out). MICT is one of the most successful public private partnerships undertaken in the Philippines to-date, resulting in continuous investment by ICTSI since the terminal was originally concessioned to it in May 1988.

The butterfly effect and efficient market hypothesis: right for the wrong reasons

Posted on November 25, 2014January 18, 2021 by Ashton Wenborn

“Prediction,” the great physicist Niels Bohr is said to have once observed, “is very difficult. Especially when it concerns the future.” In science and economics, our lack of ability to foresee the future has traditionally been attributed to two theories – the butterfly effect, and the efficient market hypothesis – which have more in common than might appear.

The “butterfly effect” was first coined by the meteorologist Ed Lorenz in a 1972 talk, based on an earlier paper in which he observed that the solutions to a highly simplified weather model were sensitive to initial conditions. When he slightly changed the inputs to the model and ran the simulation, the answer changed completely. This was like running a weather prediction model using slightly different values for today’s weather, and getting wildly divergent forecasts for the weather next week.

Theorising repercussions
Lorenz’s model only consisted of a few equations, and was not intended to be realistic, but it showed in principle that systems such as the atmosphere, or for that matter the economy, might be very sensitive as well. As former Federal Reserve chairman Ben Bernanke put it, paraphrasing Lorenz, “a small cause – the flapping of a butterfly’s wings in Brazil – might conceivably have a disproportionately large effect – a typhoon in the Pacific.” Prediction of such an unstable and highly-strung system would clearly be impossible.

Economists have an advantage over weather forecasters, in that they also have another theory of non-prediction, based this time on the idea of efficient markets. This came out of a 1970 thesis by Eugene Fama, who defined an efficient market as one where “there are large numbers of rational profit maximisers actively competing, each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants.” In such a market, he believed, “competition among the many intelligent participants” would drive prices towards their “intrinsic value” where all relevant information was taken into account.

Efficient markets are unpredictable because they are so sensitive that they instantly correct for any slight change in the economy

For example, if the price of a security exceeded its intrinsic value, investors would sell it, and the price would immediately revert to its correct level. And as new pieces of information arose – say earnings reports or an unemployment reading – the market would instantaneously take them into account. The markets knew everything that could be known, and the rest was random. It therefore followed that no one could beat the market – and no one could predict it. Techniques such as chart analysis (looking for recurrent patterns in market data) or fundamental analysis (for example looking for companies that are undervalued relative to earnings) were a waste of time according to Fama.

Empirical evidence would appear to agree. As economist John Cochrane wrote, “The surprising result is that, when examined scientifically, trading rules, technical systems and market newsletters have essentially no power beyond that of luck to forecast stock prices… The main prediction of efficient markets is exactly that price movements should be unpredictable!”

Efficiently unpredictable
So what do these theories have in common, apart from the fact that they both predict unpredictability, and emerged into the public consciousness in the early 1970s? The first thing is that they are both based on a magical degree of extreme sensitivity. The butterfly effect says that complex systems such as the atmosphere or the economy are unpredictable because they can be perturbed by minuscule changes. Efficient markets are unpredictable because they are so sensitive that they instantly correct for any slight change in the economy (including a change in the weather).

Both theories provide an explanation for our inability to predict the future, but still allow for probabilistic predictions. In the 1990s, weather forecasters began making multiple forecasts from slightly-perturbed initial conditions to get an idea of the range of possible future outcomes (a technique known as ensemble forecasting) and find out which are most likely. Similarly, the efficient market hypothesis implied that prices should vary randomly around an equilibrium value. This led to the development of tools such as the Black-Scholes formula for pricing options, or Value at Risk for assessing the probability of price changes.

Finally, both theories have a drawback, which is that they are wrong – or rather, they are right for the wrong reasons. While many equations are sensitive to initial condition, the butterfly effect was based on a toy mathematical model that had little relationship to the weather. As physicist Stephen Wolfram points out, viscous effects would tend to dampen out small perturbations in the real atmosphere, and experiments with weather models show them to be relatively insensitive to even large perturbations. Forecast error is due, not to butterflies or chaos, but to a simpler and less glamorous problem – model error. The atmosphere is a complex system that eludes precise simulation.

The efficient market hypothesis, meanwhile, is based on numerous assumptions such as the existence of rational investors who act independently from one another; but as behavioural economists have shown, real markets consist of people who are in constant interaction and are driven in large part by emotions, which is why they all tend to stampede to the exits at the same time during a market crisis. Rather than markets driving prices to their correct equilibrium levels, complexity scientists argue that it makes more sense to see markets as being at a state that is far from equilibrium, and susceptible to sudden changes. Crashes are hard to predict for the same reason that earthquakes are hard to predict.

So why are these theories still around? The traditional test of a scientific theory is that it should be able to make accurate predictions based on a logical, mechanistic argument. While the butterfly effect and the EMH correctly “predict” that systems are unpredictable, however, one needs to be careful about predictions that only give an explanation for something that is already known. As Bohr said, predictions about the future are much harder.

A simpler, if less attractive, explanation for our inability to predict our future is that systems such as the economy, or the atmosphere, are too complex to be captured by a mathematical model. Of course, this would mean that economists would have to ditch techniques such as Value at Risk – but given that those methods all failed during the recent crash anyway, maybe that is no bad thing.

Irkutsk unleashes Siberia’s oil potential

Posted on November 25, 2014November 10, 2014 by Ashton Wenborn

Oil production has recently changed in the eastern Siberia region. A massive natural gas project is being implemented by the Irkutsk Oil Company – the largest Russian independent non-publicly traded company and the third-largest hydrocarbon producer in eastern Siberia. Exhibiting high key operational and production results (reporting a 4.8 fold increase in oil and condensate production within the last four years), Irkutsk Oil invests hundreds of millions of dollars in production facilities, infrastructure development, and innovation projects, including a gas business development strategy.

The company’s fields and license blocks contain vast volumes of gas resources. The best call to migrate these resources into a successful monetary amount, a few years ago Irkutsk Oil decided to implement the large-scale gas project. Unfortunately, there is no gas transmission or gas-consuming infrastructure in eastern Siberia. Gazprom’s “Powers of Russia” gas transportation system – which is aimed to deliver East Siberian gas to the energy hungry China – was just started recently, and exact dates when it will be put into operation are still unclear.

Unchartered exploration
Extensive research and various marketing studies helped Irkutsk Oil to create an optimal project of developing business in the gas industry, which is brand new for eastern Siberia. The feasibility studies for the project have been conducted with help and technical expertise of the Japanese company TOYO Engineering, a global expert with huge practical experience in industrial engineering in both Russia and worldwide. The company plans to produce up to seven billion cubic meters of natural gas per year from the Yaraktinsky, Markovsky and West-Ayansky fields, all located in the Irkutsk region. Natural gas from these fields is rich with valuable feedstock components such as gas condensate, propane, butane, and ethane. On a top of that, the company plans to achieve more than 90 percent associated petroleum gas (APG) utilisation rate.

Due to the ecological safety of natural gas, burning it sends far fewer emissions of harmful substances into the atmosphere than burning other energy sources

Rational use of natural and associated gas resources is complicated, capital-intensive, and challenging task for the company. Irkutsk Oil’s gas project is expected to be a unique venture for all of Russia, and a number of technological solutions applied in it will most likely be used for the first time in the country. It is expected that the total investments in the gas project could reach $3.4bn, some $0.2bn is being invested in 2014.

During the next five years, Irkutsk Oil plans to build two gas processing plants with a total processing capacity of seven billion cubic meters per year, a transportation system for natural gas liquids and methane, gas fractioning facility, and polyethylene plants with a capacity of 500,000 tons of low and high density polyethylene per year with a possible expansion of up to one million tons per year. Moreover, the gas project includes a railroad uploading terminal in Ust’-Kut that will allow shipping a liquefied petroleum gas (LPG) and gas condensate as well as construction of plant to produce liquefied natural gas for the needs of the local market.

The implementation of the gas project began in 2010. The company pioneered the operation of gas-cycling process with the separation of condensate in Russia, at the Yaraktinsky field. Based on the successful testing, the re-injection of APG to the formation began. The company’s achievements in APG utilisation were highly recognised at the international level. Since 2010 the gas project continued to be one of the company’s main focus areas. In 2013 Irkutsk Oil kept expanding the capacities of its APG compressing equipment at the Yaraktinsky field by putting into operation new drive compressors.

In addition, the company signed contracts for the delivery of several more compressor units. In 2013, Irkutsk Oil also put into operation a block compressor to utilise associated petroleum gas at the Markovsky field. By the end of 2013, the company has deployed 13 compressors (with a total capacity of 34 MW) ensuring the effective utilisation of natural gas and APG at its fields and license blocks and decreasing the rate of greenhouse gas emission.

Irkutsk Oil was moving onto the next steps of its gas project during 2013. The company completed construction of injecting wells and gas pipelines, prepared all construction sites, brought some machinery, equipment and materials, invited contractors for competitive bids, placed orders for key equipment, and finished the basic stages of design works. It also continued the feasibility studies of the gas processing plant.

At the same time, engineering companies from Russia and North America completed the design of the complex natural gas and APG treatment and processing facility at the Yaraktinsky field, and submitted the documents for approval to GlavGosEkspertiza – the Russian state agency. In addition, the group completed the design of a pipeline system to transport gas components from both the Yaraktinsky and Markovsky fields to railroad uploading facilities in a city of Ust’-Kut.

At the beginning of 2014, Irkutsk Oil intensified its gas project implementation, which is essential for the successful local economic development. It will enable the construction of new production facilities, gas transmission and gas-consuming infrastructures, and power generation capacity, attests Nikolay Buynov, Irkutsk Oil’s Chairman of the Board. The gas project also provides a positive contribution to the social development of eastern Siberia. It will improve the regional labour market by creating several thousand jobs during its construction and more than 450 highly skilled jobs during operation. Moreover, Irkutsk Oil’s project allows expansion at the tax base: $3.4bn of various taxes would be paid to the local and federal budgets in the first 15 years of the project.

Developing eastern Siberia
Establishing the gas industry in eastern Siberia is considered significant on an international level, as the environmental protection of Lake Baikal – declared a UNESCO World Heritage Site – is increased. Due to the ecological safety of natural gas, burning it sends far fewer emissions of harmful substances into the atmosphere than burning other energy sources; especially coal, which is traditionally used in eastern Siberia. At first, Irkutsk Oil plans to produce and transport liquefied natural gas (LNG) to the local markets.

The company plans to produce LNG at the plant, which will be the part of gas chemical facility, located in Ust’-Kut, the north of Irkutsk region. Completion is due in the fourth quarter of 2017. The total processing capacity of this plant will be 84,000 tons of LNG per year. The company is positive that this volume of production will be sufficient for creating local markets for LNG.

Liquefied natural gas will be used in several focus areas and in particular, for domestic needs in communities within the Baikal natural territory.

Furthermore, it is economically feasible and ecologically attractive to utilise LNG as fuel for public transportation, commercial vehicles, river ships, and cars. It will allow, for example, to decrease bunker fuel costs by 50 percent and to improve environmental protection of Lake Baikal and its nearest rivers. According to estimates, emissions of carbon monoxide can be decreased by five to 10 times, hydrocarbons pollutes by three times, nitrogen oxides by 1.5 to 2.5 times, polycyclic aromatic hydrocarbons by a few dozen times.

Irkutsk Oil has already begun testing local markets for an interest in LNG. In June this year, the company and the Zabaikalsky region’s government signed the five-year agreement on cooperation. Under the agreement, parties aim to work at ways of gasification the Zabaikalsky region by using LNG and LPG. The transportation of LNG is of high priority for the territory. Besides solving some of the local problems – like reliable source of energy of the local industry – it would address the big environmental threat to the fragile ecosystem of Lake Baikal, the world’s largest and deepest lake.

Gasification of this territory can be conducted in three to five years. The starting volume of LNG, transported to the Zabaikalsky region, is estimated at 10,000 tons per year. The company plans to supply at least the same volume to Severobaikalsk (Republic of Buryatia) and Ust’-Kut (Irkutsk region). Therefore, if successful, Irkutsk Oil’s project could be considered the beginning of the regional large-scale gasification programme. But most of LNG production – about 60,000 tons per year – is due to be supplied to Baikalsk city, located at the south coast of the lake.

For decades the lake’s unique ecosystem was threatened by Baikalsky paper and pulp mill and coal plant. At present, Baikalsk is capable to change this situation and reduce environmental pollution. Irkutsk Oil hopes that using LNG will enable improvements to the town’s heating system, liquidate coal storage facilities, and sharply decrease emissions. A new source of energy could change the business landscape of this city.

Needless to say, the federal governments fully support the project. These directions of activity are also strongly backed by the local authorities. The government of the Irkutsk region and VEB Engineering Company (Vnesh Econom Bank Group’s subsidiary) began working on the pre-feed of the region-wide switching of coal-burned boilers to the ones that are operated by gas.

The company sees great benefits from the project as it has long-lasting economic, environmental and social effects. Eventually it will create a new gas industry in East Siberia and change it for the best.