China’s sovereign wealth fund increasing risk appetite

Paul
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China’s sovereign wealth fund increasing risk appetite

China Investment Corp. (CIC) is pulling out all stops to forge ahead with investments in the United States after a successful foray last year. Amid criticism aimed at China’s sovereign wealth fund citing lack of strategy and the ongoing “America First” agenda of the Trump Administration, the CIC is unfazed.

It isn’t just the US where China and the CIC are facing opposition against investment. According to the vice chairman of the CIC, Tu Guangshao, the country’s Sovereign Wealth Fund is meeting with resistance within other countries as well.

Although China stands to gain from the current process of global economic recovery, Guangshao cites “difficulties and challenges” related to “protectionism.”

In an interview with CNBC in Mandarin, Guangshao said: “As CIC and China make more foreign investments, we see the rise of protectionism in some countries and regions, be it the U.S. or Europe. They’re making some protectionist moves, some specifically targeting China.”

A Sovereign Wealth Fund (SWF) is an entity owned by the government of a particular country. The purpose of this fund is to protect and stabilize the economy, create diversity in exports, and earn better returns than through foreign exchange.

It forms a contingency fund for the government which can help in socio-economic development. In short, an SWF could be considered as an independent investment entity of the government, authorized to generate wealth through direct and indirect investment.

CIC progress

The CIC was established in 2007 by China’s State Council. The initial task of the CIC was to invest $200 billion of $1.4 trillion of assets that the Chinese government was holding at the time. When the CIC was created, Congress and financial analysts were skeptical, due to the sheer size of the SWF and the fact that it was government-owned, reporting directly to the State Council.

Over the years, the CIC progressed gradually. In 2008 it became merged with the International Forum of Sovereign Wealth Funds and signed up to a set of global standard principles for SWFs called the Santiago Principles.

In 2010, the CIC launched a subsidiary in Hong Kong called CIC International (Hong Kong). 2011 saw the establishment of the CIC’s first foreign office located in Toronto. Over the years, the CIC acquired several companies amounting to billions of dollars. In 2013, the CIC acquired Russian company Uralkali for $2 billion.

The year 2017 was good for the CIC despite rising opposition against them from the Trump administration. The CIC won a 45% stake in Avenue of the Americas and was negotiating to buy Logicor, a European warehouse company.

In 2017, the CIC posted a 37.55% rise which they attributed high profits from their overseas investments, and is currently headed by Chairman & CEO Ding Xuedong.

Strategy under questions

Although the CIC has become a force to reckon with, people are questioning the approach that the organisation is adopting.

For instance, expert commentator Tang Wei from mergermarket.com feels that the CIC lacks a coherent investment strategy. He claims that a source with close links to the Chinese government officials says that there seems to be an inherent lack of strategy and the Chinese are likely to be concentrating on the natural resources sector, shortly.

Wei further comments that the CIC recently missed out on a big deal with Citigroup last year due to pulling their feet. According to a Citigroup insider, the group put the proposition to the China Development Bank (CBD), but they asked for more time. In the meanwhile, Abu Dhabi jumped at a similar offer, and the CIC missed out on the deal.

The CIC is incredibly controversial within China. Critics have mooted the possibility that smart bankers are taking China for a ride by intelligent bankers trying to sell the CIC tainted goods.

People have also pointed out that China would have done much better if it had invested in oil instead of just buying dollars, five years ago.

Suspicious minds

With opposition to Chinese overseas investment on the rise under the Trump Administration, the US recently initiated an “anti-dumping investigation” against aluminium manufacturers in 2017.

In fact, it was pointed out in a recent CNBC article that China has its local brand of protectionism. While the Chinese government proclaims economic openness, there is evidence that points to hampering non-Chinese companies from operating smoothly within the domestic Chinese market.

Despite the vast coverage of Chinese goods flooding global markets, there is an inherent suspicion shared by several of the recipient countries. The US is now leading the pack, with the rumblings of a trade war against China.

Earlier this month, tariffs to the tune of $34 billion were slapped against each other’s countries with the possibility of another $500 billion to be imposed on Chinese goods by the US.

There is a rising opposition in several countries across the globe against the policy of the Chinese government to flood domestic markets. The primary concern is not only that it affects the local manufacturers of particular countries but also Beijing’s protectionist policies against exports to China from other countries.

The Indian government is looking into the possibilities of restricting the import of electronic and IT products from China. In line with this, India had recently imposed anti-dumping duties on 93 Chinese products. China sharply criticized this move as they felt it would severely affect the Indian economy.

Against all odds

Meanwhile, in the backdrop of opposition from various countries, the CIC forges ahead as it enters its second decade of existence. 40 years later since China’s “Reform and Opening-Up” program which they launched, the CIC is all set to put new development plans into place.

CIC vice-president Tu Guangshao quotes a poem in the context of the CIC’s aims and aspirations: “…the river travels and perseveres through mountains and canyons to form a waterfall whose magnificent spray can be viewed only from a distance.”

Guangshao further adds that although the road ahead is likely to be tedious and treacherous, they will persevere, and their accomplishments will be conspicuous amongst their international peers.

It will be interesting to see how the CIC is going to implement strategies based on these lofty claims, in the light of growing international opposition against Chinese trade policies.

On-Demand insurer Trov finds expansion in Arizona

Andrew
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On-Demand insurer Trov finds expansion in Arizona

InsurTech startup Trov makes a significant step towards its international expansion, entering the US market, as it begins to offer on-demand insurance to Arizona residents.

The company was pleased to announce the news of the roll-out on its website blog. Scott Walchek, Trov founder and CEO, author of the blog post said:

“We’re live in the USA. Our team has worked tirelessly toward this moment and we’re beyond excited that our friends and families can finally use what’s been enjoyed by users around the globe for the past couple of years.”

Trov also reported that it has receiving approval from 44 of the 50 States plus the District of Columbia, suggesting that national roll-out will follow soon.

In partnership with Munich Re as their underwriter, Trov is putting tech-driven insurance products within the reach of millions of Americans. This follows the company’s success in Australia and its recent move into the UK market.

Reached by email, Trov was unabashed about their ambitious plans to upend the insurance market.

“Insurance lags way behind the expectations of today’s connected consumer, and Trov gives them a radically new way to protect their things. What iTunes did to change the way people buy and enjoy music, Trov is doing for insurance – enabling people to protect whatever they want, wherever they are, for whatever duration they need – and only pay for the protection they use.”

Email statement from Scott Walchek, Founder and CEO, Trov

Building on initial success Down Under

Founded in 2012 by Silicon Valley veteran Scott Walchek and serial-founder Mark Dowds, Trov initially established itself in Australia in 2016, partnering with underwriter Suncorp Group. The UK followed in 2017, where Trov joined with AXA to offer services to the British market. This initial success, and a total of $85million in funding, has allowed the firm to establish itself as a key player in the InsurTech market.

One key vote of confidence is the company’s partnership with Waymo – formerly the Google self-driving car project.

Google Alphabet’s autonomous car venture has chosen Trov as the provider of rider coverage and will bundle comprehensive coverage from Trov into the overall cost of each ride. Waymo began rolling out its ‘Early Rider’ public test in Phoenix, AZ in mid-2018 which might explain Trov’s choice of Arizona as its first market. Tellingly, Waymo favoured Trov over other transport-centric InsurTech firms even though the company doesn’t highlight transportation as a key offering.

Trov declined to share user numbers but responded by email that the company has passed 1 million protected days. The company explained that “Given that many of Trov’s customers turn protection on and off for periods of time, days of protection is the core measurement the company uses to track growth.”

End-to-end technology

Trov appears focused on mobile, tech-savvy, Gen-Y and Millennial users and its marketing campaigns stress how easy and affordable it is to insure individual items on the go.

This segmentation in the US is very similar to campaigns Trov has run in Australia and the UK, reinforcing the company’s focus on this demographic. Trov highlights several key differences ranging from the user experience to the underlying policies they offer.

First, the app. The Trov app allows users to photograph an item and add it to their ‘my Trov’ inventory to quickly and easily receive coverage. Although the photo-based approach might appear to be similar to Cover.com, which uses photos of items to link a user to a broker, Trov is the also insurer. This means that the entire transaction takes place within the Trov app in a single session.

Moreover, the app also allows users to insure items for short periods of time, as little as a few hours.

Second, premiums. Trov is promoting ‘smart premiums’ where the cost of coverage is linked to the market price of the item insured. As the item’s value depreciates over time, Trov recalculates and reduces the premium to reflect this change. Although there may be a point where the depreciation reduces a claim below the actual replacement value – say where an older item is no longer available so a newer, more expensive replacement is required – this feature should again appeal to younger consumers looking for savings.

Third, Trov has a low and no-questions-asked approach to claims payments. Similar to Lemonade, the Trov app uses a chatbot backed up by fraud-detection AI to settle claims.

When the bot raises red flags, the claim is routed to a claims team who follow up with the claimant.

Otherwise, the company brags that claims are settled in as little as three seconds.

Claims settlement – InsurTech killer feature?

Trov’s simplicity and offering ‘pay-as-you-go’ micro-policies should prove attractive to connected consumers used to on-demand services. However, their rapid claims process might be the ‘killer feature’ that differentiates InsurTech firms like Trov and Lemonade from traditional insurers.

No matter how smooth and simple the purchase or extensive the coverage of a policy, the real test of any insurance is when a claim is made.

By offering fast, almost instantaneous settlement, Trov and other InsurTech firms like Lemonade, are signifying a clean break from the traditional approach of an arduous claims process. Not only does this satisfy customers who are increasingly used to fast, on-demand services, but there is a significant cost saving where fewer human claims adjusters are longer required.

Traditional firms respond slowly

Unsurprisingly for a business as conservative as insurance, traditional firms seem slow to respond to these challenges. Most major insurers such as Geico, Progressive and Nationwide offer apps to customers but these are often no more than digital policy wallets with some additional features.

Even online providers like Allstate’s Esurance are essentially offering a traditional approach of blanket policies and human claims adjusters, albeit ones summoned via the app.

Other established firms are being more innovative and in addition to underwriting Trov in the US, Munich Re has launched its own Digital Partners (DP) venture to take a more tech-led approach.

However, while traditional firms seem more focused on the front-end user experience such as digital portfolios, InsurTech firms like Trov are building end-to-end tech solutions.

Unlike firms such as Cover.com and EverQuote which are using tech to make parts of the insurance process more efficient, Trov and others imagine upending all parts of the insurance process with tech. Trov, Slice, Lemonade, Sure and Coya are all using technology to change everything from the user experience to the policies themselves.

However, while this group may pose the biggest challenge to the industry, the difficulty that companies like Trov face is to ensure that a highly efficient market, particularly one offering short-term, low-cost micro-policies, is one that is still profitable for the provider.

Trov’s US roll-out will be a test of that business model and one that other firms, traditional and tech, will be watching carefully.

Rising US Dollar puts Latin American economies at risk

Daniel
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Rising US Dollar puts Latin American economies at risk

The rising US dollar is increasing the risk of a serious global economic crisis. The dollar’s rise has triggered economic chaos in Latin America that might spread around the world.

Major Latin American economies are at serious risk for inflation, capital flight, and debt crises because of the stronger US dollar. The Federal Reserve (Fed) is magnifying the risks by raising interest rates in an attempt to prevent inflation in the United States.

The Fed raised short-term interest rates on 13 June in an attempt to cool the economy, Bankrate reported. The Fed is trying to encourage investors to move their money out of stocks and into short-term instruments such as US savings bonds.

Such policies hurt Latin America by diverting investors from Argentine or Brazilian debts to US treasury bonds. The Fed’s moves and the strong dollar make the situation worse by increasing the cost of borrowing money with higher interest rates.

A strong dollar raises the cost of borrowing because most of Latin America’s government debt is in dollars. Nations have less money to pass to pay off more expensive debt as a result of the strong dollar.

Countries like Argentina were having trouble borrowing money before the dollar started rising, economists Joseph E. Stiglitz and Martin Guzman noted. Now they face more expensive debt and severe limits on borrowing.

Argentina in currency crisis – Again

A currency crisis is already underway in Argentina where the peso lost 19% of its dollar value during the first three weeks of May 2018.

Currency depreciation created an economic crisis by making it more expensive for Argentina’s government to borrow money. Consumer prices in Argentina have been rising by 25% a year for some time.

That forced the government to turn to the International Monetary Fund (IMF) for help. The IMF approved a $50 billion financial deal for the country on 5 June.

The deal was needed to prevent an economic meltdown, Argentine President Mauricio Macri claimed. Macri believes Argentina faces a complete economic collapse without the loan.

An IMF loan can backfire and make the situation worse. Austerity policies imposed by a similar IMF loan in 2001 are widely blamed for an earlier Argentine economic crisis that included a 25% unemployment rate.

The IMF’s economic policies are unsustainable and will make long-term economic growth difficult in Argentina, Stiglitz and Guzman predicted. Those policies are also politically unpopular.

Macri’s IMF agreement sparked mass protests in Buenos Aires. Future measures like the elimination of utility subsidies may spark even more unrest.

The Argentine stock market has displayed little faith in Macri’s policies. The country’s benchmark MerVal stock index fell by 8.8% on 27 June, Reuters reported. Measures such as increasing bank reserve requirements, and lowering caps on foreign currency holdings, failed to reassure investors.

The stock selloff caused the Peso to fall by 1.2% on 27 June. A US dollar was worth 27.43 Argentinian pesos at the end of trading on that day.

That erased the gains made during Macri’s administration, by taking the Peso back to where it was when Macri took office, Reuters pointed out. The Peso was trading at 72.43 to the dollar in September 2015.

Brazil battling inflation

Like Argentina, Brazil is battling both inflation and rising political unrest.

Brazil’s National Monetary Council lowered its inflation target for 2021 to 3.75%. That number is above the 2018 inflation rate of 3.5% but below the projected 2021 rate of 4.05%, Statista data indicates.

The Council acted after a truckers’ strike drove inflation to a two-year high in mid-June. Inflation rose to 3.68% because of product shortages created by the strike. Inflation had fallen to just 2.86% at the end of May.

Inflation controls are part of Brazil’s effort to attract more international investment. Inflation is a politically sensitive issue in Brazil, where hyperinflation made life miserable for the middle and working classes for decades.

Like Argentina, Brazil has been plagued by a sluggish economic recovery that is heavily dependent on foreign investments and debts. That economy is now threatened by deflation of food prices.

Both Argentina and Brazil are heavily dependent on agricultural exports. Food prices are suffering depreciation because of a record harvest.

The escalating trade war between the United States and its trading partners has the potential to increase food deflation. Large amounts of agricultural products might get dumped on the international market at low prices if they cannot be sold in traditional markets.

That can make Argentine and Brazilian agricultural products less competitive on the global market and weaken their economic positions. Beneficiaries of this situation would include food importers like the United Kingdom, Japan, and China.

Rate hikes and inflation risks are worldwide

The risk from inflation, Fed interest rate hikes, depreciation, and the strong dollar extends worldwide.

Moody’s increased the credit risk rating for several emerging market nations on 27 June – Ghana, Mongolia, Pakistan, Sri Lanka, Turkey, and Zambia joined Argentina on Moody’s risk list.

“Countries with large current account deficits, high external debt repayments, and substantial foreign-currency government debt are most exposed to the impact of a stronger US dollar,” Moody’s Global Managing Director of the Sovereign Risk Group Alastair Wilson told the press.

The strong dollar is a burden on countries with low-foreign exchange reserves, Moody’s reported. Moody’s analysts believe countries with higher exchange reserves such as Chile, Colombia, Malaysia, and Indonesia might weather the storm.

Risk analysts need to pay close attention to the Federal Reserve’s actions. The policies of America’s central bank can generate inflation and economic chaos around the globe. The side effects of inflation include political unrest.

Carillion collapse causes domino effect on trade credit claims

Paul
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Carillion collapse causes domino effect on trade credit claims

There has been a surge in the number of trade credit insurance claims during the first quarter of this year 2018 as tough trading times continue to harm firms badly, according to Association of British Insurers (ABI) recent report.

The number of claims was estimated at 3,966 which was a 50% increase on the previous quarter, and has been attributed to the recent insolvency of construction giant Carillion. With an average of over 40 new claims on a daily basis, ABI puts these figures at an all-time high since Q3, 2009.

Mark Shepherd, Assistant Director, Head of Property, Commercial and Specialist Lines, ABI commented on the latest financial crisis: “The demise of Carillion is a powerful reminder of how trade credit insurance can be a lifeline for businesses in these uncertain trading times.”

Shepherd further added: “This is a tough time to be in business and it is not getting any easier. The collapse of Carillion was one of many high-profile major insolvencies, which dramatically highlighted how the ripple effect of a company failure can have a devastating impact throughout the supply chain.”

Construction giant Carillion finally buckled under a massive £1.5 billion debt in January 2018 following failure to secure a bailout from the government. Out of 43,000 Carillion employees, 20,000 of them are from the UK.

Insolvency service, PricewaterhouseCoopers (PwC) has addressed the employees on the Carillion website’s ‘Employees’ page, however, advising them to report to work as usual unless ‘instructed otherwise’ and they will be paid their salary as usual.

The Financial Times observed on the latest development with a comment that the Carillion’s liquidation would be felt outside Britain as well.

Carillion debts and mismanagement

Construction giant Carillion provides facilities management and ongoing maintenance. The company has worked on several private and public projects in the UK and is identified for provision of services to the public sector. Carillion is part of a consortium for construction of the HS2 high-speed railway line.

The company maintained 50,000 homes for military personnel, provided meal services for 218 schools, spent £400 million for revamping of the Battersea Power Station, maintained 50 prisons, provided 11,500 hospital beds under the NHS Scheme, and had sunk £1.4 billion in the HS2 joint venture.

Carillion’s half-yearly losses of £1.15 billion were added to an existing deficit of £900 million during December 2017.

The main reason for the company’s collapse is attributed to a series of cost overruns with three significant projects – Midland Metropolitan Hospital, Royal Liverpool Hospital and Aberdeen Bypass.

These projects and a set of others were found to be less profitable than previously estimated. The company then approached the government for a bailout of £20 million which the government refused, stating that it might be perceived that they were “bailing out yet another private firm.”

Cabinet Office Minister David Lidington stated that it could not be expected for taxpayers to bail out a private sector company, however, in contradiction of this statement, the National Audit Office noted that “the collapse of construction giant Carillion will cost UK taxpayers an estimated £148 million).”

The spillover effect of the Carillion collapse has hit other companies in varying degrees. Big names like Galliford Try, Balfour Beatty, and Morgan Sindall provided reassurance to their investors that all is still well with them. Others like Van Elle Holdings, Speedy Hire, and John Laing Infrastructure Fund have taken a beating, but they all claim that they are taking remedial measures.

Meanwhile, Carillion’s partner on the HS2 project, Kier, claims that they have a contingency plan and are working closely with clients to ensure business continuity.

Trade Credit Insurance

Trade credit insurance (TCI) is a provision where cover is provided to a business if customers do not pay or make delayed payments. This facility offers a buffer to a company for extending credit and making funding more accessible at all times, which results in the smoother functioning of the business.

It also helps a business to sell their products or services at more competitive rates. The outer time limit for providing trade credit insurance is usually set to 12 months. Cover can be obtained across different countries, and the insurers also assist with advice regarding credit risks, particularly concerning new markets. A company can apply for credit risk allocated to individual customers or all customers within its portfolio.

There are two categories of risk under trade credit insurance:
Commercial risk – Customers cannot pay their dues due to specific underlying financial problems like insolvency or default in payments due to involuntary or voluntary reasons.

Political risk – In the customer’s country, there may exist a prevailing political crisis like war, military coup, and natural disasters like floods or earthquakes. Alternatively, there may be some economic crisis like currency shortage or demonetization, which may prevent the customer from transferring the money to the company’s account.

Why TCI failed for Carillion

Although Carillion also had trade credit insurance, the warning signs were ignored and insufficient remedial action was taken to avert a financial crisis. The purpose of TCI is to assure a company that in the event of non-payment of dues from debtors, funds will still be available for the company to function smoothly.

However, in the case of Carillion, enough corrective measures weren’t taken despite the warning signs of an impending financial disaster. In July 2017 when CEO Richard Howson stepped down, Carillion chairman Philip Green said that the company would fall short of its targets for the reduction of debt in 2017.

Green stated: “…we have therefore concluded that we must take immediate action.” Although attempts were made to remedy the looming crisis, the company failed to come up with a practical action plan. The total debts incurred extended well beyond the limits of the trade credit insurance coverage, which led to Carillion going down under.

What remains to be seen now is how the spillover effect is going to impact the financial atmosphere of the region and the dynamics of the aftermath.

US Supreme Court Amex ruling changes credit card business

Daniel
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US Supreme Court Amex ruling changes credit card business

The United States Supreme Court greatly increased the amount of control that credit card companies, banks, and online platforms have over the retail process in a controversial ruling.

Gag orders that prevent retailers from encouraging customers to use cheaper alternatives to the American Express card are legal in the United States, the Court ruled on 25 June. A group of retailers had argued that gag orders had encouraged monopoly an illegal practice under anti-trust laws in Ohio v. American Express Company.

Merchants that accept American Express (Amex) cards have to sign a contract preventing them from telling customers that alternatives like MasterCard, Visa, or debit cards might be cheaper. American Express makes its money by charging fees to merchants and cardholders. Amex cards are notoriously more expensive than other credit cards in the United States.

Two-Sided Markets

Critics of the decision in Ohio v. American Express Company fear it will encourage operators of “two-sided markets” to adopt anti-steering rules like those employed by Amex.

A two-sided marketplace is a platform that connects customers directly to a service or goods. Many of the biggest technology companies in Silicon Valley including Amazon, eBay, Uber, Facebook, PayPal, and Netflix operate two-sided markets. Those companies might benefit from the decision, Axios speculated.

The fear is that under Ohio v. American Express, other companies will emulate Amex’s practices. Uber might be able to prevent drivers from telling customers they can pay with credit cards that charge a higher transaction fee for example.

An even greater fear is that a company like Uber or Amazon might enter into an exclusive arrangement with a credit card company like Amex. Under the arrangement, Uber or Amazon would accept MasterCard and Visa, but not tell customers they can use those cheaper payment options through its app.

A trade organization whose members included Alphabet (Google), Facebook, and Amazon sided with American Express in the case, Axios reported.

Monopoly fears in Silicon Valley

Ohio v. American Express has become caught up in a larger argument over anti-trust laws in the United States.

The decision will encourage the growth of monopolies and limit government control over big business, Columbia University Law Professor Tim Wu charged in a New York Times editorial. Critics like Wu fear that gutting anti-trust law will take America back to the Gilded Age of the 19th Century when giant corporations controlled large segments of the national economy.

Ohio v. American Express would allow companies to put a 2% to 3.5% tax on all credit card transactions, Wu claimed. That would increase operating expenses for merchants and raise prices for consumers.

Another effect would be to stop merchants from telling consumers about cheaper next-generation payment technologies such as cryptocurrency, or Peer-to-Peer payment solutions. The credit card providers might be in a position to charge higher fees because they would have less competition.

Risks from litigation

Ohio v. American Express demonstrates how high courts can disrupt markets with rulings. Such actions can completely change the rules of business overnight.

The long-term effects from Ohio v. American Express are unclear but it is likely to change some business practices in the United States. The decision might influence future litigation in English-speaking countries like India and the UK, where courts often follow precedents set in other common-law nations.

Something else is clear the issues raised by Ohio v. American Express are likely to spark major political battles in the United States that will affect the markets. American business may soon get a new set of rules that will affect the rest of the world.

Lemonade takes Wefox One insurance to court

Timothy
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Lemonade takes Wefox One insurance to court

New York-based insurtech Lemonade is suing Wefox’s One Insurance for copyright infringement of its Intellectual Property (IP). Julian Teicke, founder of One Insurance, and parent company Wefox Group are included in the lawsuit.

The IP in question is Lemonade’s website and underlying technology which the plaintiff claims Wefox reverse engineered in order to come up with One Insurance. The allegations imply that Wefox are in violations of the Computer Fraud and Abuse Act.

Lemonade CEO Daniel Schreiber accused Wefox’s founder and his team of creating numerous false accounts which they used to initiate claims through the Lemonade app and website. All of this in a bid to reverse engineer Lemonade’s revolutionary mode of operations. Reverse engineering is the process of breaking down a finished product in order to find out how it works. This is often done when someone want to replicate the design and functionality of an existing product or service.

In a post on LinkedIn, Schreiber said, “They methodically reverse engineered Lemonade, and then used the bootlegged IP to create apps, websites and products that are facsimiles of Lemonade,”

This is clearly a breach of their contractual obligations by using the fake accounts. The contractual obligations to customers categorically states that users on the Lemonade platform should not “copy content … to provide any service that is competitive … or to … create derivative works”

When Lemonade found out what Wefox was doing, emails were sent to warn them against their plans. A plea that fell on deaf ears even after a ‘seize and desist’ letter was sent. Despite this, Wefox continued to send the false requests to Lemonade’s servers.

At this point, Lemonade decided to pursue the matter by involving the Southern District Court of New York. “This didn’t have to end in court,” were Schreiber’s remarks on taking the legal action.

In his LinkedIn statement, Schreiber said that any proceeds realized from the lawsuit would be donated to code.org – a non-profit organization that promotes diversity by expanding access to computer science for minorities.

Before pointing out that getting ahead in the insurance business was no easy task. “We believe in the tech revolution insurance is experiencing, and alongside many others, work hard to ensure regulators, investors, and the public believe in the integrity of these innovations,”

He added “That’s why we hold ourselves to strict legal and ethical standards, and it’s why we call out those who do not.”

Lemonade claims to have revolutionized the world of insurance by fully automating their process. According to the FAQ section on their website, Lemonade is available for signup only through mobile apps and their website. The company has taken a completely different approach to the insurance business. In a bid to make their business operations more efficient, they expedite this process whereby making the customer experience much better.

An update from a Wefox representative said:
“At Wefox group, we have 160 talented people whose hard work has created a unique business that is challenging the status-quo every day. These allegations have no merit and ultimately appear as an attempt to disrupt our business rather than a serious dispute…”

German Finance Minister calls for EU-wide unemployment insurance

Paul
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German Finance Minister calls for EU-wide unemployment insurance

German Finance Minister Olaf Scholz suggested that the time has come to create a Europe-wide network for unemployment insurance to breathe life into the financial transaction tax, in a recent interview with Der Spiegel, the online German news channel.

Talking to the journalists Christian Reiermann and Michael Sauga, Scholz said:

“I’m in favour of supplementing national systems for unemployment insurance with a reinsurance for the overall eurozone,” Mr Scholz said. “If a eurozone member faces an economic crisis that leads to massive job losses and a heavy burden on its social-security system, the country could borrow from this joint reinsurance fund,” he added. “Once the recession is over, the country would pay back the funds it borrowed.”

Emmanuel Macron’s proposal

It was pointed out to Scholz that the recent comments of German Chancellor Angela Merkel regarding French President Emmanuel Macron’s proposal were seen as rather lukewarm and unambitious.

Macron, championing the European cause, has vowed to reform the bloc and is pushing for the creation of a parallel budget for the eurozone.

Scholz however defended Macron’s stand, stating that Germany is not a presidential democracy like France. He said that the matter would have to undergo a thorough process of interviews, discussions and texts. Out of the 10 billion people who are estimated that will be living on our planet by the middle of this century, Scholz said, in order for the voices of 500 million European voices to be heard, these issues would need to be channelled through the European Union (EU).

Scholz also disputed the claims that Brussels is interfering in matters of daily life in Europe. He emphasized that the EU have still not come up with any concrete plans on the immigration issue, and much of Macron’s proposals are focussed on that concern.

In response to the emerging popular view of Germany being called the “hegemon of Europe”, Scholz rubbished the term, emphasizing strongly that Germany shouldn’t be only focussing on certain areas of Europe like unemployment in southern European countries or security policies of East European countries. Germany, he said, needs to contribute to “strengthening solidarity in Europe.”

Macron & Merkel at Franco-German Summit press conference June 2018
Macron & Merkel at Franco-German Summit press conference June 2018

Reinsuring the entire eurozone

When it was suggested to him that it would seem that cash would flow to the south from the north, Scholz denied that it is so simple. There is a certain social responsibility of individual states, he said, where each should have independent unemployment protection, a social safety net if you may, and a robust minimum wages policy in place.

He further added that all eurozone countries need to be aligned in terms of corporate tax rules to avoid big countries pitting against each other. Instruments to shore up economic convergence also need to be developed, he said.

When asked to elaborate, this is where Scholz came out with his recommendation for reinsuring the entire eurozone. If for instance, a country was experiencing considerable job losses resulting in a burden on its social security system, it could draw upon this joint reinsurance fund which could be paid back at a later date.

When asked if Germany would bear the risk, Scholz said, absolutely not – on the contrary, Germany would profit from the entire process. There would be no impact on the German Federal Employment Agency’s reserves and no debts would be incurred. The overall financial system would gain more stability and the German unemployment system wouldn’t be disadvantaged.

Scholz drew a parallel to the American system where unemployment insurance contributions are made by individual states, which would have access to funds in case of an unemployment crisis.

Possible opposition and consequences

The Spiegel interviewers hinted at the fact that conservatives may construe this step as a “liability union” and how practical would be the feasibility of its implementation in this light?

To this, Scholz recalled the stance taken by Germany during the financial crisis of 2008 where funds for the “reduced hours compensation programme” were drawn from the Federal Employment Agency’s reserves.

He expressed his conviction that the same method could be applied for the eurozone. This could be funded by collection of transactional tax, he said.

Other EU countries have resisted such tax revenues. Scholz was asked what his stand is on the issue. He said that Germany doesn’t want to preach European sovereignty without practicing it. A European financial transaction tax could be modelled on the lines of the German federal tax system where states and the federal government reach a common understanding regarding the taxation policy.

It was pointed out to Scholz that there could be opposition to such a proposal, but he was optimistic. Even if it hasn’t been previously discussed, the time is ripe for such a discussion, especially in the light of the potential shortfall in revenue following UK’s exit from the EU next year.

Sources of the funding

Regarding the money involved, Scholz felt that about 5 billion to 7 billion euros could be generated, not enough for the entire coverage but still a substantial contribution.

The proposed EU digital tax targeted at large internet-based companies for prevention of tax evasion could also add another 5 billion euros to the deal.

With allusions to Italy’s opposition to the stability pact, Scholz disagreed with the allegations and expressed his confidence in Italy’s pro-European stance said that it values the euro. He felt that ultimately, Italy will act in accordance to the euro and Europe.

In the event of any dissent, said Scholz, even if a single country did not fall in line, the EU consists of 28 countries, so ultimately, the disagreement of one member shouldn’t have a major impact if the major states were in concurrence.

Olaf Scholz belongs to the centre-left Social Democrats party in coalition with the centre-right Christian Democrats led by Merkel and sister party, the Christian Social Union. Merkel’s proposals were published on 3 June 2018 in Frankfurter Allgemeine Sonntagszeitung where she stressed on adding strength to the EU immigration policy with the possibility of creating a small investment fund.

The EU leadership is expected to take up these proposals during the summit to be held on the 28 and 29 June 2018, with a possibility of increasing the eurozone bailout fund. Germany had previously opposed this, stressing on the need for banks to first clean up their own act by clearing non-performing loans before putting forth such an insurance proposal.

EverQuote announces IPO becoming first US InsurTech firm to go public

Andrew
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EverQuote announces IPO becoming first US InsurTech firm to go public

InsurTech startup EverQuote filed S-1 paperwork with the US SEC on 4 June making it the first US InsurTech firm to go public. Led by JP Morgan and Bank of America Merrill Lynch, EverQuote hopes the IPO (Initial Public Offering) will raise around $75 million (£57 million) from the sale of 4.69 million shares, of which a third are currently held by stockholders.

Launching with the ticker symbol ‘EVER’, the IPO should net EverQuote $43.2 million. Some market analysts are describing this $400 million valuation as “tame” suggesting EverQuote will see significant interest from investors.

This cautious approach bodes well for EverQuote at a time when several other competitors are entering the InsurTech market and customers seem increasingly wary of sharing their data online.

InsurTech with an unusual pedigree

The 10-year-old Cambridge, MA-based firm provides a marketplace for customers seeking competitive quotes that are matched to their needs using a combination of personal data and proprietary machine learning algorithms.  EverQuote generates its income from ad revenue and the sale of customer referrals to providers.

The company cites a data-led approach as its competitive advantage and boasts of over 1 billion consumer data points and the generation of over 35 million quotes which feed its algorithms.

Originally founded as AdHarmonics in 2008, EverQuote differs from many other tech firms in the makeup of its leadership team.  Unlike the 20-something leadership of many startups, founders Seth Birnbaum and Thomas Revesz are both in their mid-40s and EverQuote is their third venture together.

This combination of experience and solid technical backgrounds – both are MIT alumni and Birnbaum holds several technical patents – may make EverQuote attractive to more conservative investors, some of whom may be cautious following the sharp drop of tech stocks after other high-profile Initial Public Offerings.

Caution in the face of challenges

Currently, EverQuote generates the majority of its income from auto insurance policies but plans to branch out into a full range of consumer insurance products including property, home and life policies.  This will broaden the company’s appeal and mitigate one of the key risks highlighted in the S-1 paperwork, reliance on a single market.

EverQuote also faces challenges from other online insurance marketplace sites such as Precise Leads, MetroMile and Hometown quotes.  Several of these other marketplaces share big-name insures such as Farmers and Allstate with EverQuote making a bidding war a possible threat in the future.

Meanwhile, other InsurTech firms like WeFox and Lemonade offer a wider set of services such as their own policies or a more streamlined settlement process.  While these competitors don’t necessarily challenge EverQuote’s marketplace model directly, younger consumers looking for a more tech-centric approach might be attracted to these more innovative platforms.

Ultimately, EverQuote’s biggest risk might come from consumers themselves.

EverQuote shaky customer experience

EverQuote is aware of the challenges it faces and is clear-eyed in its evaluation of the risks in the S-1 documentation.  But of these risks, it seems that consumers, and their attitudes to online privacy, might prove to be one of the biggest.

EverQuote Reviews & Complaints @ Better Business Bureau
EverQuote Reviews & Complaints @ Better Business Bureau

Many online reviews of the company are negative but closer inspection reveals that many complaints seem to stem from a misunderstanding of the company’s service.   Several negative reviews claim that the company “sold” their data after the customer was contacted by an insurance broker, missing the fact that this is precisely the service EverQuote is offering.

Some consumers may think that the company will provide quotes on-screen rather than in a follow up call or email from a broker but the company’s site seems clear.

“Either connect online or over the phone to compare quotes and maximize your savings.”

From the EverQuote ‘How It Works’ Section

Moreover, the collection of data is explicit so complaints of this kind, although concerning to the firm and its reputation, seem misguided.

Nevertheless, customer concerns over data privacy, no matter how spurious, don’t bode well for EverQuote or any online business that needs to collect consumer data to deliver a product.

Attitudes to privacy may pose biggest threat 

Recent privacy scandals have increased the public’s concern over sharing information online but rather than deserting the social media firms who were the ‘original sinners’ – some of whom remains opaque about how they collects and use data – consumers instead seem to be punishing companies that are explicit about how they collect and use personal data.

While younger, tech-savvy consumers may be “very confident” in online sites’ ability to protect their data, older consumers have significant doubts.  Worryingly for InsurTech firms, it is older consumers, who are more likely to own property, vehicles or want life insurance, that make up a greater share of the market.

These growing privacy concerns should be a worry for everyone in the online space but particularly in InsurTech which relies on a user’s willingness to share large amounts of personal information online.  EverQuote, along with any other tech startups that rely on consumer data, will encounter stronger headwinds as privacy concerns grow.

This is despite the public’s seeming willingness to continue to share personal information freely with platforms such as Facebook, Google and Amazon.  Similar to GDPR in Europe, any future US privacy regulations would likely result in greater entrenchment of these incumbents, posting a major threat to small startups.

For now, however, EverQuote can enjoy the distinction of leading the pack in InsurTech IPOs in the US with a conservative offer that will entice investors and give the firm the capital required to grow its market share and expand its service offerings.

EU regulator publishes guidelines on MiFID II requirements

Timothy
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EU regulator publishes guidelines on MiFID II requirements

The European Securities and Markets Authority (ESMA) recently published report updates in regards to the transparency and market structure issues under the Market in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).

The purpose of the publication is to ultimately ensure that the MiFID II and MiFIR supervisory measures are observed and upheld by all stakeholders in the financial markets.

For a long time, there had been many queries and concerns raised by investors and other stakeholders. The ambiguity of some of these legislations would then open up loopholes that would somehow lead to infringements from either party. It is for this reason that ESMA found it necessary to provide the relevant responses to the questions.

Examples of questions and answers highlighted in this publication are in the below format:

Q – “If an investment firm (firm A) merely transmits a client’s order for execution to another investment firm (firm B) who uses algorithmic trading, is investment firm A engaged in algorithmic trading?”

A – “No. The transmission of an order for execution to another investment firm without performing any algorithmic trading activity is not algorithmic trading.”

While most of these regulations are purely preventive and for the good of all stakeholders ESMA has made sure that it retains the power to take immediate action if need be. For example, ESMA reserves the right to require a person or institution to reduce or eliminate their derivative positions. In cases where ESMA suspects foul play, it could restrict a person’s ability to enter certain positions in the derivative markets.

Since its creation, ESMA has been at the forefront of assessing risks to investors, markets and financial system within the European Union, besides contributing to the MiFID II.

What is MIFID II

Implemented first in November 2007, the Market in Financial Instruments Directive (MiFID) is a regulatory framework whose purpose is to create a level playing field for financial firms doing business in the European Union.

Although the initial legislation coincided with the financial crisis of 2007, it left a lot to be desired because it mainly focused on equities thus leaving out all other assets such as derivatives and financial products.

Dynamic market conditions and technological advancement brought about the need to create more relevant regulation. As such, MiFID underwent revisions and was first implemented fully in January 2018 when it came into action.

At the same, there was the introduction of the Markets in Financial Instruments Regulations (MiFIR) which in totality made up the MiFID II; legislation made specifically to regulate the financial markets.

MiFID II purpose

The key purpose of MiFID II is consumers and investors protection, in addition to increased transparency through regulation and oversight. Financial institutions have the responsibility of applying these (level 1 and level 2) provisions therefore it is required of them that they fully understand their scope.

As such, this continuous process of Q&A will ensure that all market players uphold their responsibilities accordingly. MiFID II focuses on regulating include policing of trading venues, pre and post-trade data transparency, high frequency/algorithmic trading and extensive reporting.

Overall, one of the main agendas that MiFID II brings to the table is moving trading away from the traditional phone calls and into electronic channels that are traceable.

Who is affected by MiFID II

Stakeholders who are affected by MiFID II include financial institutions such as brokerage firms, institutional investors, exchanges, high-frequency traders, banks and hedge funds. Ultimately all the regulations are meant to benefit the investor so they too will be affected.

MiFID II also allows non-EU country firms to provide professional services as long as the said firms are able to meet the minimum requirements that have been set by the ESMA.

Now that financial firms are required to have full transparency on secondary trading all firms are in a position to know the true value of a tradable assets. Information on the volume, prices and times at which different assets were traded should be provided to ESMA. Previously, it was nearly impossible for a retail investor to know how liquid the markets truly are and how much trading was taking place at any particular time.

The reinsurance industry also welcomed this move with open arms considering the fact that their clients will need to disclose the true value of their investments. By doing this, the reinsurance firms will know the true value of their risk/liabilities.

InsurTech startup Coya raises $30 million in Series A funding

Andrew
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InsurTech startup Coya raises $30 million in Series A funding

Berlin-based insurtech startup Coya moved closer to its goal of modernizing the insurance industry on last week as the two-year old firm closed their Series A round raising $30 million.

Peter Thiel’s Valar Ventures led the round suggesting a vote of confidence from Thiel who was part of Coya’s $10 million seed round in 2017.

Coya announced that this investment would be “the fuel to develop digitally focused insurance solutions that are fairer, faster, and future ready”.

The startup was founded in Berlin, Germany in 2016 by Andrew Shaw, Dr Peter Hagen and Sebastian Villarroel. Each partner brought solid industry and technical knowledge to the firm, Shaw and Villarroel hailing from credit and lending startup Kreditech and Hagan as the former CEO of Vienna Insurance Group. Since their founding, Coya has raised $40 million between its Seed and Series A rounds and has expanded its workforce to 55 employees.

Critical to their strategy, the startup is also reported to be close to securing regulatory approval to operate as an insurer in Germany, a licence which opens up access to the entire insurance market in the European Union. Despite the additional time such regulations required, Coya stresses that becoming a licensed firm allows them to “focus on simpler, more transparent and more flexible products”, in addition to providing better and faster customer experience.

Coya is one of several InsurTech startups looking to dominate the nascent market where technology is being offered as a solution for everything, from doing away with old-fashioned paper policies to improving actuarial services through AI (Artificial Intelligence) and Big Data.

And it seems that consumers are upbeat and ready for it. Ernst and Young (EY) reported double-digit growth in the adoption of fintech products between 2015 and 2017 noting an adoption rate of 33% in 20 key markets surveyed.

Money transfer was the most widely adopted fintech solution with around 50% of respondents saying that they had used this kind of service, but insurtech was also growing rapidly with 24% of respondents reporting use of a fintech insurance service.

Different ways to insurtech

Startups like Coya, their German rivals Wefox and Element and US firm Lemonade are all taking a firmly tech-led approach to clearly differentiate themselves from the traditional firms. However, traditional banks and large insurance organisations are also keen to jump on the insurtech bandwagon, albeit using significantly different approaches.

Some are likely to simply offer an online space to store policy documents. For others, insurtech means a different brokerage platform to sell the same products as illustrated by Deutsche Bank’s partnership with broker Friendsurance.

Meanwhile, others are pushing into new, innovative areas like Munich Re’s Digital Partners (DP) venture which is promising a range of solutions and new tech-led products.

Although the approach of the traditional firms may be more conservative, sheer size and market foothold may still allow them to fight off the challenges from tech-led startups. However, for now, insurtech remains a competitive field with a number of companies offering very different technical solutions to modernize the centuries-old industry.

Whatever their differences, the firms seem to agree on one thing: Berlin is becoming the place to be for insurtech in Europe.

Berlin insurtech hub

Europe saw fintech deals amounting to $2.67 billion in 2017. 27% of these deals were closed in Germany which is a significant increase from the country’s 2013-2017 average of 14%. The UK leads fintech deals with 38% of investment over the same period, but questions over the UK’s post-Brexit relationship with European markets casts doubt on Britain’s ability to maintain this lead.

Berlin east side gallery
Berlin east side gallery – by PeterDargatz

In Germany, Berlin remains the fintech capital where insurtech and blockchain firms dominate the scene. 80 fintech deals, or 27% of the total, were Berlin-based in 2017, outstripping the closest rival, the Rhein-Man-Necker (RMN) regional around Frankfurt, which accounted for 25% of deals.

Berlin enjoys the advantage of a concentration of knowledge and expertise which is often critical to success for startups, but the city isn’t just fostering homegrown talent. Berlin is also attracting fintech startups looking for a tech hub in which to base themselves in.

So, while Coya and Element are Berlin ‘natives’, the city’s reputation also attracted Wefox which originated in Switzerland.

Coya’s successful $30 million series A is just another sign that Berlin is cementing its place as Europe’s insurtech hub.

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