reserve discount and inflation part 3 is still coming

I need a little more time (read: a weekend) to finish the third part of my series on inflation and discounting for non-life claims reserves.  Keep an eye out for it next week, along with some posts on systemic risk, equity investments and risks to pension fund sponsors and a book review.

Life in our time of cholera?

I love to read, so I’m not proud to admit right upfront that everything I know about “Love in the time of cholera” I learnt in 3 minutes from wikipedia starting about 3 minutes ago. Seems like a book I should read.

But another than playing on the well known book and movie title, this post has nothing to do with the book.

It has everything to do with cholera. And the very real possibility of a cholera or similar disease outbreak in Cape Town in the next year. Here is a little superficial analysis of the numbers.

The City of Cape Town now expects us to run out of municipal water

The City of Cape Town has gone from claiming unequivocally:

“we want to give the people of Cape Town an assurance that this well-run city will not run out of water.”

on the 17th of August 107 to 4 October 2017’s:

If consumption is not reduced to the required levels of 500-million litres of collective usage per day, we are looking at about March 2018 when supply of municipal water would not be available.

How are dam levels and consumption point away from achieving these targets

CT has been stuck persistently above 600Ml (million litres) per day for an extended period and this is down from a peak of 1,200Ml per day in January 2015. The low hanging fruit are long gone. I do not see how we will decrease consumption by another 20% (since we’re over 600Ml at the moment) and this therefore suggests we will run out of water.

Consumption has reduced significantly, but shows no signs of decreasing below 600Ml per day

Continue reading “Life in our time of cholera?”

31, 151 and what comes next

This is my first new post in over two years. There are many reasons for that, and I may get into that in a future post.  As to why I’m restarting – a conversation with an old friend last night combined with a lunch discussion with an actuarial student a couple of weeks ago has inspired me to attempt to, temporarily at least, restart my blog.

I’m going further than just restarting, I’m committing to a new blog post each day for October. Now the reasons for having stopped blogging haven’t suddenly changed, so it’s likely that some of these posts will be short. (And similarly, some of them long.) Since the decision was made last night, I also haven’t though through anything like a full plan for the month.  I invite you along to see how it goes.

I’m probably not alone in being slightly more jaded, slightly less optimistic than I was two years ago. A summary of the two years might make its way into another post, more to help me collect my thoughts than anything else.

Cape Town is experiencing an intense, multi-year drought and there is a real possibility of the city running out of water before next winter. I will definitely be blogging more about the vacuum of credible communication and forecasting on this front in a later post. For now, a single-purpose website  is currently proclaims (they update weekly, I think, based on updated weekly reports of dam levels) that we have 151 days of water left and will run out of useable water on 1 March 2018.

For now, the claims of cholera in Puerto Rico have not been proven, but it does feel like it’s only a matter of time. Anyone fretting over drinking water in Cape Town should probably bump diseases such as cholera up their list.

The official position of the City of Cape Town is still “we won’t run out of water”, but there are reasons to doubt this and be concerned. I’m keen to work out objectively what the level of risk is. To that end, it would have been useful to be able to dissect the  methodology to understand how credible their forecast is. This is the entire disclosure of their methodology:

Using our recent consumption as a model for future usage, we’re predicting that dam levels will reach 10% on the 1st of March, 2018.

I’m not losing sleep over their forecast. So for now, sleep.

Foo Fighters and Munich

Brief personal note. I’m off to the Milliman Life Consultants Forum in the US this week. Looks like an amazing programme covering ORSAs, Solvency II vs EV reporting and many of their software tools. Great to have such a relevant programme to me and for us in South Africa.

I’m writing a blog post on unemployment (up soon!) while listening to the brand new Foo Fighters album, Sonic Highways, courtesy of iTunes Radio. Looks to be a fantastic album – might just become the soundtrack of my trip.


Norway’s new bank notes

Pretty far from a normal topic for this blog, but at least it relates to money.

Norway's new banknotes
Norway’s new banknotes

Norway has new banknotes or at least they will be 2017. Standard on one side and abstract, competition winning pixelated art on the other. Feels appropriately Scandinavian to me.


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.

Sanral with blinkers on and no imagination

I read Nazir Alli’s opinion piece on BDLive this morning. Unsurprisingly, he talks up tolling as the best way to fund roads.

Now, I don’t have as strong a view as some that etolls are Universally Bad. Frankly, I also feel that many people who complain about etolls are still complaining about having to pay. The arguments against etolls have become more sophisticated over time, but I can’t shake the suspicion that many of those who support fuel levies would have been almost equally outraged if an increased fuel levy had been used instead of etolls.

Let’s take a look at some of the more egregious comments from Mr Alli:

There should be agreement that the fuel levy is not an option, especially in the context of reducing inequality, though that is what the populists and dissenters keep punting. That leaves us with three options.

Starting with the end in mind? It’s a bold claim that “there should be agreement that the fuel levy is not an option”. As far as I can tell, there is no justification for this in the piece.  The plea to reduce inequality is also vague – I can think of several mechanisms that could be used to mitigate the increased burden on the poor. There are more complex, more subtle interventions than the simple, single-lever ideas Mr Alli imagines.

Then there is the capacity-related backlog in and around our metropolitan areas. These are the roads that are reaching their maximum capacity during peak hour, resulting in increased congestion, which in turn contributes to driver frustration, decreased safety and negative economic consequences. To alleviate congestion, additional lanes or new roads need to be built. For this, Sanral needs a further R120bn.

This is a separate point for Mr Alli and for me. The need for funding doesn’t talk to how that funding should be raised. This paragraph does provide a fascinating insight into the 20th century mindset on dealing with road congestion. Congestion? More roads! The answer to congestion is actually fewer parking spaces and increased public transport. Think about it, if you have nowhere to park your vehicle, you won’t drive to work. If there are a range of efficient, reliable, safe and cost-effective public transport options available, then you have the carrot as well.

It gets better:

These are huge sums of money but if one takes into account that about 87% of all goods and services move by road, it is really important to keep road traffic moving. In light of the needs elsewhere in the economy, it is unlikely such funding will be forthcoming.

Yes, roads are used, overused, for transport in South Africa. One can hardly blame Sanral for the decline in our rail network, but the 87% needs to be decreased as part of a coherent national transport and logistics plan.

Mr Alli says “it is unlikely such funding will be forthcoming”.  All the funding comes from South African citizens and corporations. If Mr Alli believes that the only way to raise funds is via etolling, then it’s hardly surprising that he is so fixated on etolls as the “right answer”. There are other options, even if Mr Alli can’t conceive of them.

The growth in the length of roads Sanral has to manage is not matched by an increased allocation from the Treasury, which means the agency must be innovative, smart and prudent with allocated funds.

I’m waiting for a recognition that the etolling infrastructure is extremely expensive and doesn’t really talk to “prudent” at all.

Keeping in mind the large sums required for road construction and maintenance, it is obvious that the levy would have to rise by between R1.35/l and R2.80/l, depending on the time frames in which the backlogs should be addressed

I would like to see the analysis behind this – and get a view on how these compares to the etolls in terms of their ability to deal with backlogs of funding.

That will hit the poor really hard, given the long distances people have to travel to get to work. In Gauteng, nearly 64% of commuters rely on minibus taxis — the preferred mode of the poor — which receive no transport subsidy at present, yet are exempt from e-tolling. Increasing the fuel levy may result in increasing pressure from the taxi industry for a transport subsidy.

There is nothing inherently pro-poor about etolls. The exemption for taxis is pro-poor. A taxi transport subsidy would be pro-poor.  What exactly is the point being made here?

An important toll principle is that those who use a road should directly pay for it — the direct user-pays principle.

My Alli apparently believes this principle, but it is not a natural law of the universe. It is one principle out of many. And ironically, isn’t particularly pro-poor which seems to be so important to Mr Alli. It also doesn’t talk to the complications of who ultimately pays for the etolls – business will increase prices to be born by consumers so it’s not only those individuals who happen to be driving who will bear the cost anyway.

In simple terms, if you live in Springbok, you will not pay for the road between Johannesburg and Pretoria if it is a toll road. Also, a cost-benefit study has shown that those in the higher income brackets will be paying about 94% of the passenger vehicle toll — in other words, those who can afford it.

There are two points here. The first is that individuals who don’t personally use a road don’t benefit from it. I am happy to pay for a road network, as we have all done in this country and other countries for decades. On the 94%, it is an interesting number. I’m curious to know which income brackets have been used, what the comparable number would be for the fuel levy AND what the number would be without the exemptions factored into current etolls.

We need to understand that the e-tolling system enables different tariffs to be charged for time of day and day of the week, providing a mechanism to reduce demand during peak hours and thus for costly capacity upgrades — which is not possible with the fuel levy.

Finally, an excellent and valid point. I’m also a fan of using etags more broadly – paying for parking automatically amongst others.

Going the fuel levy route or waiting for the Treasury to find the considerable sums needed would have a simple and often overlooked consequence: it would be virtually impossible to deliver large infrastructure projects in short time periods when they are needed — due to the very high fuel levy that would be required to achieve this. It would also encourage people not to use public transport.

Alternative funding mechanisms are possible. Sanral could be permitted to borrow to repay the borrowings out of future income, amongst others.  The second point is more ridiculous – Mr Alli is comparing etolls with exemptions for public transport to fuel levies without subsidies for public transport. That is not a fair comparison.

With the fuel levy, the present generation needs to pay in full for infrastructure that has a 20-or 30-year life expectancy, which may result in less infrastructure being built than needed.

No, it doesn’t. Again, alternative funding mechanism are possible with the fuel levy performing the same function as the etolls in providing income to finance the roads over time.

Where is the mention of the relative efficiency of collecting money via etolls and the fuel levy? The saved costs of etolling infrastructure, call centres, debt collectors an advertising? Where is the imagination to see how other options might work (or at least, might have worked)? Where is the discussion of the forex expenditure and trade deficit implications of paying significant money to foreign companies?

Mr Alli has a position to argue and he’s done it narrowly and with a single-mindedness that is terrifying.

The debate over etolls is a complex one. This doesn’t help.