CVS Aetna takeover signals US healthcare consolidation

Daniel
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CVS Aetna takeover signals US healthcare consolidation

America’s private health insurance system is rapidly becoming centralized. Shareholders approved drugstore giant CVS Health takeover of the insurance company Aetna Inc.

The $69 billion acquisition will combine CVS’s 9,000 pharmacies and 1,100 Minute Clinics with Aetna’s health plans. The New York Times estimates the combined CVS and Aetna will serve 94 million customers. About 22 million people take part in Aetna’s health insurance plans.

The deal could transform American healthcare by giving a few centralized companies control over the market, CNBC claims. For example, CVS and Aetna could force its policyholders to only use its clinics and pharmacies.

Many Americans will have to go along because they receive health insurance from employers. To clarify, those Americans have to accept whatever health insurance their employer provides. The employers deduct health-insurance premiums from the employee’s pay.

CVS and Aetna try to reduce healthcare costs

CVS Health’s Minute Clinics are testing telehealth video visits with physicians, Healthcare Informatics reports. The visits will cost $59 and be available 24 hours a day, seven days a week.

CVS believes Video Visits could reduce healthcare costs by eliminating expensive consultations with specialists. Specialized care is one of the most expensive aspects of American healthcare. Americans are more likely to see specialists because their healthcare plans cover all the costs.

One way Aetna could reduce claims costs is to steer policyholders to CVS Minute Clinics. Another is to reward policyholders that took advantage of video visits.

A hope is that CVS and Aetna can reduce drug and healthcare crises with high market share. High-health costs are a major concern in America. For example, Amazon, Warren Buffett’s Berkshire Hathaway, and JPMorgan Chase (America’s largest bank) teamed up to create their own lower cost healthcare service.

Healthcare spending accounts for 18% of America’s gross domestic product. Analysts expect healthcare to make up 20% of America’s GDP by 2025.

CNBC estimates 98% of CVS shareholders and 97% shareholders voted for the deal. The merger still requires approval from the United States Department of Justice. The Department must determine if the deal complies with America’s antitrust laws.

America’s increasingly centralized healthcare industry

America’s healthcare industry is becoming increasingly centralized with recent deals.

For example, the health insurer Cigna is acquiring widely-hated pharmacy benefit manager Express Scripts. To explain, benefit managers like Express Scripts handle all the paperwork associated with prescriptions.

Moreover, America’s second largest drugstore operator Walgreens, Boots’ sister company, is forming an alliance with the nation’s largest grocer, Kroger. Under the arrangement, Walgreens will sell Kroger groceries in its drugstores.

Amazon acquired the digital pharmacy PillPack. It considers expanding PillPack’s operations to service more health insurance plans.

Notably, Amazon and PillPack plan to service America’s largest health insurance plan Medicaid. Statista estimates that 73.5 million people participated in Medicaid, America’s government health insurance scheme for the poor, in 2017.

The goal of these mergers is to create large centralized healthcare providers similar to Britain’s National Health Service (NHS). The hope is that the centralization will lower costs by controlling market share, eliminating middlemen, and restricting access to healthcare.

Are Aetna and CVS preparing for single-payer?

Such mergers will intensify the debate over single-payer health insurance in the United States. America is the only major industrialized nation that lacks a single-payer healthcare system.

Many American politicians including former President Barack Obama have embraced single payer. Obama announced his support for such system and called for ‘Medicare for All’ in a speech in Illinois last September.

Several other powerful political figures, including Senator Bernie Sanders (I-Vermont) and Senator Kamala Harris (D-California), publicly support the single-payer system too.

President Donald Trump (R-New York) has publicly praised single payer systems including the NHS. However, Trump has backed away from single-payer support to please elements of his Republican Party in recent years.

Single-payer health insurance is likely in the United States because a Reuters/Ipsos poll found 70% of Americans supported it. Therefore, a likely rationale for the Aetna and CVS merger is to prepare for single-payer.

The federal government is already America’s largest health insurance provider. Around 56.8 million Americans participate in the government-subsidized Medicare plan for the elderly and disabled. Another 73.5 million take part in Medicaid. Therefore, the federal government will be Aetna and CVS’s largest customer.

The consolidation of healthcare will change America’s insurance industry. The greatest change is that health insurance companies like Aetna/CVS and Cigna are becoming healthcare providers.

Venezuela defying the odds with new cryptocurrency, El Petro

Walid
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Venezuela defying the odds with new cryptocurrency, El Petro

Nicolas Maduro has advised government workers to invest in the newly created cryptocurrency, El Petro. The Venezuela president made the call (in Spanish) on Thursday 18 October in a public television network’s announcement.

The plea is highly controversial given that the country faces major economic and governmental crises. However, the Petro was precisely created for these particular reasons, to alleviate the harsh pressures and allow the country to breathe again.

Without surprises, the development of the Petro was met with wide range of local and international concerns and criticisms.

Venezuela experienced a period of exceptional economic growth from 2004 to 2013, averaging 6% growth per year, with a blip during the financial crisis of 2008. Benefitting from soaring oil prices Hugo Chavez, former Venezuela president, initiated the ‘Bolivarian Missions’, a series of social programs focusing on social welfare – providing housing, educational services, free health clinics, and other forms of support.

Since Chavez death in 2013, Nicolas Maduro took over the presidential powers and has been fighting an ‘economic war’ against the opposition, the US administration and other enemies who are trying to destabilize Venezuela.

The International Monetary Fund (IMF) predicts that the inflation rate may reach a staggering 1 million percent by the end of 2018. Alejandro Werner, director of IMF’s Western Hemisphere department, said “We expect the government to continue to run wide fiscal deficits financed entirely by an expansion in base money, which will continue to fuel an acceleration of inflation as money demand continues to collapse.”

Nonetheless, Maduro latest plan is to use the Petro cryptocurrency to fight back.

Previously in a television address, he announced that the cryptocurrency would be used as the second unit of account for local salaries, goods, and services. Since the national currency, the bolivar, keeps struggling with hyperinflation.

What’s the Petro?

The Petro (PTR) is the Venezuela government attempt to create a digital currency that uses encryption techniques to regulate the currency units, and benefitting from cryptography to secure the financial transactions.

The cryptocurrency is backed by the country’s most important asset – Petroleum.

The idea originates from Hugo Chavez, who wanted to have a strong currency backed by raw materials. According to its released whitepaper, the Petro is backed by gold, diamonds and iron besides oil assets.

The Petro is divisible by 100 million units, with a minimum exchange unit of 0.00000001 called the Mene.

The Petro raised $735 million in the first day of its pre-sale on 20 February 2018. In a television address, Maduro said it raised $3.3 billion in total, Bloomberg reports.

The Petro’s base price is equivalent to the price of a single Venezuelan oil barrel, around the $60.

The cryptocurrency will be available to the general public on 5 November. It will, theoretically, be available on six international exchanges from which it can be acquired using other established digital assets or popular fiat currencies such as Dollars, Euros and Bitcoins.

On their website, the government provides a link to the Petro digital wallet that can be downloaded from Google Play, or for other operating systems such as Microsoft Windows and Linux. No indications of a version for iPhone users yet.

Since its inception, the cryptocurrency has drawn a lot of criticisms from, not only financial analysts but also cryptocurrency experts. Though, others see the Petro as a great experiment with risks and challenges never undertaken before.

Will the Petro succeed?

Perhaps the most damning criticism comes from the US administration who has called the Petro a stunt.

In a special investigation, Reuters travelled around Venezuela, spoke to cryptocurrencies and oil-field valuation experts, and even attended the sites of the pledged oil reserves in addition to scouring the coin’s digital transaction records.

Their findings revealed little evidence of the infrastructure put forward by the Maduro’s government. This was also highlighted by Alex Tapscott from the Blockchain Research Institute during an interview with the BBC.

“The government says each unit of the Petro is backed by oil […] But we have no proof at all. There is very little technical information about it.” Tapscott said.

Technically, the Petro takes place via the blockchain technology, which consists on a public ledger that digitally records the transactions between two parties. One of the tenets of blockchain is its decentralization feature. Since the cryptocurrency is oil-backed and the oil assets production is controlled by the Venezuelan government; this would contravene the principle.

At present, the Petro is like an outsider with a lot stacked against it. Betting on outsiders is a risky strategy, yet they do win once in a while. Unfairly or not, the US administration has been using sanctions as a weapon against its enemies and economic competitors. This leaves them with ‘no choice’ but to back outsiders.

Moody’s downgrades Italy credit ratings on budget deficits concerns

Walid
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Moody’s downgrades Italy credit ratings on budget deficits concerns

Italy appears to be in the midst of another major financial crisis as Moody’s cut its credit ratings from “Baa2” to “Baa3”, one level just above the junk territory.

The expected move is the result of a review initiated on the 25 May after the newly elected government signalled an increase of spending in its draft budget, and thus making Italy vulnerable to future domestic or externally sourced shocks.

The agency had publicly indicated that it was reviewing the policies enacted by Italy Ministry of Economy and Finance before making any decisions.

Moody’s update notes that the key drivers for the downgrade were the significant risk of a material weakening Italy’s fiscal strength and the potential risk that structural reform effort stalls.

Ratings are expressed with letters A, B, C which represent the quality of the credit risk obligations.

Italy’s Baa3 long-term issuer rating denotes a premium grade with some speculative elements and moderate credit risk. In the short-term market, this means that the country’s ability to repay its short term obligations is deemed acceptable.

Ratings agencies measure the credit worthiness of governments and companies to determine whether they can pay back their debts on time. These ratings provide insights to investors on how risky their investments are.

Talking to CNBC’s Squawk Box Europe last week, Colin Ellis, managing director for credit strategy at Moody’s said: “Our ratings are not about whether the policies are right or wrong. Our ratings are merely rank orderings of credit risk, they are an assessment of ‘will you get your money back in full and on time’,”

On the other hand, Moody’s Investors Service updated the credit outlook from ‘negative’ to ‘stable’ citing that Italy still exhibited important credit strengths that balance the weakening fiscal prospects.

A populist budget

Since the credit crunch of 2008, many European countries including Italy have struggled to resurrect their financial position. Discontented from the economic crisis and corruption, Italians were lured to populist parties such as ‘Lega Nord’ and ‘Five Star Movement (M5S)’ at the March 2018 general election, resulting in a hung parliament.

After several months of negotiations, both parties formed a coalition for a new government headed by Matteo Salvini and Luigi Di Maio, the leaders of Lega Nord and M5S respectively. They promised voters to boost the struggling economy by increasing welfare spending, cutting taxes and cancelling unpopular pension reforms, and thus expanding its budget deficit.

The plans worried investors around the world and triggered a sell-off of Italian bonds, besides facing growing pressures from the European Union Commission. Under EU rules, member states are not supposed to run annual deficits greater than 3% of their total economic output.

Deputy Prime Minister Matteo Salvini stated that the government have no intention of backtracking on budget plans or existing commitments. Salvini also suggested that underhand activity was afoot, accusing powerful financial institutions of effectively ganging up on Italy, with the intention of purchasing Italian companies at knockdown prices.

As the situation continues to develop, the Italian Council of Ministers continues to work on its 2019 budget. The draft publication was submitted to the European Commission on 15 October.

In a letter published on its website, the Commission’s Vice President Valdis Dombrovskis said that Italy’s Draft Budgetary Plan (DBP) for 2019 was clearly breaking EU rules.

Valdis Dombrovskis and Pierre Moscovici © European Union, 2018
Valdis Dombrovskis and Pierre Moscovici © European Union, 2018

Italy worries investors

Following Moody’s update, S&P Global is expected to announce their rating decisions before the end of October.

In what has already been a choppy time for European markets, investors are very much on edge at present. This will be one of the first tests of the new government viability and coherence.

Many market observers believe that the new policies are unwise. There is concern that the extra spending included in the budget will result in public debt becoming unsustainable. This would then raise the prospect of a public debt crisis in the foreseeable future, with markets already hugely sensitive to the consequences of such situations.

However, Moody’s also indicated in a preliminary statement on the issue that the Italian credit line can be considered particularly safe, and that a downgrading of its rating is by no means inevitable. This can be considered somewhat encouraging, at a time which is undoubtedly one of uncertainty for Italians.

UBS Wealth Management and Allianz Global Investors have both taken up significant positions in Italian bonds, believing that the country low probability to default within the next two years, presents a great buying opportunity for investors.

However, other major institutions are less than convinced. The International Monetary Fund (IMF) is dubious about the Italian mooted plans and sceptical in regards to the notion of increased borrowings, particularly at a time when Italy is already significantly indebted.

The IMF warned the Italian administration to follow European Union rules closely, or face risking a major rebellion from investors.

Moody’s downgrade to Baa3 rating takes Italy to just one notch above junk status. This certainly represents a tricky conundrum for the government, at a time when it feels that the economy requires a major boost of investments.

Insurance Premium Tax upsurge hitting businesses hard

Walid
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0
Insurance Premium Tax upsurge hitting businesses hard

The UK Government made nearly £6 billion in income from Insurance Premium Tax (IPT) for the year 2017/2018 – an increase of up to 22% on the £4.88bn it collected the previous year.

This upsurge is severely affecting businesses and consumers alike, and poses risks to the overall economy.

As announced in its Autumn Budget Statement 2016, the government increased the IPT rate from 10% to 12%, to fund a series of measures such as improving the country’s infrastructure and its citizens’ lives.

During his speech Chancellor of the Exchequer, Philip Hammond said “In order to raise revenue, which is required to fund the spending commitments I am making today, it [IPT] will rise from 10% currently, to 12% from next June.”

UK Insurance Premium Tax rate changes over the years 1993-2018
UK Insurance Premium Tax rate changes over the years 1993-2018

Hammond minimised the impacts and forecasted that IPT would raise £680 million in tax revenue for 2017/18. However, the latest data revealed total receipts of almost £1 billion, being a 47% difference from forecasts.

One of the main reasons, driving the higher than expected tax revenue, is that businesses are impelled into taking out more insurance policies than in the past. This has meant that businesses are being hit twice when combined with the IPT increase.

In addition to compulsory policies such as employers’ liability insurance, businesses face new threats like cybercrime, social media, and regulations that they have little choice but to insure against.

New threats

Cybercrime is becoming an increasingly important risk for businesses. A Financial Times and ICSA survey showed that 72% of FTSE 350 companies consider cyber-attacks their biggest concern, and 88% are currently increasing spending on cyber-risk reduction.

One problem faced by businesses is that cyber insurance costs can be high due to the evolving complexity of cyber risks and the lack of historical data, besides the fear that insurers won’t pay.

When the National Bank of Blacksburg lost $2.4 million (£1.7m) between 2016 and 2017 because of hacking attacks, the bank relied on its $8 million insurance policy from Everest National Insurance. However, the bank was offered a mere $50,000.

Another threat is the growing regulations environment imposed on companies. Despite voting to leave the European Union, the UK still has to comply while being part of the Union. The latest regulation is the General Data Protection Regulation (GDPR) which overhauled how businesses process and handle data.

Companies breaching the GDPR will face penalties of up to €20 million (£17.5m) or 4% of global turnover, whichever is highest. This might be that the costs of professional indemnity insurance increases, as companies are pursued more frequently for failing to appropriately manage their clients’ data.

The new and existing threats both contribute to the increase in government tax revenue which the Treasury is fortunately benefitting more than they had originally expected.

Divisive new tax

Initially when introduced in 1994, the insurance premium tax rate was only 2.5%. The UK government introduced the tax simply to raise revenue from the insurance industry, which was viewed as undertaxed and not subjected to VAT (Value Added Tax).

Former Chancellor Kenneth Clarke, who announced the tax in the November 1993 Budget said: “I have never disguised my personal view that the coverage of value added tax in this country is too narrow.”

The UK is not the only government introducing the tax. Many EU members have used it to increase their revenue too.

However, successive government changes have resulted in the current rate of 12%, and these increases have created many criticisms.

The British Insurance Brokers’ Association (BIBA) has reiterated its view that the rate should be reduced, and described the IPT as a regressive tax. In its budget submission to HM Treasury, BIBA described two negative effects: an increase in the number of claims by uninsured drivers of 10%, and the serious impact that the IPT has on floods, particularly for those living or operating in high-risk areas.

Graeme Trudgill, BIBA Executive Director called for freezing the IPT “No more increases, they’ve gone too far,”

BIBA concluded that IPT may be an important tax contribution to the government, but seriously misses the effect on insurance take-up.

Iran considering Insurance-Linked Securities market for reinsurance

Walid
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Iran considering Insurance-Linked Securities market for reinsurance

Iran is considering the development of new financial products, including insurance-linked securities and Islamic bonds, to alleviate the US sanctions on its economy. The aim is to provide local firms funding options to weather the financial pressures, according to Reuters.

The recent collapse of the nuclear agreement after the US unilaterally withdrew from the Joint Comprehensive Plan of Action, known as “Iran Deal” brings the country back into a financial impasse.

The latest economic indicators present a gloomy picture and confirm the dire situation. Annual inflation hit an over 4 years high of 24.2% in August 2018. The national currency, “Rial”, has come under severe pressure and has lost 16% of its value.

The report from Reuters suggests that Iran’s Securities and Exchange Organisation (SEO) is looking into improving the fiscal policy by introducing a range of financial products as a way to increase the sources of funding for domestic companies. All the products will be structured as to obey the religious laws of the country since Iran is an Islamic republic.

Tapping the ILS Market for Reinsurance

The big challenge facing the Iranian authorities is that of insurance, especially reinsurance. With specialist markets like the Lloyd’s of London underwriting market not accessible due to international sanctions, they have to source reinsurance elsewhere. This comes with its own unique set of hurdles aside from compliance to Islamic law.

Insurance-linked securities (ILS) are essentially financial products that can help insurers mitigate risk by raising capital on policies that would otherwise be very expensive to sustain especially when claims are made. Insurance policies are valuable assets in their own right and insurers can sell asset-backed notes to investors to release some of that value.

The move towards the ILS market is in the early stages as there are still a lot of areas that need addressing and compliance to Islamic laws. As such, the Iranian government is having to restructure its economic operations to allow financial products onto the market that are suitable for investment against the religious backdrop.

Tapping into the ILS market comes with trappings that could be construed as violating Islamic principles, so the Iranian government is being very careful about how these products are made available and how they operate.

In addition to ILS the SEO is looking into Islamic bonds (Sukuk), which have long been considered fine under Sharia laws, and make these more available to stimulate the capital market.

Islamic Bonds

Islamic bonds have been specifically designed to meet Islamic regulation and provide investors with a secure means to generate a return on their investment. Typically, a traditional bond would pay interest but with an Islamic bond they will pay profit.

Normally these are security backed investments attached to real estates or commodities. Investors will then collect the rent as a profit on the bond and because investors will own something tangible, it is considered a stable and non-speculative investment.

The global Sukuk market reached a record in 2017 amounting to $116.7 billion, an impressive 32% increase in volume from the $87.9 billion in 2016. The increase in volume was mainly due to sovereign Sukuk issuances by Saudi Arabia coupled with steady issuances from Asia, the Gulf countries in the Arabian Peninsula and Africa.

The Sukuk market in Iran is not well developed and represents less than 1% of the global issuances with nearly $1.4 billion. However and according to financial broker Agah Group, a member of the Tehran Stock Exchange, the size of total Sukuk issues on Iran Debt Market increased by an astonishing figure of 500%.

The Securities and Exchange Organisation is also looking into other products such as warrants and crowdfunding.

AIG files $6.1m lawsuit against Kim Kardashian’s former bodyguard

Daniel
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AIG files $6.1m lawsuit against Kim Kardashian’s former bodyguard

Bodyguards are liable for the property losses of the rich and famous. AIG is suing Kim Kardashian West’s former security firm for $6.1 million (£4.67 million).

Pascal Duvier caused the 2016 robbery of Kardashian at Paris Fashion Week AIG alleges. AIG claims Duvier’s company left Kardashian vulnerable to robbery by leaving her alone in an apartment with millions of dollars’ worth of jewels, CNN reports.

Duvier, and his company Protect Security, “negligently, carelessly, and/or recklessly performed their protection, security, monitoring, inspection, and/or surveying of“ Kardashian, AIG’s suit charges. AIG reportedly sued Duvier in a US Court in the state of Delaware on 3 October 2018.

American International Group (AIG) like many large US companies headquarters in Delaware. Companies like AIG headquarter in the tiny state of Delaware because of low taxes.

Bodyguard negligence

Protect Security’s negligence included failing to correct several alleged security breaches, AIG charges.

The alleged breaches included no closed circuit television, a nonworking intercom, and a broken lock. In addition, the apartment building’s concierge “did not have any security training and/or background.”

Despite the breeches, Kardashian was carrying jewellery, valued at €9 million, when Duvier left her alone in the apartment. Instead of guarding the reality TV queen, a security detail apparently went to a nightclub with Kardashian’s sisters.

The well-organized robbers reportedly wore police uniforms and carried guns. They gained entry to Kardashian’s apartment by forcing the concierge, Abdulrahman, to take let them in. Interestingly, the robbers used bicycles as their getaway vehicles.

The lawsuit targets Duvier because he is the CEO of Protect Security, CNN reports. Duvier and Protect Security have guarded several celebrities including The Black-Eyed Peas and Ciara.

AIG lawsuit real aim

The goal of AIG’s lawsuit is not to recover claims paid, but to force security firms to do their job.

Notably, AIG’s lawsuit is for less than the reported value of the jewellery. The Paris prosecutor’s office claims Kardashian was carrying €9 million ($10.33 million or £7.91 million) worth of jewels, yet the suit is for $6.1 million.

If AIG’s claims are true, the robbery resulted from Protect Security’s negligence. Interestingly, documents about the suit fail to answer obvious questions about the robbery.

For instance, how did the robbers know where Kardashian was staying? In addition, how did the robbers know Kim was unguarded and carrying her jewels. That points to an obvious security breach at Protect Security or an “inside job.”

Notably, Kardashian’s chauffeur Michael Madar, and his brother Gary Madar, are among the 18 people arrested as suspects in the robbery, Vanity Fair reports. That arrest strengthens AIG lawsuit because it indicates Duvier failed to screen the chauffeur.

Where are Kim Kardashian’s Jewels?

Also unknown is the fate of the jewels, which reportedly included a €4 million ($4.49 million or £3.51 million) engagement ring. French media claims the crooks broke most of the pieces up and sold the jewels and precious metals in Antwerp, the American magazine People reports.

People identified the robbery’s mastermind as Aomar Ait Khedache. Surprisingly, Khedache claims Kardashian’s €4 million ring is still intact but did not say where it is.

Khedache’s claims may explain why AIG is only suing for $6.1 million. The insurer believes that recovery of the ring is still possible. Therefore, it may have only paid Kardashian for the other jewels. A strong possibility is that Khedache is trying to reduce his prison sentence by using the ring as a bargaining chip with prosecutors.

There is one certainty in the whole affair. Kim Kardashian West will probably pay a much higher insurance premium. The reality TV icon has demonstrated that she is a terrible insurance risk. Hopefully, Kardashian will hire a better grade of bodyguard.

Greed-driven misconduct exposes Australia’s banking sector

Paul
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Greed-driven misconduct exposes Australia’s banking sector

Australia’s banking sector shocked the world with blatant misconduct which highlighted selfish means for short-term financial gain.

The intervention by the Royal Commission has brought to light four of Australia’s biggest banks where wealth managers placed profit in preference to customer interests. The guilty parties are the Commonwealth Bank of Australia, Australia and New Zealand Banking Group, National Australia Bank, and Westpac Banking Corp, who acknowledged their guilt in separate statements.

All four banks have promised to provide a more comprehensive response by the end of this month during which all of them will also be facing questions from a parliamentary committee.

Some of the shocking allegations include collecting fees from dead people, convincing a legally blind pensioner to stand guarantor for a loan without updating her about the risks involved and selling a complicated insurance policy over the telephone to a boy who has Down Syndrome.

The banking sector went into a state of upheaval in the wake of the recent revelations by the Royal Commission, which sent share prices crashing and destroying the credibility of some of Australia’s biggest companies.

Royal Commission condemns misconduct

Banking royal commissioner Kenneth Hayne, QC, who conducted public hearings condemned the misbehaviour of the guilty parties and called for stringent punishment while criticising regulators for not being able to exercise enough control on banks for their misconduct.

Although the interim report drafted by Hayne was harshly-worded in describing poor ethics of the banking industry, it did not come up with immediate recommendations for legal action or suggest any particular reforms. The commission will publish the final report in February 2019.

During public hearings that lasted for almost 60 days, the proceedings covered instances of bribes, fraud, extortion through fees and board-level scams.

The three-volume report puts the primary motive of gross violations of these banks as being a “widespread culture of avarice.”

“Too often, the answer seems to be greed,” said the report. “…the pursuit of short-term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?” it said.

Lack of adequate regulatory measures cited

According to Treasurer Josh Frydenberg, the Royal Commission’s report proves that the present corporate regulator in Australia, the Australian Securities and Investment Commission (ASIC) needs to play a more active role in curbing misconduct in the Australian financial market.

Frydenberg went on to say, “They do need to pursue litigation, to impose the penalties that are available to them, rather than some of these negotiated settlements which have seen the perpetrators of these offenses or misconduct get off too lightly.”

The consensus seems to be that the ASIC is quick to negotiate settlements with banks regarding breaches. Whenever there is a proven case of misconduct, it results in an apology by the perpetrator and a long, drawn-out negotiation between the ASIC and the entity concerned. This could be followed by a media release or an infringement notice, expressing ASIC’s ‘concerns’ regarding the lapse.

The Australian government is mooting new legislations for increased penalties and prison terms for financial crimes to give more power to the regulator. This move is a positive step, as it seems that the ASIC is not able to be forceful enough with the existing powers vested in them.

The primary observation of Commissioner Haynes is that whenever misconduct was revealed, there was neither any punishment meted out nor were the consequences proportionate to the seriousness of the offence. While ASIC seldom went to court to pursue disciplinary action against offenders, the Australian Prudential Regulation Authority (APRA) never did.

Content of the interim report

The opinions of Commissioner Haynes feature in the executive summary from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry interim report.

The findings of the commission have brought to the notice of the public, misconduct of financial services entities, some of which the regulators were aware of and some of which it was not.

Why did it happen? How can this be prevented from recurring in the future? These issues cover a significant part of the interim report.

The first question presents an answer in a single word – greed. The report cites the motive as pursuing short-term profit while compromising on “basic standards of honesty.” The sale of services and products became an end to the means for these Australian banks.

There was an exponential increase in products and services while banks clamoured for a slice of the pie. The customer was side-tracked for the more substantial and tempting reward of huge profits from sales.

However, asks the report, what can be done to prevent this from recurring?

In continuation with the commission’s work, both entities and regulators are trying to predict the outcome and responded to the commission’s revelations. There is talk about remediation for consumers who have been impacted, discontinuing certain products or practices, and selling entire divisions. There are even murmurs about enforcement and more intense focus on the regulation of certain activities.

According to existing laws, entities need to ‘do all things necessary to ensure’ services are provided “efficiently, honestly and fairly.” However, the recent actions by the banks in question have been contrary to law. As a response to these illegal and unethical actions, saying “Do not do that” would hardly serve the purpose.

The interim report further asks questions like whether the law as it stands today needs to be different and what needs to be done for entities to act with fairness and honesty, obeying the law, and not to deceive or mislead.

The report also questions why entities should not provide suitable services with adequate care and skill in the best interests of the parties to whom they offer those services.

While the immediate role of the interim report seems to be to reveal and ask questions at this stage, it remains further to be seen what actions will ensue in the next round of the commission’s public hearings that are due to commence shortly.

Danske Bank scandal exposes money laundering risk

Daniel
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Danske Bank scandal exposes money laundering risk

Financial institutions are at greater risk for money laundering losses than ever before. The Danske Bank scandal reveals that even institutions in law-abiding nations have a high risk of money laundering losses.

For example, launderers reportedly used 15,000 accounts at Denmark’s largest bank for suspicious transactions. Disturbingly, the suspicious activity at Danske Bank’s Estonian branch went on for nine years from 2007 to 2015. Tellingly, Danske Bank made that revelation in a press release.

The suspicious transactions involved €200 billion ($235 billion). In particular, investigators labelled the “vast majority” of 6,200 Danske Bank customers in Estonia suspicious.

Lax Anti-Money Laundering procedures

“Danske Bank has previously concluded that it was not sufficiently effective in preventing the branch in Estonia from being used for money laundering in the period from 2007 to 2015,” the bank itself admits.

Lax Anti-Money Laundering (AML) procedures and limited enforcement of AML laws created the risks at Danske Bank, CNN Money reports. “Fragmented and inconsistent” regulation makes money laundering easy in Europe despite strict EU AML laws.

All launderers need to do to evade AML is put money into one bank account in any EU country. Launderers target lesser institutions, like Danske Bank in smaller countries like Estonia, because of weak AML regulations.

Risks from AML Failures are growing

The risks from AML failures are growing dramatically because penalties for money laundering are increasing.

For example, Denmark’s parliament increased fines for AML violations by 80%, The Guardian reported. Significantly, Danske Bank is already facing a £475 million fine in Denmark.

The European Union is expanding its definition of money laundering, Global Compliance News reports. For instance, the latest Anti Money Laundering Directive (AMLD) covers digital wallets, prepaid cards, cryptocurrencies, digital wallets, and art as well as bank accounts.

Therefore, the EU could prosecute cryptocurrency exchanges, digital wallet operators, issuers of prepaid cards, and even art dealers for AML violations. For example, it could prosecute Apple if launderers moved money through Apple Pay.

The AMLD creates new markets for AML insurance products. Providers of cryptocurrencies, digital wallets, e-commerce platforms, and even comic-book or art dealers might require AML insurance or bonding.

The EU is promising to increase the powers and capabilities of Financial Intelligence Units (FIUs) to better enforce AML laws. The FIUs are law enforcement units set up specifically to fight money laundering.

How AML is changing banking

AML regulations are dramatically changing banking. The latest AMLD eliminates anonymity for bank accounts and safety deposits in EU countries.

The same directive requires banks to report information on real estate owners to authorities. The same AMLD makes ownership details of EU-based companies’ publicly available information.

The AMLD could lower risks for insurers by requiring AML due diligence at financial institutions. In particular, the EU could require enhanced AML due diligence on transactions from “high-risk” countries.

They do not identify the high-risk countries, but the EU is preparing a list of nations that are “politically exposed to corruption,” Global Compliance News reports. Presumably that means countries with high-levels of corruption or money laundering.

It will require enhanced AML due diligence for transactions from high-risk countries. Under the regulations, EU members may require greater AML measures. It will allow only transactions from countries or institutions that comply with EU AML laws.

How Money Laundering threatens Insurers

The Danske Bank scandal proves that money laundering and AML are becoming grave risks to financial institutions. Insurers had better take notice because it will target them for AML enforcement at some point.

An obvious way to head off such enforcement will be to apply AML measures to all claims and premium payments. That would reduce the risk of launderers using insurance policies to get around AML laws.

A launderer could buy an insurance policy on a vehicle and deliberately crash it to generate a claim, for example. Such fraud is likely if the EU AML crackdown is successful.

Performing AML due diligence on clients and policies from high-risk nations could reduce the risk of such fraud. Stronger AML enforcement will force launderers to find new ways to move money.

The Danske Bank scandal shows how money laundering creates risks and opportunities for the insurance industry. Insurers that understand AML can avoid losses and exploit new opportunities created by money laundering.

Accenture finds more people are using wearable health devices than ever

Andrew
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Accenture finds more people are using wearable health devices than ever

More and more people are turning to technology to help them make positive strides in getting better ways to access care and benefit from simpler healthcare experience.

This upsurge in consumer demand for digital-based health services is creating a new model for care in which patients and machines are joining doctors as part of the healthcare delivery team, according to results of a survey from Accenture.

The Meet Today’s Healthcare Team: Patients + Doctors + Machines report surveyed almost 8,000 people across seven countries to assess the rates of adoption for health-related technology and people’s attitudes towards sharing electronic health records (EHRs).

Unsurprisingly, the adoption rate for health-related technology is increasing across the board with the exception of health-related website use which seems relatively steady.  Technologies, ranging from mobile apps to smart scales to wearables have seen significant growth in the past few years with no sign that this growth will slow.

And wearables are not simply ways to gather data and to monitor health.

Wearables also encourage healthy behaviours through subtle nudges such as a vibration to remind you to move after periods of inactivity or gamification and competition on data-sharing sites.  Some products can even warn of impending cardiac arrest.

The survey found that the number of people willing to share EHRs is also increasing. However, there is a clear preference towards sharing data with a doctor, medical practitioner or family member whereas sharing data with their employer or a government agency was treated with more suspicion. Use of wearables in the workplace to monitor employee efficiency may further heighten this suspicion.

Artificial Intelligence (AI) – which offers significant benefits for both the wearer and the healthcare provider – seemed to split respondents with just under half expressing a positive view of the benefits of AI when it came to interpreting their EHRs.

For insurers, the report highlights two trends of particular interest: the growth of wearable technology rising from 9% in 2014 to 33% in 2018 and the high numbers of respondents willing to share their data with a health insurance provider (72%).

Both trends indicate a growing opportunity for wider integration of technology and wearables with the health insurance which should benefit both the consumer and the insurance provider.

Since the first iterations of wearables in the early 2000s, which were little more than electronic versions of old-fashioned pedometers, the market has exploded.

An estimated 125.5 million devices were shipped in 2017 with forecasts that the market could almost double to 240 million devices by 2021.

Wearables Shipments 2014/2020 - Source: IDC Tracker
Wearables Shipments 2014/2020 – Source: IDC Tracker

This growth of wearables has overlapped significantly with developments in smart watch technology making products like the Apple Watch one of the best-sellers in this category.

Other products are broadening the range of what we would consider health-related wearable. Spire produces a breathing-monitoring device that helps manage stress and Neuroon is an eye mask that promises to improve your sleep.  Some firms are even promising clothes with built-in sensors.

The senior “Gold Rush”

Contrary to the assumption that this kind of tech is for younger and active users; a growing selection of wearable products are specifically aimed at seniors.

These ranges from more traditional products which gather and monitor health data to shoes equipped with sensors that sound an alarm if someone falls or check that wearer has moved recently.  In these cases, wearables are not only providing healthcare benefits but also quality of life benefits for seniors with increased, or sustained, mobility and independence.

And these products aimed at those aged 55 may be the next area of explosive growth. The trillion dollars market for senior-focussed products is being described as a “gold rush”.

This growth of products aimed at the lucrative seniors’ market would likely lead to even wider adoption of these technologies by the under 55s.  Biohackers, for example, are always looking for ways to repurpose medical technology to gain an edge.  In turn, these innovations are often what spark wider consumer adoption creating a cycle of adoption and innovation.

With wide adoption of external, surgically implanted external blood glucose sensors and recent FDA (Food and Drug Administration) approval for blood glucose implants in the US, implants are likely to be the next iteration of these advancements. One clinical study described the widespread adoption these as imminent: “perhaps even in the next decade.”

Opportunities for health insurers

In addition to investments in the technology aspects of this market, the growing overlap of technology and healthcare has attracted the attention of the health insurance market.

A recent CapGemini report forecasts that “wearables will impact all parts of the insurance customer journey” through personalized products, continuous underwriting, policyholder service & risk control and claims management.

Some of these ideas are not new and traditional insurers saw the benefits of wearables relatively early.  Early partnerships with firms such as Fitbit offered incentives and discounts based on the user’s level of activity.

However, the effectiveness and benefits of these initiatives are unclear as the data collected was minimal and often shared via the employer, something users were reluctant to do as Accenture found.

However, with thousands of healthtech startups and devices producing significantly richer sets of EHR data, there are growing opportunities to integrate wearables into health insurance.

Mountain View, California’s HealthIQ is offering fitness-oriented individuals more favourable insurance plans due to their active and therefore assumedly healthier lifestyles. HealthIQ surveyed over a million people and partnered with medical researchers to support this approach and had over $8 billion in coverage under management in May 2018.

Other startups are offering to coordinate data management between the insurance firm and the user, cutting the employer out of the picture.  Australia’s Fitsense is placing itself in the centre of this relationship by providing data analysis and processing to help build individual risk profiles on consumers for use by insurance and healthcare providers.

With such innovations and opportunities, the increasing use of EHRs gathered through wearables by health insurers is set to increase. This offers opportunities for both the consumer with targeted customized coverage, and insurers who can better manage their risks.

However, with insurers potentially holding massive troves of what amounts to users most personal information, the onus will be on insurers and data handling services to protect and manage this data carefully.

A data loss, or worse a data compromise, would significantly erode the confidence of users and likely stifle this opportunity for integration.

California fires force sale of Aspen Insurance to private equity firm

Daniel
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California fires force sale of Aspen Insurance to private equity firm

Climate Change is dramatically transforming the insurance industry. The troubled Aspen Insurance Holdings reportedly agreed to sell itself to private-equity giant Apollo Global Management LLC for $42.75 a share.

California wildfires, widely blamed on global warming, caused a $135 million (£100 million) underwriting loss at Aspen in 4th Quarter 2017, Artemis reported. Aspen is probably facing even greater losses from this summer’s California wildfires, which were apparently more destructive.

Fires and other climate-related catastrophes devastated Aspen’s reinsurance business last year. Observers blamed climate related disasters for 55% of the company’s losses in 3rd Quarter 2017, and 75% of the 4th Quarter 2017 losses.

Wildfires are not the only climate catastrophe affecting insurers. According to Insurance Business Magazine, Aspen took heavy losses from hurricanes Maria, Irma, and Harvey in 2017. The Magazine estimated Aspen’s pre-tax losses for the first three quarters of 2017 at $310 million. News reports did not specify hurricane loss amounts.

Aspen CEO Stephen Postlewhite resigned on 26 January 2018; a day after the company revealed the underwriting losses, Business Insurance reported. Disturbingly, Aspen admitted actual 2017 losses could be greater.

Private Equity profiting from Climate Change

Aspen’s problems were Apollo Global’s opportunity. The private equity fund will pay $2.6 billion for Apollo’s $12.9 billion in assets.

Apollo is one of several private funds shopping for insurance assets. Bain Capital Private Equity paid £1.2 billion ($1.5 billion) for Esure Group LLC in August. Cinven Ltd is reportedly in talks to acquire one of AXA SA’s retirement products units, Bloomberg claimed.

Private equity funds are buying insurers to gain the float generated by insurance premiums. Float is a stream of revenue that an investor can tap to make acquisitions or pay debt.

The strategy of using float to finance equity investments is a speciality of American investment legend Warren Buffett. Buffett used float from the auto insurer GEICO, and reinsurance operations, to build his Berkshire Hathaway empire.

Equity operators like Apollo Global’s Leon Black are trying to emulate Buffett by buying up troubled insurers. By purchasing Aspen, Apollo gains access to premiums from annuity provider Athene Holding Ltd and reinsurer Catalina Holdings Bermuda Ltd.

Aspen Insurance will go private in 2019

Insiders expect the Aspen-Apollo deal to close during the first half of 2019, Reuters reported. After the deal, Apollo will become a privately held portfolio company owned by Apollo Funds. Aspen’s board still needs to approve the acquisition.

Aspen Insurance Holdings has operations in the United States, the United Kingdom, Canada, the United Arab Emirates, Singapore, Ireland, and Australia. Its current headquarters location is in Hamilton, Bermuda.

Aspen Insurance Holdings trades on the New York Stock Exchange under the ticker symbol AHL. Aspen Holdings had a market capitalization of $2.455 billion and a share price of $41.12 on 31 August 2018.

Aspen reported a $14.8 million loss at the end of 2nd Quarter 2018. Stockrow data shows Aspen’s revenues declined by 13.07% during 2nd Quarter 2018.

Insurers facing tough times ahead

Scientists believe shifting weather patterns created by Climate Change caused by greenhouse gases caused California’s wildfires. Climate Change leads to high temperatures which makes the fire season worse.

“The weather patterns are just stuck,” Jennifer Francis a Professor at Rutgers University said. “They’re trapped.” Francis is an expert in atmospheric circulation.

Fires have taken a terrible toll on California this summer. The Chronicle estimated that wildfires destroyed over 1,000 homes and killed eight people by 3 August 2018.

The peak fire season in the Western United States is now nine days longer than it was in 2000, a study by Columbia University and the University of Idaho found. Insurers can expect increased fire risk around the world, Francis predicted.

“We’re seeing this mix of conditions across North America and Europe, but they’re all connected,” Francis said. Under those conditions, high underwriting losses might be the new normal for many insurers.

Interestingly, publicly held insurance companies might be one of Climate Change’s first casualties. Other publicly traded insurers are likely to follow Aspen’s lead and sell out to privately equity firms to cover underwriting losses.

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