Bancassurance anyone?

Is merging banking and insurance an unsung risk management strategy?

I’m off to open a bank account with my insurers

Out of the turmoil from which finance is emerging ten years after the crash, a question emerges: is seeking the synergies uniting banking and insurance through bancassurance a better idea than the conventional wisdom portrays it?

Banking and insurance within one institution are prospering in many parts of the world. However, the repeal of the Glass-Steagall Act in the US in 1999, that permitted bancassurance for the first time, has not seized the imagination of financial innovators there. They may be missing a trick.

Advocates of bancassurance sing its praises from the rooftops: it achieves “synergies”, cost savings, customer retention, revenue diversification, better utilisation of resources, building brand equity and more.

One of the great attractions was said to be the cross-selling opportunities. After all bank customers needed insurance and insurance customers needed banking. It all looked great on a spreadsheet. What could possibly go wrong?

Clash of cultures

Even in mergers in the same sector doing the same sort of job often flounder. Like the failure of marriages, there can be multiple causes. But the most likely cause of mergers coming unstuck is ephemeral and amorphous. It is not to be found anywhere in a spreadsheet: it is the clash of cultures.

It was said of bancassurance that banks’ requirements were quicker than insurance; banks run on a five-year cycle compared to insurance's fifty-year cycle. Then there was the question of margins with the insurers raising eyebrows at the margins expected by the bankers. But most of all the merged entities were said to be just too big to manage.

While some European bancassurance attempts have been less than successful there are many bancassurances in Europe and the rest of the world that are thriving.

Banking is simply intermediation between lenders and borrowers with the bank taking a margin for bringing the parties together. Insurance is one the one hand risk management, taking a turn on the bet that something is less likely to happen than to happen.

On the other hand, the life insurance and pension-dimensions of insurance companies provide a platform for the inevitable – death or retirement – and structuring investments to ensure long-term liabilities are met.

Shared risk management

While on the surface they seem disparate businesses what banking and insurance have in common is risk management; risk management through the structuring of financial products and outcomes.

The use in banking of structured finance vehicles and the securitisation of debt instruments to create flows of income is pure risk management. These instruments and vehicles, in theory at least, facilitated the transfer of risk and liberated liquidity.

But wasn't it just such instruments that were the downfall of banking in the 2008 financial crash? Sadly the financial innovation inherent in the alphabet soup of CDOs and ABSs and CLNs (collateralised debt obligations, asset-backed securities and credit-linked notes) ironically underwritten by CDS (credit default swaps) proved unsustainable.

But many lessons in risk management have been learned and the number-crunching technology of risk measurement has improved dramatically.

It may be too late to ask if an injection of insurance expertise would not have helped avert the disaster that befell banking. However, the freedom bankers now have to call on the insurance sector’s long-term risk management skills is open to US banks. The surprise is bankers seem unaware of the advantages or are they too proud to ask for such help.

QE airbags

QE was supposed to help whom? Corporate bond issuers have been the main beneficiaries

Airbags for dummies?

Bystanders at a road crash would be a little surprised if the paramedics attended urgently to the driver of the car who had seriously injured a large group of pedestrians – particularly when the driver was drunk and had been protected by a government-approved air bag.

That is the way that bystanders in the form of the general public will view the research by Bank of America Merrill Lynch analysts that shows that the top 20 issuers in the euro investment-grade bond market this year have accounted for the lion’s share of the European Central Bank’s corporate sector purchase programme.

In the minds of these bystanders, who can still see the halt and lame victims of the 2008 financial crash, this quantitative easing programme has, in large part, ameliorated the pain those who caused the accident: those who had exceeded the stated dose of intoxicating credit expansion.

Real investment?

But it is not the victims of the financial crash who have benefitted form QE. it is the bankers and the large corporates who have been protected with the quantitative easing airbag.

When corporates like Unilever, GE, AT&T and Pfizer central bank largesse in the form of quantitative easing bystanders might ask, "What’s the point"?

Bystanders might agree that QE is aimed at banks, firstly to bail them out for their mistakes, but secondly to encourage and finance real investment. They might ask wasn’t QE supposed to fund SME’s and fund job creating or productivity-improving investment?

They might be curious as to why the programme is instead featherbedding large corporates, some of them from outside Europe with no obligation to invest or invest in Europe.

Next time (and it's hard not to believe there will not be a next time) access to QE should be conditional. Instead of fuelling asset price growth and buffering large corporate borrowers, the financial emergency services should make access conditional on palpable real investment that produces evidence of new jobs, greater productivity or should be applied to the restoration of run-down infrastructure.

Benefits of beneficiation

Why do more emerging and commodity-based economies not require beneficiation?

We want to make stuff too

If you look at infrastructure and trades maps of Africa from the end of the colonial era in the 1970s the spider's web of communication links head in one direction - towards the colonial "motherlands" in Europe.

During the Roman Empire "All roads led to Rome" In the European African empire all roads and telecommunications led to London, Paris and, to a lesser extent, Brussels, Berlin and, yes, Rome. Making a telephone call from Mombasa to Kinshasa probably required routing the call through London and Brussels.

The road and phone routes followed the money, mostly from the mines in the "Dark Continent's" interior to mills, plants, foundries, and factories in Europe where Africa's raw materials were beneficiated, converted into refined commodities that were in turn, made into manufactures, often to be sold back to Africa.

Change of compass

Today's maps are little changed, the roads are still head to the ports but the compass of telecommunications links and trade routes are no longer fixed solely on Europe. There has been a boom in intra-African telecoms and the ships carrying the excavations from the bowels of Africa's earth mostly head towards the Far East.

But in half a century one thing has changed very little. The minerals still leave Africa in the same raw state in which they were brought to the surface to be beneficiated in refineries, forges and factories out of Africa.

Of course this is not just an African issue. Huge ships from Australian coal mines navigate the Great Barrier Reef to serve Chinese markets, iron ore from Brazil is loaded for India and so on. Instead of being refined and manufactured close to their source that would create jobs and opportunities in the producing countries commodities are still travelling in bulk across the world.

Ex Africa semper aliquid novi (Out of Africa always something new)

Tanzania has had enough. It's National Assembly passed a new raft of mining legislation that, amongst other things, will create a "Requirement for beneficiation". The legislation says, "Any arrangement or agreement for the extraction, exploitation or acquisition and the use of natural wealth and resources shall ensure that no raw resources shall be exported for beneficiation". The new laws also require operators to provide a, "Commitment to establish beneficiation facilities within the United Republic".

It is difficult to fault the idea on logical grounds. Beneficiation will bring much-needed investment, jobs, income, skills, profits as well as retained earnings and tax revenues for the country. Local beneficiation also reduces the levels of bunker fuel pollution arising from bulk goods being unnecessarily shipped vast distances across the globe.

It is late in the day, but better late than never stopping the export of low-value commodities to countries where they will be beneficiated to the benefit of the investment, jobs, income, skills, profits etc. of the customer countries of Tanzanian producers.

Any goods produced using raw materials extracted, but not beneficiated in Tanzania but imported into Tanzania are proportionately more expensive. From now on, if they are made from beneficiated commodities exported by Tanzania in a manufactured or semi-manufactured form, they will be proportionately cheaper.

Not so super-cycle

"Market economies" such as Australia may baulk at not exporting bulk on the grounds that it would be a restriction of producers and customers’ freedoms. But Australia is an interesting example. Not only does exporting commodities that require dirty beneficiation also man exporting the need to meet exacting environmental and labour standards: the "super-cycle" commodity boom Australia "enjoyed" in recent years resulted in a soaring currency. That, in turn, decimated Australia's manufacturing exports by rendering them uncompetitive on world markets.

We will have to wait to see if there is Ex Australia semper aliquid novi.

The Word Bank

The World Bank's chief economist has been promoted sideways for trying to stop the turgidity and impenetrability of the bank's written output.


Paul Romer's "promotion" is comparable to that of a British cabinet minister, Edwina Currie, who was fired for stating that chicken eggs have salmonella. The fact that chicken eggs have salmonella is a fact, but her telling the public scrambled the egg industry lobby into action and Mrs. Currie was shown the exit (pun deliberately avoided).

But as sure as eggs are eggs, World Bank writing is turgid and torturous to read - something it shares with its sister IMF and its friends in the United Nations and other agencies and most "officialise" and "bureaucratese" in governments and corporations.

I'll read that later

There is no basis for assuming that the progress of these admirable organisations in seeking world peace, global economic prosperity and international financial stability has been hindered in the writing in their papers and reports. However, it doesn't help them achieve their goals when their written output is read with dread; is placed in the "I'll read that later" pile or journalists, whose job it is to read, understand, digest and report to the world what the reports report, prefer to plagiarise the press release or the executive summary and to avoid delving into the report's detail.

Opacity, opacity, there's nothing like opacity

International agencies are not alone in creating verbal walls that halt the migration of understanding. It is no unknown for corporate annual reports to be so opaque as to repel light or to possess such gems as to infinitely refract insight as to be wholly meaningless.

Words are solvents of ignorance, incomprehension and misunderstanding. The right composition, compound, or solution of words makes them invaluable productivity tools: understanding, insight, comprehension arising from clear and concise writing allows for fast and effective action, triggers innovative solutions and, poetically, but very practically, ensures everyone is singing from the same hymn sheet.

Verbal pork barrel

One of Mr. Roper's biggest beefs is what might be called the "pork barrel" effect. "Pork barrel" because it mimics the way US legislators tag-on funding of projects in their own electoral districts that have no relevance to the legislation under discussion. Roper objected to the high numbers of the word "and" in World Bank reports and demanded the conjunction should be fewer than 2.6% of the total words.

The high incidence of "ands" occurs because authors seeking to rise from the swamp of anonymity or to drag their lights from under bushels, tag- on their achievements to those in reports: "The World Bank build a $500 million dam in China and a $100 million road in Peru and used 1.2 million fewer paper clips thanks to the cost-cutting efforts of the World Bank's ever-vigilant Secretariat for the Conservation of Stationary"!

It is difficult to suppress ambition or self-aggrandisement when there are multiple contributors to a document. The problem is familiar to anyone compiling, say, an annual report for a multinational with diversified divisions competing for attention. It can feel brutal or politically risky for an employee excising someone's attempt to gain recognition or acclaim.

That is why Mr. Roper could have done worse that to ask FinanceWriter, as independent, professional writers, to give his World Bank reports the clarity, brevity and consistency they need. Sometimes an external consultancy, responding with neither to fear nor favour, can deliver on the client's brief by distinguishing the dead wood from the trees.

Writers can’t always write

Clare Hollingworth scooped the most important story of the last century – but she was not writer

As Mr. Hitler proved, you can’t be good at everything

As a journalist there wasn’t a bigger scoop than to warn the world it was about to be plunged into war. Yet, in 1939, a young Clare Hollingworth, having crossed from her posting in Poland into Germany saw the Nazi tanks amassed for Hitler’s "Blitzkrieg" (Lightning war) and reported it.

This scoop was no just beginner’s luck: she went on to beat the hack pack on some of the major stories of the twentieth century.

But writers can’t always write

But according to her obituary in the Economist she couldn’t write for toffee. Isn’t that a bit strange for a much-feted reporter? No, it is not uncommon. Some of the best reporters are astonishing in their ability to find a scoop, but prove are clueless when they have to write it down.

Ask yourself, is it that surprising that people who specialise in one facet of a job, but not all its aspects. The division of labour existed well before Adam Smith identified it in The Wealth of Nations. But some people and companies still don't see the advantages to allowing in specialists and insist on completing all tasks themselves – sometimes with questionable outcomes.

Helpful intervention

According to the Economist, Clare Hollingworth’s husband, "Geoffrey Hoare, also a journalist, would briskly correct the spelling, enliven the prose and unearth the lead which she tended to bury five paragraphs down, prefaced, cryptically, with 'according to certain sources'.

At FinanceWriter we write. You could say we play a role akin to Geoffrey Hoare’s. He may not have known about the world events his wife covered, he may not have been there and seen what she saw. But as she didn’t, he had a way with words. They made a good team.

"In theatre"

Our clients are specialists in banking, wealth asset management, investment, the run financial institutions and multinational corporations. They are "in theatre". They know what is going on in financial markets and the economy. But they don't claim to know it all.

But then nor do we! Our role is to have an intelligent grasp of the issues and be able to write about them. We don’t work "in the front line" in the equity, bond, derivatives or commodity markets but we can write about them clearly, accurately and with authority.

FinanceWriter’s clients have a way with money and business. We have a way with words that we craft in their annual reports, thought leadership papers, articles, case studies, websites, blogs and marketing suites.

OECD – lacking skills (or vision)?

SHOCK REPORT: OECD shuts stable door as Trump, Brexit and Le Pen bolt globalisation’s horses

All you need is skills

The Organisation for Economic Cooperation and Development (OECD) reflects the view of its cosy, well-off members. These countries have, at least until now, shared the liberal values now being ravaged in lurch towards Trumpism, Brexitism and Le Penism.

In a reaction to, rather than an anticipation of the problems that have lent these "isms" their populist appeal, the OECD has produced a report that declares: "In an increasingly competitive international environment, providing workers with the right mix of skills can help ensure that globalisation translates into new jobs and productivity gains rather than negative economic and social outcomes."

"Left behinders"

It is not a term of opprobrium to label many of the supporters of these "isms" the "left behinders". Put simply, globalisation and digitalisation that probably raised the living standards of most people in the world, have not just passed the "left behinders" by: in many cases, regionally in the US rust belt and the north of England, and sectorally in heavy industry, coal mining, steel making etc. they have been out priced by cheaper foreign workforces or overtaken by automation.

The governments with liberal economic policies – the "liberal elite" if you will - accurately predicted and actively pursued the benefits of globalisation; aided by the breakneck speed of automation, computerisation and now, robotisation. Bankers, investors, multinationals who were in the front line of enjoying those benefits, enthusiastically supported pro-globalisation governments.

Blinded by rose-tinted specs

Yet the perspicacity of the leaders of developed nations and their banking and business partners did not extend to predicting the negative outcomes of this rush to globalise.

Their clear-sightedness in anticipating the gains and the profits from manufacturing and trading on a truly global scale did not extend to foreseeing either the rush to the bottom when it came to wages and working conditions in the economies where investment would be based or the deleterious impact on workers in the countries that would lose industries to cheaper competitors.

Or was it more about turning a blind eye or brushing under the carpet the possibility that globalisation was not all a rosy scenario?

Now available 20/20 vision for 2020

The OECD’s "Johnny come lately" report tells us that it is adult skills that will ease the pain of globalisation. The question is why the OECD was not researching and analysing the potential impact of the liberalisation of capital flows on skills and workforces when they were unleashed in the late 1980s and 1990s?

Why has it taken the governments represented by the OECD until now to find solutions in skill building for problems that were an inevitable consequence of the desired outcome of more competitive international markets, freer trade and cheaper goods?

The current shifting of the political tectonic plates away from a "liberal consensus" to an exclusivist, nationalist agenda could not necessarily have been predicted. However, factors creating these seismic forces should and could have been foreseen or dealt with as they began manifesting themselves.

The OECD report is better late than never, but do governments have the will to commit resources to improving skills?

Future of futures shanghaied

What's behind the soaring volumes of commodity derivatives?

The volume of commodity derivatives traded on the world's exchanges soared 27% in 2016 – mostly at the expense of equity derivatives. Sometimes an apparently insignificant news item disguises much larger and much more important trends. Conversely, it is also the case that too much can be read into events.

But with such a significant increase it is interesting to ask why?

Boring equities

Over recent years the absence of volatility in equity markets has made equity derivatives a bit dull for the average trader. This has been reflected in equity derivatives falling to from 72% of global derivatives volume in 2009 to 45% according to the World Federation of Exchanges annual report.

But boring equity derivatives alone cannot account for the bumper crop of commodity derivative contracts: their volumes have increased respectively by 57%, 27% and 13% in the EMEA, Asia-Pacific and the Americas.

The big change was in commodities futures, the number of contracts of which rose 28.5%

Why has there been this extraordinary rise in the volume of commodity derivative use?

Oil inflames

One reason may be that commodities have become a bit more exciting. The contracts recording the highest volumes were the Crude Oil Brent futures in the EMEA region, Crude Oil and Natural Gas futures in the Americas. However, it was Steel Rebar, Soyabean Meal and Iron Ore futures that turned on traders in the Asia-Pacific region.

The focus on oil products reflects the volatility and uncertainty in energy markets induced by Saudi Arabian oil production constraints that seemed aimed at scuppering the shale oil boom in the US. Seeking certainty of price and security of delivery of the real product will have played a part in derivative market activity.

The fact that the Dalian Commodity Exchange and the Shanghai Futures Exchange, two of the three exchanges that dominated the commodities derivatives market are in China (the third was the CME) reflects China's growing impact in international commodity finance.

But the high volumes of Steel Rebar and Iron Ore futures traded in the Asia-Pacific region may also have been a reaction to administrative uncertainty regarding domestic iron ore production and foundry capacity within China.

The other asset class

The particular and possible reasons for energy and iron ore to spur derivatives market activity does not account for the steady rise in commodity derivatives activity since at the same time as equity derivatives volume has slumped.

Volumes of traded commodity derivatives during the "commodity super cycle" were modest with traders probably working in the physical markets confident of demand and delivery.

Growing volumes, rather than being a transient phenomenon may suggest commodity derivatives are coming of age and will in future rank more equally alongside equity, interest rate and currency derivatives.

In the long run, we are all dead

Governments failed to plan for longevity. Will they make the same mistake with demography?

It is thought the last person to have been born in the nineteenth century died, aged 117, in mid-April. Improving nutrition, social welfare, medical advances, the realisation of how bad smoking and other environmental pollutants are have seen longevity among the populations, particularly of developed countries, advance in leaps and bounds.

But the failure of governments to plan for the added cost of caring for the old, the increased price of advanced medical treatments and the feeble state of government and corporate finances to support large numbers of people who are spending half a lifetime living on generous pensions has turned this boon for humanity into a crisis.

The new (de-) population crisis

Another demographic sea change is on the horizon. But with current preoccupations of politicians, it is unlikely that any plans will be made until it is again too late.

The economist John Maynard Keynes is not famous for stating the bleedin’ obvious that, “In the long run we are all dead”.

In the middle of the coming century, the Japanese population will have more than halved from around 127 million to around 50 million. The fertility rate in developed countries is falling, the Japanese age profile is simply the most dramatic illustration of it. Already one in eight houses in Japan is empty with no laughter of children filling the air.

Amidst Malthusian angst that the world is becoming unsustainably overpopulated, this is good news. A falling population, especially in the developed world that binges on most of the world’s resources, will move the Earth to a more sustainable existence pending its ultimate extinction as a frazzled carbon crisp when our sun runs out of hydrogen (in a few billion years time).

In the meantime…

One of the reasons the Japanese population will decline so precipitously is that the country shuns immigration. In many developed countries, there is a political panic about immigration that is creating barriers, or in the case of the USA, walls, to prevent them contributing to the economic lives and the diversity of their desired destinations.

The economic case for encouraging immigration is overwhelming – immigrants are proven to contribute more than they take out of their new homes and many services are depended on the younger blood immigration brings.

But in short-term, politically, the price is too high, the appeasement of those frightened by and opposing immigration too easy.

In the long run

Having failed to act when they had all the evidence that predicted longevity, governments have no excuses not to prepare for the decline in population. The decline is a long time ahead; decisions can be taken now that will ameliorate the impact to shrinking populace without negatively affecting the current population.

But then most of readers of this article and its author won’t be around to hold them to account. Perhaps that’s why governments get away with failure from generation to generation.

Location, location, no location

Words gain the power as we face the digital death of financial centres

London's Mayfair is considered the epitome of posh. Its celebrity is due to its historical proximity to Buckingham Palace. Physical proximity to what as the seat of monarchical power used to be very important.

The pub used to be the centre of social activity: you bumped into friends, settled differences, bought poached game from the local lord's estate or snapped up a new TV that had probably fallen off the back of a lorry.

In the ancient market cities the clothiers, the goldsmiths or the spice merchants clustered in their "quarter" that would draw in customers and allow traders to keep an eye on the competition – an early version of market transparency.

Falling footfall in financial centres?

A report1 that shows London and New York losing out to financial centres to Asian financial centres. How the City of London will fare in the wake of Brexit raises questions about whether location is as important as it once was. And if proximity pales into unimportance, what will replace face-to-face communications if where a financial centre is located ceases to be relevant?

The pub is in decline with many closing every week. The physical market, in the form of the high street, is in retreat. Social media is in ascendency. People are choosing to fraternise of Facebook, buy dodgy TV's on eBay and shop on Amazon rather than engage or exchange in a particular location.

Can questions about the usefulness of a "global financial centre" be far behind? Sure rise of Asian banking is seeing the burgeoning of the banking, asset management and investment options in Chinese financial centres and sure doubts are being cast over London's future role by the political flux over Brexit.

Seeing the whites of their eyes

But the migration of stock exchanges, commodity trading floors and derivatives exchanges from the floor of the open outcry system to flickering images on multiple desk-bound screens have long been harbingers of the decline of physical financial centres.

Rubbing shoulders, seeing the whites of the opposition's eyes or weighing up their body language has long ceased to be in the trader's armoury. If the sight, feel and smell of interaction are no longer tools of the trade, has location lost its lure?

And if location, location, location is no longer the imperative for interaction other forms of effective communication become vital.

If a firm seeks to promote, persuade, present, advocate or float an idea when the power of public peacock strutting is no longer an option, it gives alternative communications far greater weight.

Clear, readable, authoritative writing is a crucial and influential alternative to face-to-face communications in promoting, persuading, marketing, selling and maintaining clients.

The power of content on a website, in a blog, in a descriptive case study or a thought-provoking thought leadership article are replacing well-located real estate as the determinant of interaction and engagement.

Being near Buckingham Palace remains an attractive option if, on the spur of the moment, the Queen invites you around for a cup of lapsang souchong. But that no longer carries the same influence as the trader with a smart phone on a Bermudan beach.

Trump steamer scuppers a slow boat from China

Just when Chinese wages outstrip other emerging markets, the country faces protectionism. Is globalisation in its death throes to be replaced by a phase of "deglobalisation"?

If anyone was looking for the benefits of globalisation they need look no further than China. That is not say there are not disbenefits to be found in the US rust belt and deindustrialised areas like the north of Britain. But Chinese prosperity has progressed dramatically since its low-wage workforce made it the new "Workshop of the World".

Yes, we have no bananas

The wheel has turned: Chinese wages are surpassing those in places like Latin America. China has already seen the effects of wage inflation forcing industries migration inland, away from the higher-cost coastal cities. Chinese productivity is high and rising meaning Chinese workers can still expect further wages rises.

Evidence that Chinese labour risks pricing itself out of the global market comes at a bad time: Chinese Premier Li Keqiang warned the National People’s Congress at its annual meeting in this, the Chinese, Year of the Rooster, that the economic growth target was being cut (to a still respectable 6.5%, but way below the double-digit figures of recent years).

Little to crow about

Mr. Li has little to crow about in a country also beset by soaring domestic debt, corruption, "zombie enterprises" producing for the sake of production, not to meet demand, and by pervasive smog spewing out of its factories and cars.

But a bigger and less manageable problem is on the horizon. Just at a time when wage growth is paring competitiveness, China faces the threat of protectionism from the new "cock of the global walk" Mr. "Buy American, Hire American" Donald Trump.

Chinese takeaway

Mr. Trump is a "Johnny come lately" to trends in world trade. Yet he is seeking to label China a currency manipulator, accusing Germany of economic Blitz Krieg across Europe and shredding trade agreements north, south, east and west.

While China is already committed to increasing domestic demand, that has stimulated a risky, debt-driven housing boom. But the Chinese economic supertanker is turning - slowly.

Chinese wages still have room to rise, but there is the potential for Chinese companies to seek new, low-wage locations for their factories – in effect globalising. Such moves could keep down production costs, but also allow Chinese companies as sneak into new, bilateral free-trade zones Mr. Trump envisages with compliant trading partners.

Or will rising Chinese wages and the erection of trade barriers feed technology, like 3D printing, that will undermine the need for a growing proportion of international trade in manufactures?

Sound the retreat

Globalisation has seemed unstoppable over the past half century, but the stage is now set for retreat. The US administration wants to bring manufacturing "home" and China is about to lose its low-wage, competitive edge.

Add to that technological progress promising to reduce the risks, transport costs and time lags of importing goods from distant countries and the conditions are in place for globalisation to be thrown into reverse. The trend for the next half century might well be described as "deglobalisation".

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