Before reading on, pause and consider: What strategy would you use if you were playing this game?

The Optimal Group Strategy

If we’re working as a team to find the number as quickly as possible, what’s our best approach? We need a systematic way to eliminate as many possibilities as we can with each question.

The optimal strategy is binary search – repeatedly halving the possible range by asking if the number is in one half or the other. For a number between 1 and n, this takes approximately logâ‚‚(n) questions. This is provably optimal from an information theory perspective – each yes/no question can at best halve our uncertainty. (This approach might be familiar if you’ve ever studied or used binary sort algorithms in computer science – the same principle of dividing the search space in half each time.)

Why does this work so well? Each question eliminates half the possible numbers, regardless of the answer. After k questions, we’ve reduced the possible range by a factor of 2^k. For example, with a starting range of 1-1000:

• Question 1: >500? Reduces to 500 numbers
• Question 2: >750 or >250? Reduces to 250 numbers
• Question 3: >875 or >375? Reduces to 125 numbers
  And so on…

The Competitive Dynamic

But here’s where it gets interesting. The class isn’t actually trying to find the number as quickly as possible. Each child is competing to be the first to identify it. This transforms our optimization problem into a game theory challenge.

Consider child A’s decision when it’s their turn. They now face a trade-off:

1. Ask a “narrowing” question that helps everyone by reducing the possible range
2. Make a direct guess at the number

This becomes a competitive sequential search problem, touching on three related areas of study:

1. Competitive Search Problems: How do agents search through a solution space when competing to find something first? This appears in various contexts, from R&D races between firms to parallel search algorithms in computer science.
2. Information Cascade Theory: How do individuals make sequential decisions while observing others’ choices? This typically studies how public information influences private decisions, leading to potential herding behavior.
3. Strategic Information Revelation: How do agents decide what information to reveal when that information might help competitors? This is crucial in contexts like patent disclosures and auction bidding.

The optimal individual strategy shifts as the game progresses:

• Early game: The search space is too large for guessing to be rational
• Mid game: There’s a tipping point where direct guesses become more attractive
• Late game: Once the range is sufficiently narrow, direct guesses become optimal

For a rational player, the decision at each turn should be based on:

1. Calculate probability of winning with a direct guess: p = (current range size)^-1
2. Calculate probability of winning later after a narrowing question, accounting for:

• Reduced range size
• Number of other players who might guess correctly before your next turn
• Number of turns until you go again

1. Choose the action with higher expected value

Crucially, this assumes all other players are also playing rationally – a strong assumption that might not hold in practice, especially with younger players!

The Finite Guesses Twist

Here’s another interesting variation: what if players are limited to a fixed number of questions? This creates a fascinating optimization problem even in non-competitive scenarios.

At some point, if you have k questions left and n possible numbers, random guessing becomes better than binary search. The intuition is that binary search might narrow down the range significantly but leave you unable to identify the specific number.

For example, with just two questions left and a range of five numbers, you might be better off making two direct guesses (probability of success = 2/5) rather than two binary search questions that could narrow it to 2 numbers but not identify which one.

The optimal strategy becomes a dynamic programming problem, where at each stage you need to calculate the expected probability of success for:

1. Using a binary search question
2. Making a direct guess

The mathematics behind this optimization is fascinating, but I’ll leave that for another post!

An Interesting Parallel

This competitive dynamic reminds me of the board game Cluedo (Clue in North America). While the optimal strategy is usually to gather information methodically, the game dynamic shifts dramatically when you suspect another player is close to solving the mystery. At this point, making an educated guess at the solution, even with incomplete information, might be your best play despite the penalty for guessing incorrectly.

This perfectly mirrors our number game – when you suspect other players are close to identifying the number, the rational strategy might be to take a calculated risk with a direct guess, even if you’d normally prefer to gather more information.

Final Thoughts

What started as a simple classroom game reveals layers of mathematical and game theoretical complexity. It demonstrates how individual incentives can lead to strategies that are suboptimal for the group – a common theme in game theory.

Have you encountered similar games or puzzles that seem simple at first but reveal hidden complexity? I’d love to hear about them in the comments.

A distribution channel that has never quite got off the ground is even more challenging. With confidence shaken, it’s easy to wonder whether success and scale will ever be possible.

Over the last couple of years, I haven’t engaged with a life insurer that hasn’t experienced some of this. You might be surprised by how ubiquitous this is:

• Yesteryear’s giants of funeral products struggling against the compelling advantage of bank branch, app and call centre distribution. This shakeout has probably benefitted customers with more attractive pricing at the cost of margin for providers.
• Organisations with strong brand and huge existing customer base struggling to generate meaningful volumes of commodity products, becoming reliant on expensive aggregators to achieve some amount of scale.
• Insurers seeing their market attacked by banking competitors investing significant sums into their banking operations – looking for a share of banking revenues and profit, but very much also looking to defend their insurance customers from extremely competitive banks. Some of the success of banks relates to their better digitalisation of distribution systems and related processes. Digitalisation is necessary but not sufficient – as evidenced by the banks slow progress in distributing complex underwritten products.
• Established insurers with success in non-underwritten products, and others with success in complex fully underwritten products, both struggling for scale, persistency and profitability in simplified issue / lightly underwritten products. Maybe it’s only a matter of time before someone cracks this, but for now I’m pretty wary of impressive sales volume projections.
• Insurers with impeccable track records of successful distribution feeling unfamiliar pressure on margins and volumes. (Increasing prices to improve margins can be self-defeating if volumes drop and fixed expenses burn margins further.)
• Life insurers urgently looking for new markets to expand to, including non-life, in order to keep growth going as their core market stagnates. (There are opportunities, but it’s not a simple transition. A key message is that what works for one market segment quite likely won’t work for another.)

I’ll be posting more on this theme in the coming weeks. If you have questions, post below and I’ll try to work them into future posts.

If you are a master of the dark arts of distribution, what do you see as the common or recent failings? What is the key to focus on? Is there just one?

I’ve had reasons to think about Nigeria recently, in general but also from an insurance market and acquisition environment. I’ve helped several investors looking at Nigerian insurers over the years. Familiarity with the market and the expectations of these investors has bred complexity rather than contempt. This isn’t an easy diagnosis of land of plenty or dystopian money pit.

Nigeria still presents a compelling opportunity with its expansive land, sizable population, youthful demographics, positive growth trajectory, and abundant natural resources. Beyond its renowned oil and agriculture sectors, Nigeria boasts a vibrant movie industry (Nollywood) and a robust financial services sector, albeit with banks making more headway than insurers. Wholesale and retail trade are the biggest contributors to economic growth. This dynamic mix showcases Nigeria’s diverse economic landscape and entrepreneurial spirit and an increased focus on the service sector over energy extraction and farming.

While Nigeria’s potential has long been evident, ongoing challenges test that optimism. 

Inflation (29.9% annual for January 2024) and currency depreciation (74% down against USD since January 2022) have impacted individuals and businesses, amplifying economic strains. The local impact of foreign currency denominated debt has ballooned due to Naira depreciation. Ghana’s recent default weighs on everyone’s mind.

Food security for many is now a significant risk. Infrastructure limitations persist, impeding the full realization of economic growth. High unemployment rates, coupled with security challenges and governance issues, have eroded public and investor trust. In the insurance sector, while some have some growth and success with new product lines, overall insurance penetration remains modest. Insurance adoption has not accelerated as rapidly as envisioned over the past decade or two

While Nigeria stands to gain from ongoing disruptions in the Middle East and related waterways, the nation’s oil and gas sector remains a double-edged sword—both a source of revenue and trouble. Given the historical challenges of theft and attacks on infrastructure, Nigeria may not be able to maintain let alone increase production to meet an increased demand.

The recent decision by Shell to exit Nigeria’s onshore oil sector highlights the substantial risks involved, not only to infrastructure but also to human life. As a significant portion of Nigeria’s economy is still reliant on the oil and gas sector, these developments raise concerns about potential prolonged challenges, affecting the economy and therefore adding headwinds to insurers growth aspirations.

Insurers can’t fix these challenges directly. They need to focus on perception and reputation, on paying claims and improving operational efficiencies. Some insurers are excited about mandatory health and pensions, to go along with mandatory cover for motorists, but these compliance push factors do little to promote trust in insurance unless servicing and claim payment are slick and reliable too.

Most of the growth that insurers have managed over recent years has related to growth in GDP rather than an increase in penetration. The sorts of sustained 20%+ real growth that attracts investors and revolutionises a market will not come from economic and population growth alone.

There are opportunities for growth. When someone cracks microinsurance distribution and costs, and reaps the rewards of brand awareness, that can unlock massive growth and profits over time. There are many uninsured vehicles that could be bought into the insurance net. Smaller group policies covering household help could meet a needs of employers and employees. Annuities are a growing product for some insurers, and may present a further way to accumulate assets and also demonstrate trust worthiness to the market. (On the flip side, a single failure of a provider of annuities will crush this market for decades.)

Insurers need to have a strategic plan to manage their business within the turbulent environment. Some of what’s needed:

• A focus on consolidation around key products, unsentimental views of product profitability and underwriting performance.
• Allocation of capital to products to demonstrate return on capital, or at least incorporating an appropriate cost of capital into performance measures.
• Clear separation of investment returns generated on shareholder assets when understanding operating performance. (Warren Buffet’s words can be on “the float” misconstrued to destroy shareholder value.)
• (While you’re at it, it’s way past time to carefully segregate portfolios and match or at least hypothecate assets to specific purposes.)
• Clear-eyed evaluation of participating products. Customer expectations, levels of fees and charges. Fair investment returns and bonuses. The aim is to grow trust over time and wealth for your policyholders. Performance for shareholders will come.
• In general, a greater proportion of premiums must be used for benefit payments to policyholders, distribution costs must be contained, and expenses must be decreased. This is necessary to drive customer value and build trust, while leaving space for returns to shareholders.
• A better understanding of the role and benefit of reinsurance in life insurance. Different structures and different retentions may provide better results than rolling over similar structures indefinitely.
• A Digital Distribution and Servicing Strategy than recognises the trust deficit insurers have to work with and constantly pushes that flywheel to build trust rather than just drive the next sale. Customers want ready access to policy information and up-to-date account balances and policy status. On the back end, a single view of customer is required, giving customers and servicing agents the ability to update details once – and then use those details for effective, useful communication to policyholders. The more self-service possible the more empowered customers will feel.
• Recognition that driving down unit expenses (per policy expenses) is necessary for profitability and customer value. And decreasing unit expenses requires economies of scale. And that economies of scale requires BOTH scale and low variable costs – which is a function of automation, Straight Through Processing, Standard Operating Procedures and streamlined products.

Nigeria presents an opportunity, but it’s not without risks. The time necessary to realise investment objectives may be longer than is palatable to many, and disinvesting in difficult times often leaves a bitter taste and a lightened pocket.

Focus areas will differ by entity, but based on my experience, the points above are a sensible starting point for most. Add the controversial elements of tax rule application consistency and greater market conduct regulation and Nigeria’s market could really begin to take off.

The larger insurance players seem reluctant to enter the market. Why do you think this market has been slow on the uptake? The regulatory barriers to entry certainly don’t appear to be that restrictive so either existing insurance companies are not flexible enough to offer the products required or it’s a poor business decision/larger risk that they’re unwilling to take on. Do you have an opinion on what is causing the low number of microinsurance players in the market?

So here goes. Certainly a far from complete or perfect answer, but a starting point based on my discussions with many people and entities actively interested in pursuing the market over the last few years.

What do we mean by micro insurance in the South African context?

The issue with micro insurance is scale, particularly of distribution and distribution costs. Okay, followed closely by premium collections (and that is about maintaining scale so that you don’t lose insurance policies as quickly as you sell them). These are the two issues that need to be solved for real success for any new micro insurer or a new platform for micro insurance.

Micro insurance and funeral insurance

Whether micro insurance is big in South Africa or not comes down to how one defines “micro insurance†.  There are major life insurance players that have funeral products with modest premiums, below R100 or even R50 per month. So those large insurers (major traditional insurers plus the bancassurers) are operating in this space already, but as “assistance business† as the current licence category is termed.

Under some definitions, South Africa is already one of the largest micro insurance markets in the world. On other measures, there are still plenty of excluded people who could benefit from appropriately priced, appropriate value insurance on a micro scale. I still hope to see viable products with premiums below R10 per month (and not on some misleading bundled basis) or even less on a micro-transaction basis.

These players are less interested in the particulars of a micro insurance licence because they have yet to see a material benefit. Product restrictions and the complexity of an additional licence don’t warrant lower capital since they aren’t actually constrained by regulatory capital but rather by their own view of economic capital.

Distribution innovation

Some of these players have tried innovative products (pre-paid funeral plans, allowing skipping premiums) with low, no or at best moderate success. The bancassurers push heavily into ATM, USSD and call centre sales rather than branch sales because they are lower cost, and sometimes lower risk of anti-selection. Getting life insurance via the banking apps is an easy step (and some have taken it) so probably the view is that a dedicated app just for insurance is unnecessary.  The banking brands (target of popular complaints as they sometimes are) are still generally well trusted.

The traditional insurers have invested in their own distribution channels, more typically broker- or agent-driven, for decades and this has carved them a good, profitable niche. Changing that for revolutionary distribution has risks.

Fraud and anti-selection are key concerns when you have the ability to turn coverage on and off.  I think many insurers are quite nervous about this. I’d love to see someone dedicating a small pot (R25m or something, so significant enough to do something with, but small enough for major players not to declare a national emergency if I doesn’t work) and experiment with something and see how it goes.

Micro insurance for assets

On the non-life side it’s more a definite gap. Acquisition costs, risk selection, differentiated pricing, claims underwriting and fraud risk (very serious fraud risk!) are non-trivial things to overcome.

Underwriting / risk assessment at policy inception is an expensive exercise. Claims stage underwriting can be problematic from a customer experience perspective if the policyholder genuinely expected to be covered and wasn’t (in which case even refund of premiums paid doesn’t help them, and with that the insurer has likely already incurred a loss based on the claims assessment and administration costs).

Credit insurance and micro insurance – but are we doing it right?

Credit insurance is the one area that sidesteps many of these issues. Clearly established need, assessment of ability to pay, distribution and lower fraud. It’s a pit this is also one of the areas that has achieved such a bad reputation (much of it deserved) for charging high premiums and making super profits based on the lack of a good market. It feels like we should be doing better here.

It would be amazing if someone could also consider what sort of loss they’d be prepared to take on a pilot programme to see if our worst fears are realized for asset insurance outside of the credit insurance space.

All the other hot trends

I’m staying close to developments on what I term “hyper selection† and also peer-to-peer insurance.  Some of this may present opportunities to unleash micro insurance from its current constraints.  I haven’t yet seen developments that seem ready for prime time and which solve what I view as the fundamental problems. Hopefully someone is already quietly working on something incredible in this space.

Micro insurance – opportunity for society, opportunity for business or both?

But the real answer to your question is that the supposed huge potential of micro insurance is a little difficult to pin down in pure commercial terms. Most of the success stories of micro insurance in emerging markets and public-private partnerships, NGO programmes etc.  Many of these also fail even with an explicit return on capital requirement.  Solving these issues on acceptable commercial terms for insurers who already have a successful business is a big question mark.

So even with my belief that micro insurance and inclusive financial services is a good thing for society, it’s less clear to me that it’s an easy buck to make for insurers.

I went to Cambridge (to visit, very sadly, not to study) in 2003. I found an awesome board game store and tried to buy Diplomacy.  The incredibly wise assistant basically forced me to buy Settlers of Catan before he would allow me to buy Diplomacy.

About Settlers of Catan

I have played hundreds of hours of Settlers, and recently gave Diplomacy away never having played it. I still believe it’s an awesome game.  (Strategy, relationships, IQ and EQ, competition and a little backstabbing. What’s not to like?) However, it  requires having enough people, the right sort of people. enough time (a weekend apparently is ideal) and ideally a couple people who have played before because it is complicated.

Now, Settlers has plenty of scope for tension as it is.  I kicked my best friend out of my flat once after a kingmaking incident. I’ve had arguments with significant others over games. And this is Settlers, not Diplomacy.

Do I recommend Settlers? Sure, it’s a popular game and usually a great deal of fun, especially if everyone is relatively inexperienced. Are there better games, absolutely. I hardly play Settlers in any more.  (Actually, I play massively less often than in the past given, well, life.)

Why I’ve been playing recently

I’ve played a little more recently in a work context, games to break up the stress of a major project or a chance to bond with colleagues involved in separate projects where we haven’t had as much opportunity to interact as I would like. It’s obviously fun, but can also be really insightful into the different ways people think, their aptitude for different types of tasks and the reactions when the game goes “less well” for them.

Understanding teams and team members

You might think a bunch of actuaries would be extremely similar. I’ve been surprised at the differences in interest and aptitude and styles of play – generally I take this as a positive. I believe in the value of diversity, not only the traditional focus areas of gender, race, age and culture, but the more subtle ways in which we are individuals.

It is useful to understand the way peers approach a problem or challenge and my aim is to better utilise team members based on this understanding. It is also true that certain aptitudes emerge or are confirmed (at risk of confirmation basis for sure).

Idea – recruitment and graduate recruitment

We’ve begun using these games as a part of a recruitment process. It is a more relaxed (but not always absolutely relaxed) way of interacting and evaluating candidates. It is likely distinct from other recruitment experiences and provides some insight into our team culture. It also allows several people from our team to meet the candidate and likewise the candidate to meet the team in an artificial manner but less artificial than an interview or formal introduction.

Games as relevant interludes during workshops

I’ve been involved with actuarial education for over a decade. My involvement is mostly around developing and presenting workshops on various topics. One thing I’ve learnt is that an entire day workshop with a single presenter is really hard work for the presenter and hard work for the students too.

I mix it up with Q&A, group exercises, live audience response polls, and sometimes board games. These games are selected to be relevant and fun. I think they’ve worked well – if you’re involved in something similar, even just inside your own organisation, I highly recommend it.

The value of co-operative games

For me, one of the least natural parts of a group interview or exercise is the cut-throat competitive nature. This sort of activity is more common at a graduate level than for “experienced hires”. The idea of working ostensibly in a group but knowing that there will be winners and losers, and often far more losers than winners, goes against any culture that seeks to promote effective teamwork. Sure, over time, individuals will seek to impress and their careers will broadly progress individually. The ability to cooperate in a team towards a common goal, albeit with different experience levels, skill levels and interests, is so fundamental to many positions that it seems bizarre that this isn’t a greater focus.

I only started playing co-operative boardgames a few years ago. If asked earlier in my life, I would have thought it odd or not fun. I wanted to win. What is the point if its not competitive? With some semblance of maturity, I now appreciate the joy work competing together. There is still a win or lose, but it’s naturally as a team rather than as an individual. I recognise this paints younger me in a less flattering light. I suspect I’m not alone, particularly in the actuarial world.  At least I can say I’ve learnt and grown and developed beyond that point.

Cooperative games can still create intense stress between individuals, exactly as in the real world. Competing views of how to achieve success, communication challenges, shared leadership and collaboration, the impact of mistakes and time pressure are common to both. How individuals respond to these stresses in a cooperative team environment can be extremely informative.

So what am I playing with this cooperative and team informative view in mind?

• Hanabi Card Game
• Codenames
• The Resistance (The Dystopian Universe)

Other games I still enjoy or really enjoyed in the past

• Settlers of Catan (including expansions)
• Carcassonne
• Betrayal At House On The Hill (also cooperative)
• Dominion
• Bananagrams
• Ticket To Ride

There have been plenty of debate around the regulations, in part because of the dramatic financial and operational impact they will have, and partly because of how imperfectly worded they are and the scope for interpretation.

I’ll be posting about this more in the coming days.

Basing the premium on initial or outstanding balance

First, a real anomaly is the ability for insurers  to charge the capped premium rate either on initial loan balance or on the declining outstanding balance.

There are good practical reasons to want to charge a single, known amount to policyholders. It is easier to administer and policyholders have greater clarity on what they are paying.

The actual premium charged over the lifetime of a loan can be substantially higher where it is based on the initial balance rather than the declining balance, particularly for longer term loans. How a cap designed to moderate profits and improve value for money can allow such disparity is bizarre.

There is an interesting quirk here, which I hope is exploited to drive value for money and increased competition in the market. The credit life regulations require lenders to permit substitute policies where the policy meets the minimum regulatory required benefits. Where an insurer (or in practical terms, usually the lender) is charging a premium based on the initial loan balance, it becomes easier for a third party insurance company to offer a substitute policy at a cheaper rate, based on the lower actual sum assured partway through the loan or policy term.

I am not a fan of outright caps, although I recognise there are times when it might be the least bad regulatory intervention. The holy grail is a competitive market where consumers have access to information and providers compete for the business.  This will drive profit margins down to reasonable returns for the risk and capital required, and drive business into the arms of the operational cost (and distribution cost) competitive providers.

Those entities still charging on initial balance will actually help to drive this competitive market.

As much as I believe in the right of businesses to make money and make good money, value for money will be driven by competition and more of it is still needed.

…is an arrangement in which a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank’s client base. This partnership arrangement can be profitable for both companies. Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer bases without having to expand their sales forces or pay commissions to insurance agents or brokers.

Bancassurance has been a major part of European and Asian insurance markets and, for a time, was presumed to be the future of insurance distribution in most countries around the world.

What happened was different. Bancassurance has not taken off in all markets the same as it did in the early success stories. Some of this has to do with the reversal of trust relationships between banking and insurance.

Bancassurance in South Africa

In South Africa, the major banks have continue to write mostly credit life and credit insurance, funeral policies and linked investments (often off the back of tax advantages arising through the sale of credit life and funeral policies.) Other products are also sold, including additional simple, non-underwritten products and some more complex risk products. With some exceptions though, the sale of more complex risk products by banks in South Africa has only been modestly successful.

Non-underwritten, low advice bancassurance in South AFrica

The sale of funeral policies to existing customers, leveraging the brand, customer relationships, administration capability and premium collection advantages is actually exactly what bancassurance is about.  It is a low-advice, non-underwritten product, but it has been a success.

Credit life products are a slightly different creature. Although they are insurance products sold to bank customers with many of the same advantages as funeral products, the reason for sale is usually quite different. This is generally not a product demanded by customers, but rather one used by the lender to improve revenues and manage risk. Although some bank literally refer to “credit life” only as bancassurance, I believe that is a distraction from the real model of bancassurance.

Investment products

There are two primary types of investment products offered by most South African banks.

1. Linked, where the product is effectively a life insurance tax wrapper for existing unit trusts.
2. Guaranteed, either lump sum or income, with the ALM work done by the insurer, the bank, or occasionally a third party derivative or structured product provider.

These products are successful through the tax advantages of the life wrapper, and the typical bancassurance advantages of brand, relationship and administration. Many of the sales will come through insurer- or bank- owned distribution channels of branch sales, call centres, tied agents, some online / direct and financial advisor divisions. However, there are also sales from true independent advisors, usually when sufficiently well informed to undertand the tax advantage of the expenses incurred within the life licence through the risk products.  (Since changes in life insurance tax rules and the introduction of the Risk Policyholder Fund, this advantage is rapidly disappearing.)

The tax advantage aside, this is probably another tick for bancassurance in South Africa.

There are many other investment products offered. There are still some with profits products, there are some property investments, hedge funds, fund of funds and private equity than fit better into a linekd life policy than into a unit trust.

Underwritten, complex “new generation” life products

The notably less successful element has been the higher permium, higher advice, higher income targeted, underwritten, complex life products. This is the sector that includes Discovery’s Life Plan, Old Mutual’s Greenlight, MMI’s Myriad and similar offerings from the major life insurers.

As a general rule, the insurance arms of South African banks have not been successful in this market.

Where bankassurance isn’t yet working

Bancassurance has yet to really crack the complex, underwritten life space.

Some of the major reasons include:

• These products are predominantly sold by independent advisors and agents. The agents of banks are more used to selling simpler products and do not always have the knowledge to see more complex products. Independent advisors are not as impressed by banks’ brands in the insurance space and break the link of customer relationship between the financial services “product provider” and the end customer.
• The major insurers, not all to the same degree, innovated in product design some time ago. Me-too products have less to differentiate themselves from the crowd and must compete on other measures to attract attention.
• The major life insurers have invested decades in building their credibility in this space, with end consumers and with brokers. I’m not convinced that banks always appreciate how much time is required to offset this and that a strong banking brand doesn’t automatically follow through to compete on the same level as a dedicated life insurer.
• Bancassurers have historically made significant profits with attractive margins selling in the less competitive space of their own customers, typically lower income and less financially sophisticated. There is therefore less incentive to grow into less well known markets where the same advantages don’t apply to the same degree.
• Low acquisition cost products (such as simple, non-underwritten ones) suit a cash-accounting basis more so than those with higher acquisition costs and longer payback periods. To some degree this is fixable with more appropriate accounting and reserving policies, but often times banks have moderate appetite for the complexity and volatility this can create.
• People love to hate insurers. This is also true for banks, even those that are generally well regarded and win awards! But as much as people don’t like insurers, they do have views on who is more or less likely to pay a claim. And, unlike the lending business where banks have to trust customers upfront and hope they repay, in insurance, customers have to pay first and trust the insurer to make good on their promise to pay claims. This reversal of the trust arrangement is a fundamental difference for insurance, and is dramatically more important for more educated consumers with longer term horizons.

What next for bancassurance?

Discovery, launching a bank, will further integrate its product offering and is expected (by fans and competitors alike) to successfully integrate a complex life insurance offering, a generally admired and trusted brand, and a slick legacy free banking platform. They will likely make mistakes in the banking space, but it’s hard not to see this as a success.

Investec is relaunching an old insurance licence acquired in the aftermath of Fedsure’s failure and will offer risk products to its private banking clients. However, Investec doesn’t have the same volume of customers as Discovery and this will likely be a different, smaller threat to established insurers.

FNB has made great strides recently with their refreshed, revised and new product offerings. They may make greater inroads into a full bancassurance model than others have in the past.

Absa sometimes feels hard-done by, with their technological innovations not receiving the same coverage as those of FNB. Standard Bank has a different relationship with Liberty and Standard Insurance than the other banks (especially now that MMI is not operationally linked to the FirstRand Group), but will surely be eyeing developments elsewhere with interest.

Capitec has been inching into the insurance space with caution. Their success and growth in the lending and more recently transactional banking space may be warning signs that more is planned. Their core target market is less of an immediate target for complex products, but that could still change.

Overall, tax reforms will make investment products by funeral- and credit-life- heavy bancassurers less attractive. New Policyholder Protection Rules may also disrupt the market.

These changes aside, banks maintain significant advantages in selling financial services products. The next few years in South Africa may see a little momentum move the way of bancassurance in South Africa.

There is plenty more to the story than just manufacturing increasing in the US – it also includes an historical perspective on the sources of labour in the textile industry over the last two centuries.

The relevance for me and South Africa is – even with our 40% duties on imported textiles, why are we still shedding jobs? In the US, it’s been a desire for higher quality, more reliable quality, shorter turnaround times, cheaper transport costs and a growing discomfort with safety conditions in Asia.

The higher average incomes in the US also make price less of a overriding factor than in South Africa. The COSATU t shirts that were made in China at least once is a clear reminder of how cost impacts buying decisions above almost all else in big parts of our economy. I don’t know whether the quality of our production and the appreciation for buying locally made products is great enough locally yet. The NY Times article spend several paragraphs talking about the need for strong English and Maths skills. We’re still struggling with our legacy of broken education even while we fail current learners. None of this helps to take advantage of these trends.

Manufacturing growth in the US and other developed markets is also driven by increased automation. Higher real wage are less critical when automation in eras decreasing the amount of labour required. Possibly counterintuitively, this increases the demand for labour in developed countries even while decreasing global demand for labour.

Wages for cut-and-sew jobs, the core of the apparel industry’s remaining work force, have been rising fast — increasing 13.2 percent on an inflation-adjusted basis from 2007 to 2012

If you look at a graph of the share of US GDP that goes to labour compared to capital, it’s been a steady decrease for decades. I can only imagine the same is true in South Africa. The increased use of automation (including new robots that work more interactively with humans in auto plants) may drive this even further.

So is this a story that bodes well for South Africa? We should be a low (lower than the US and Europe anyway) wage producer so developed market manufacturing should hurt our export industry. Given that we import textiles from China, should we maintain hope – against all experience of the last two decades – of regaining a meaningful textile industry? Or do we need to recognize that Africa should be our biggest export area and we should leverage our proximity, both geographical and cultural, and focus on our competitive advantages over the Chinese? Where is our Industrial Policy in any of this?

Lexmark is throwing in the towell on inkjets and will focus on laser printers. This links to the story about HP and Dell struggling to make money on commodity PCs while Apple changes the market and the margins.

Michael Porter’s Five Forces are just as relevant today. If you have intense competition, with plenty of threats from substitute and many competitors you’re margins are on a one-way trip to negative.

The question for me is, should financial services be any different? How different can you really make the products, services and customer experience? Apple has done it where other computer manufacturers can’t see a way, so maybe it is possible in FS.

If you were university educated in South Africa, you are likely to be in the market at various times in your life for a large LED backlit LCD panel with a high refresh rate and more HDMI inputs than you will ever need. You will also quite likely have a market-oriented, Anglo-Saxon view of government’s role in industrial policy and international trade. Thus you would probably say “yes, import cheap TVs from China so I can buy a cheap TV and not pay for inefficient local firms to manufacturer expensive, inferior TVs.”

If you are a TV snob, you will still want free imports of Chinese TVs to keep the prices down of competing, but fancier Sony and LG models from Japan and Korea.

If you are a little cynical, you might say South Africa could never have the manufacturing capability and scale to produce all the components and assemble them into a modern LCD TV. That’s not actually the debate I ant to pursue now, so in that case let’s say the alternative would be to locally assemble sets made with significant local components, even if the LCD panel itself were imported. Of course, the reason South Africa doesn’t have the scale to produce the panels themselves at the moment is a function of industrial policy decisions decades go. There is no absolute reason we couldn’t have that capability. But, that debate is related but separate post.

If you never completed Grade 8 (that I still think of s Standard 6) then you probably would rather have a job than a Chinese TV and even a single HDMI input or output is one too many. Also, you don’t care about free international trade leading to optimal allocation of economic resources or the World Trade Association for that matter.

But you wouldn’t necessarily be wrong.

Reason #1
A large-screen LCD TV is not a factor of production of any industry that I’m aware of. Restricting cheap imports won’t increase the costs of a domestic industry an therefore won’t reduce the competitiveness of a local company or industry.

So far so good.

Reason #2
The Chinese will still buy or raw natural resources even if we don’t buy their TVs. We aren’t a sufficiently big market for them in the first place. We don’t reduce our exports but we do reduce our imports. This grows the local economy.

This does assume that over time, the higher prices of Imported TVs will discourage their purchase for other goods or encourage purchase of South African made TVs. It also assumes,NAND this is where things get more complex quickly, that our currency won’t strengthen to reflect the reduced imports. A strengthened currency would make all our exports less competitive and imports more competitive, leading to higher imports and lower exports across all industries and consumption.

Reason #3
Te burden if higher prices will fall on the wealthy, whereas the boom of greater employment will fall on the less wealthy, even increasing total demand for labour.

A critical question is what sort of labour.

If it is skilled labour, then our right skilled labour market will have wage pressure without increased employment and there will be a transfer of wealth from television set consumers to skilled labour and an increase in the cost of production of many other industries. All in all not a great outcome. We’ve damaged several industries and are reliant on the relative consumption habits of skilled labour versus television set consumers to see what this means for domestic versus import consumption.

If the demand is for unskilled labour, or separate but well-timed government education and training policies provide unskilled labour with the necessary skills, the result is far more appealing. Wages won’t increase as unemployed resources are put to work. So, no damage to other industries. The productive capacity of unemployed persons is put to work in an economically productive way. The country is producing more things domestically so all the additional money spent on more expensive TVs is employed back into the economy. The recently newly employed are likely to focus their purchases on domestically produced items (especially since TVs are now made locally)

Assuming the caloric requirements of these newly employed persons are not much different from during their unemployed years, the opportunity cost for the economy as a whole of paying them to make TVs less efficiently than the Chinese is zero. There is noting better they could have done with their time.

The arguments of comparative advantage totally break down when there is significant unemployment in one country. Free trade is centred on the idea that countries should focus on producing goods where they have a comparative advantage. Quotas and tariffs distort the true comparative advantage leading to suboptimal solutions.

There are other ways of achieving a similar result. Taxing TV set consumption to pay for skills training and subsidised public transport might lower some of the restrictions on supply and demand imbalances in the labour force, but without the focus on growing a particular industrial sector that will give rise to a cluster of related industries, developed scale to lower costs, eventually gain efficiencies and export to African markets with lower cost than the Chinese.

Why should the Chinese target attractive industries for growth through strong industrial policy and South Africa doesn’t? Why are the Chinese so uniquely well placed to target LG and Samsung?

There are a hundred problems with this scenario, including possibly the choice of TV as the product, but there is more to this discussion than the Washington Consensus would have you believe. Disagree, please comment below!