Author: Ashton Wenborn

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

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

What can we expect from Davos 2015?

Posted on by Ashton Wenborn

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

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

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

How much did it cost to attend Davos?

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

$52,000

Annual membership with the WEF

$137,000

Industry associate with the WEF

$260,000

Industry partnership with the WEF

$530,000

Strategic partnership with the WEF

2,633

Total attendees

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

History of the World Economic Forum

1971
Founded by a group of European business leaders held in Davos, Switzerland

1972
The second annual meeting drew 300 participants and was a modest event

1974
The Forum expands its series of round table discussions to seven events

1975
The Forum welcomed its first delegation from a non-European country – Mexico

1976
A membership system is introduced, allowing 1,000 of the leading global companies to join

1979
The Forum’s well known index of competitiveness was introduced

1982
The US participated regularly at Davos after Regan sent a live message to the event

1988
The Davos Declaration was signed by Greece and Turkey, turning them away from war

1994
Its 1,000th member was welcomed, followed by a cap on membership to 1,000

2005
The annual meeting launched the G8 agenda on global climate change and poverty

2008
An online community called WELCOM was formed for business and government use

2013
Henry Kissinger spoke out on the US and Russia to cooperate on ending the crisis in Syria

Will volatility return to the markets in 2015?

Posted on by Ashton Wenborn

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

KIB facilitates investment in Kuwait

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted on by Ashton Wenborn

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

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

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

Sri Lanka in figures

0.86%

Population growth rate

16.24

Birth rate per 1,000 population

72

Men’s life expectancy at birth

80

Women’s life expectancy at birth

3.4%

Health expenditures 2011

Source: Index Mundi. Notes: Includes estimated 2014 figures

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

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

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

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

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

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

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

Source: SLICL
Source: SLICL

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

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

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

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

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

Bonus Banca de Inversion on the future of infrastructure developments

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why are commodity prices falling?

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Project Syndicate 1995–2014

Kuwaiti insurance group GIG expands across the Gulf

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

Nigeria to slash 2015 budget as oil prices slump

Posted on by Ashton Wenborn

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

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

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

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

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

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

Unemployment special: can France escape a vicious circle?

Posted on by Ashton Wenborn

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

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

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

South-Africa

Read more

Unemployment special: statistics to get worse for South Africa in 2015

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

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

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

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

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

Fubon Life becomes leader in the Taiwanese life insurance field

Posted on by Ashton Wenborn

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

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

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

TWD 1.22trn

Taiwan insurance premium income (H1, 2013)

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

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

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

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

Fubon Life Insurance
Source: Fubon Life Insurance

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

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

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

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

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

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

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

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

Outrageous predictions: ‘2015 is a great year for employment’

Posted on by Ashton Wenborn

World Finance: So putting aside your outrageous predictions for 2015, what do you think the year ahead will look like?
Steen Jakobsen: If you had three inputs, energy prices, interest rates and currency, what would be the path of least resistance? Clearly the world is not functioning well with a strong dollar, so the top line for next year in terms of currency is lower dollar.

In terms of energy, the world right now is battling out whether this is inflation impact from low energy, or the increase in discretionary spending is more important. The analysts think discretionary spending is more important, the market seems to think that the disflation is more important. Energy needs to stabilise to be slightly higher.

I think 2015 is a great year for employment, it’s a great year for productivity, it’s a great year where we’ll turn around

In terms of the interest rates, we know for a fact that debt to GDP is rising, certainly in Europe, but all over the world. So low interest rates. So if you take the path of least resistance, it means a slightly weaker dollar, unchanged interest rates and a slightly more stable to higher energy. I think that’s exactly what happens, because at the end of the day water flows to the lower point. Gravity isn’t resisted even in these financial markets.

But I think in asset terms, the big play next year is to realise that being in so-called safe high yield plays is not going to work. Next year it’s about the transition from the 20 percent of the economy which is the listed companies and governments, into the real economy.

I think 2015 is a great year for employment, it’s a great year for productivity, it’s a great year where we’ll turn around, but first we need to get to that bad point in Q1/Q2.

World Finance: So how do you think we should approach the year ahead?
Steen Jakobsen: Prepare, rest well, train well, because 2015 is guaranteed to be more volatile, and I think as we come into 2015 in the WQ1, that will be exactly nine months since oil prices and the Europ started to fall. My rule of thumb is always nine months is the time it takes for a macro-impulse to work.

So be as I am: long fixed income, conservatively long the equity you need to own, and then as you come into Q1/Q2 next year, you need to be buying when everybody else will be selling.

Philips to acquire US healthcare firm Volcano for $1.2bn

Posted on by Ashton Wenborn

The deal marks Philips’ biggest healthcare buyout since it acquired sleep and respiratory product maker Respironics in 2008.

Volcano is the leading company in the image-therapy industry, which is worth around $400m according to Philips. The firm manufactures products such as catheters, which allow blood flow to be measured without the need for invasive surgery.

The company plans on boosting its spending on pharmaceuticals technology

Frans van Houten, Philips CEO, said the acquisition would boost the company’s R&D and “accelerate the revenue growth for our image-guided therapy business to a high single-digit rate by 2017”.

He added that non-invasive solutions offer wide-scale advantages. “Image-guided therapies provide significant benefits for healthcare systems and patients, including reduced patient trauma, shorter recovery times and hospital stays, and lower costs.”

Scott Huennekens, Volcano President and Chief Executive Officer said the deal would also help strengthen Volcano’s proposition. “This transaction will be beneficial for our shareholders, customers, partners and employees,” he said. “There is a large and growing global market opportunity for image-guided therapies, and as part of Philips, we gain the scale and resources needed to accelerate our goals.”

Philips has been expanding its healthcare sector over recent years, with revenues from the business hitting €9.58bn and accounting for 41 percent of all sales in 2013. The company plans on boosting its spending on pharmaceuticals technology, which currently only accounts for five percent of its healthcare business.

The firm is looking to further bolster the division as it shrinks its formerly diversified portfolio. It announced earlier in 2014 that its 123-year-old lighting arm would be spun off to form a separate business, putting an end to the conglomerate structure which has characterised the company for over 100 years.

China calculates the risks of cranking up shale gas production

Posted on by Ashton Wenborn

Among China’s long list of feats is one that reads: host to the largest shale gas deposits in the world (see Fig. 1). And while at first glance the characteristic appears the perfect fit for the world’s number one consumer of energy, the process of tapping what precious resources sit beneath the surface is riddled with potentially damaging repercussions for those above ground.

Across the pond, shale gas development has fuelled a resurgent US energy market and sparked talk of self-sufficiency in the not-too-distant future – with the International Energy Agency (IEA) and BP agreed that energy independence is on the cards for 2035. Far more than an isolated finding or two, America’s vast shale gas reserves have allowed the country to break free of its dependence on fuel imports and made way for hundreds of thousands of additional jobs. Starting at 0.6 trillion cubic feet in 2004, shale gas production is forecast to tip the 17 trillion mark by 2040.

The transformative effect of the so-called ‘shale revolution’, therefore, is something Chinese authorities have been eyeing with interest, given that the country’s estimated recoverable reserves are 70 percent greater even than America’s. However, looking at the country’s headline figures in isolation is to ignore the many obstacles that stand in the way of extraction, namely complicated geology, inadequate technology, skills shortages and ground water contamination. And as China’s natural gas consumption continues to climb, 90 percent between now and 2019 according to the IEA, the country must weigh up the benefits of production against the risks associated with extraction.

70%

of China’s rivers and lakes are unfit for human consumption

The importance of the dilemma was again made clear in August when Wu Xinxiong, Director of the country’s National Energy Administration, cut 2020 production capacity estimates in half. And although in 2012 the National Development and Reform Commission claimed production capacity would reach 60-80 billion cubic metres before 2020, Xinxiong’s revised figures pointed to the lesser sum of 30 billion cubic metres. What’s even more disconcerting is that the new estimates are equivalent to little over one percent of China’s total consumption, which begs the question of what sacrifices must necessarily be made for the country to meet demand.

“China’s energy security and battle with air pollution urgently require China to constantly develop shale gas projects,” says Xiaoliang Yang, Research Analyst at World Resources Institute China. “As China gains more and more experience with strong government support, it is possible that China would have its own shale gas revolution, eventually helping China decrease its reliance on coal. Before that, China needs to sort out the technical, political, and market challenges, which leaves a long way to go.”

Coal to gas
With an average annual GDP growth rate of 10 percent in the period through 2000 to 2011, China’s sky-high economic and social development came accompanied with an insatiable appetite for fossil fuels. Specifically, the country’s fixation on coal has shrouded its largest cities in smog and last year resulted in greater greenhouse gas emissions than the US and all 28 EU nations combined. Accounting for close to 65 percent of the nation’s total energy mix, China’s coal obsession has received severe criticism from inhabitants and environmentalists alike, and with good reason. Health Effect Institute figures show that the pollution emitted by its cars combined with its 3,000 plus coal-fired plants was responsible for 1.2 million premature deaths in 2010 alone.

“The country’s consumption is expected to increase to 311 billion cubic meters by 2020. Of which only 200 billion cubic meters is expected to be met through conventional domestic production. The remainder of the demand has to be met through unconventional sources,” says Anshuman Bahuguna, Senior Research Analyst at Grand View Research.

A departure from coal is critical for a country keen to escape the consequences for its inhabitants, and the energy sector has found itself forced to reposition its strategy and focus instead on low-carbon alternatives to stave off what hazards a reliance on coal might bring.

Crucially, major industry names have taken pains to exploit the country’s vast shale gas reserves, and have already mapped out 54 shale gas blocks and drilled 400 wells, 130 of which are horizontal. State-owned China National Petroleum Corporation (CNPC), for example, has etched out plans to drill over 110 wells before the mid-point of 2015, building on the nine wells it runs currently.

Elsewhere, a transcript posted on the Ministry of Land and Resources website outlines what figures the market’s constituents hope to post in the years ahead – 1.5 billion cubic metres in 2014, 6.5 billion cubic metres in 2015 and 15 billion cubic metres in 2017. And while the country already accounts for 13 percent of world shale gas growth, according to the BP Statistical Review of World Energy 2014, the resource is not without its fair share of challenges.

Source: Reuters
Source: Reuters

Greater implications
Critical to China’s energy market inadequacies is how viable a solution shale gas will prove, coupled with the financial costs and the repercussions this could bring for the country’s dwindling fresh water supply. And though fracking is far from subject to the same scrutiny it has been in Europe, the fact remains that the implications of drilling are likely far larger on the Asian continent than they are elsewhere.

Whereas in the US, many of the better known shale gas deposits lie close to the surface, in China the ‘recoverable’ reserves are either buried far below ground or located in densely populated areas, both of which come with a premium price tag. Research conducted by Bloomberg New Energy Finance in May found that China’s shale gas production costs were double what they were in the US, and, despite superior reserves, the government’s 2015 target is short of what the US was producing in the late 1990s.

“Over the course of five years, China needs to train its personnel and equip them with the skills required for shale gas production. The government has to ease regulatory barriers and frame a light handed regulatory environment. Through technology sharing with US, China can offset the lack of technology,” says Bahuguna.

If China is to compete on costs with the US, the government must introduce both increased tariffs and subsidies; and for most residing in the region, not doing so would mean operating at a loss. Without additional stimulus, China’s fledgling natural gas industry will be hard pressed to replicate the success of its American counterpart. “There is no doubt that China’s central Government will continue to support shale gas development,” says Yang.

Water pollution
Ahead of China’s concerns regarding feasibility and competitiveness is the issue of water scarcity, which could rear its ugly head like never before – should leading industry names decide to increase shale gas production at quite the same rate they have been doing. And while economies of scale and infrastructural improvements have made the practice of exploiting shale gas more financially viable, the repercussions for the country’s already-short water supply could be dire.

The issue of water scarcity has already halted a number of plans to exploit shale deposits, namely at the Tarim Basin, a site that, while large, is without sufficient water supply to facilitate the fracking process. Home to 20 percent of the world’s population, the country is also home to only six percent of available fresh water reserves, and is losing what reserves it has fast, due to economic development, out-dated agricultural practices and climate change.

Ahead of China’s concerns regarding feasibility and competitiveness is the issue of water scarcity, which could rear its ugly head like never before

According to government findings, 70 percent of China’s rivers and lakes are unfit for human consumption, and last year, reports circulated about 28,000 of China’s 50,000 rivers having disappeared over a 20-year period. The mismanagement of the country’s fresh water reserves in years passed has given rise to growing concerns of chronic shortages in the near future. And whereas the overwhelming majority of demand today stems from agriculture, industry will represent a greater share of the total in the years ahead, owing primarily to the adoption of water-intensive processes such as fracking.

Aside from the amount of water required to tap shale gas, critics have posed the question of whether the process itself contaminates groundwater and, if so, whether the rewards are equal to the repercussions. One study undertaken by a research collective at the University of Texas found traces of methanol and ethanol as well as metals such as selenium, strontium, strontium and arsenic in wells located alongside extraction sites, though the exact reasons for are unclear.

Far from excluded to China, a report authored by the World Resources Institute in September found that 38 percent of the world’s known shale resources are situated in areas that are either arid or under extreme water stress. What’s more, approximately 386 million people live in shale rich regions, where public demand for water is likely to come to blows with industry demand, though China’s woes are among the worst, with 61 percent of its shale plays facing water shortages or located in arid conditions.

Should China decide to increase its shale production, the technical demands of doing so should be seen as secondary to the plight of those living in water scarce regions. Without the guarantee that fracking will not put the country’s already-stretched fresh water reserves at risk, China will be given little option but to rely on imports and focus instead on the transportation and storage of natural gas.

Baroness Nicholson: foreign aid has no economic benefit for Britain

Posted on by Ashton Wenborn

World Finance: I just want to ask your opinion on foreign aid, because it’s very big in the news at the moment, especially following Osborne’s Autumn statement. So what do you make of the government dedicating so much money to this?
Baroness Nicholson: Aid is incredibly important when there is a real immediate crisis, but in the long run the golden thread of aid should lead rapidly through development, through trade and business. You want to stop people being victims as fast as possible, get them up on their feet again, get them competitive. Get them in a position where they can work and buy their own services, like you and I can.

[A]id is important, but it is by no means the end of the story

So, aid is important, but it is by no means the end of the story, and looking back on the past few decades, I think the weakness has been that people have taken aid as both the front and the back line of everything. What has that done? It’s enable millions of people to remain as refugees, in an utterly squalid, desperate existence.

I don’t like anybody to be a refugee or a displaced person. I want them to be up and running again, and to be as competitive, hopefully more successful than all the rest of us.

World Finance: Do you think foreign aid is of any benefit to Britain’s economy?
Baroness Nicholson: I’ve never seen foreign aid as benefitting the UK at all, except in terms of soft power. I believe that Britain gets a lot of credit from the United Nations for example, for being one of the biggest donors in the globe to UN funds. But I don’t think it benefits Britain in any other way.