Category Archives: financial risk

The worst insurance policy in the world

Aviva in France is still dealing with having written the worst insurance policy in the world. From the sounds of things, they weren’t alone in this foible. It’s also hard to say as an outsider what the right or reasonable resolution to their current problem is, but here is the policy that they wrote.

  • Buy a policy
  • Choose what funds you want to invest in
  • Unit prices calculated each Friday
  • Allow policyholders to switch funds on old prices until the next week
  • Hope like hell policyholders don’t switch out of poorly performing funds into well performing funds with perfect information based on backwards, stale prices.

Inconceivable – and since I don’t know more than I read on this blog post, maybe the reality and liability is really quite different.

See the post from FT Alphaville on the man who could own Aviva France.

Book Review: Bitcon – The Naked Truth About Bitcoin

Jeffrey Robinson, the author of the well known book “Laundrymen” that I’m now reading, has written an engaging story about The Satoshi Faithful (as he calls them) supporters of Bitcoin and where their Faith is leading them stray.

The book is called BitCon: The Naked Truth About Bitcoin and it doesn’t pull punches in deriding the would-be currency. If you don’t know anything about Bitcoins, it may skip over some of the introductions necessary to hold your own in conversation. This isn’t a primer on Bitcoins or crypto-currencies, but it also doesn’t spend chapters on involved technical details so you won’t be completely lost.

I described the book as “engaging”. For me, already very sceptical of the long-term chances of success for Bitcoin and specifically  critical of its suitability as real “currency”, it had me nodding in agreement with many sections. Frankly, I don’t know how persuasive it would be to a fervent supporter (not that much anything would be).

I did enjoy the insights into some of the personalities behind Bitcoin and the histories of different supporters and how this has changed over the short time Bitcoins have been around. I learnt more about the Dark Web than I knew before, gaining a new appreciation for how dark the underbelly of the web and Bitcoins are.

Robinson ignored what I think is a key limitation on Bitcoin. Supporters claim its value derives in large part from the limited supply, but without any intrinsic value, other crypto-currencies are near-perfect substitutes. I’ve blogged about this before and was looking forward to seeing another take on it.

I enjoyed the book, reading through it fairly quickly and without wanting to switch to something else, suggesting Robinson hit the target with length and balance of information vs entertainment.

Go grab a copy from Amazon – BitCon: The Naked Truth About Bitcoin.

European deflation risks not deflating

The UK Telegraph (and other sources) are highlighting the rising panic about Euro area deflation. For those Austrian / hard money / gold standard / bitcoin / generally poorly informed amongst you, it’s not that deflation is itself a problem, but that it creates scenarios of debt spirals increasing the real value of debt obligations and decreases demand and economic growth through increasing the real cost of labour through downwards sticky prices (most especially wages).

European five year inflation expectations

European five year inflation expectations

It really does seem that UK / US policies are, more slowly than necessary, coming right and the economies are slowly shrugging off the GFC and are moving forwards.  The rest of Europe is not.

Argentina in default for second time in 13 years

S&P declares Argentina to be in default for the second time in 13 years and the third in 25. Inflation is likely to hit 40% this year and the Peso has already lost a quarter of its value this year, measured against the US Dollar.

Messages? This time isn’t different, sovereign debt crises happen all the time, ignore currency risk at your peril and there are many reasons governments can default on their debt.

Banking failures in South Africa

South Africa has a pretty rich history of banking failures.  This paper, part of a masters, by Sipho Makhubela, provides an interesting over of banking failures since 1994. I haven’t read the entire paper yet, but Section 4 (starting on page 72) outlines  the background behind banking failures in South Africa and is fascinating reading in its own right.

Credit Suisse annual update on market performance

Credit Suisse has for several years now put out an annual Credit Suisse Global Investment Returns Yearbook 2013 is out now.

It’s worth reading in its entirety for the insights. I don’t agree with everything there, and I certainly don’t agree with the widely held view (not among the authors) that the universe of countries included in the survey is supposed to be somehow representative of the world.

The countries chosen have an absolutely clear bias in their selection. They are successful economies with successful financial markets. They are included by virtue of their long-term success and capital growth and returns for investors.

The authors know this, but many readers don’t.  The returns per this survey are an overly rosy view of possible future returns.

Worrying signs of renewed credit crunch

The last month hasn’t been pretty for economic performance, credit or retail sales. Everyone from Richemont to Mr Price has taken a beating.  Woolies is down about 13% in the last month.

And now both Capitec and African Bank are reporting worse default experience (respectively through temporary strike-blips or through a cyclical downwards trend) and are pulling back on credit extension.

I think I buy African Bank’s more pessimistic view than Capitec’s “blip from the strike and growth will slow”. The reality is economic growth has been very low for several years and much of the consumption over this period has been through a reinflating credit “bud”.  It’s not at bubble proportions, but when that bud starts slowing in growth the true impact of several years of poor economic and basically non-existent employment growth will be felt.

I still need to update 2013 predictions, but so far I’m not feeling particularly optimistic about being a credit retailer and certainly not enough to justify the still-high PE multiples.

 

SAM Risk-free Rate Workshop

The Technical Provisions Task Group and KPMG ran a workshop for industry participation on risk-free rates recently. The idea was to see whether we could improve the extent and quality of industry comment on key, controversial areas of the proposed SAM regime.

Turnout was good, but not great, but the discussion and points raised were all fantastic. Plenty more to do from here onwards, but I thought it might be useful to include the presentations somewhere publicly available.

Some of the concepts that were on the agenda

  • Swaps vs Bonds, the theory as well as practical implications for insurers, banks and the capital markets
  • Extrapolation methods and what challenges this creates for practitioners
  • Identifying and measuring illiquidity premiums, credit spreads and the difference between Expected Default Loss and Credit Risk Premiums
  • European developments on Matching Adjustments and Countercyclical Premiums. Should we follow their path? Is bottom-up or top-down more practical?
  • Do we need a methodology for nominal and/or real yield curves?
  • Non-South African countries – what is the practical answer to requiring multiple yield curves?
  • Reducing regulatory arbitrage between banks and insurers for credit and market risk on swaps and bonds

Panel Members:

  • David Kirk
  • Ian Marshall
  • Philip Harrison
  • Brian Kipps
  • Lance Osburn
  • Lindy Schmaman
  • Louis Scheepers

Presentations (reproduced with permission from the authors)

Risk free rate workshop outline November 2012

Position Paper 40 (v 3)

Philip Harrison – Risk Free SAM Workshop

Risk free yield curves Brian Kipps

Risk-free rate workshop_LSchmaman

SAM Risk Free 29 Nov012 Louis Scheepers

SAM Workshop 20121129 Lance Osburn