Facebook Cambridge Analytica scandal a godsend for upcoming GDPR

John
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Facebook Cambridge Analytica scandal a godsend for upcoming GDPR

Facebook scandal that allowed the data of 50 million users to fall into the hands of political consulting firm Cambridge Analytica (CA) is perhaps the biggest story of 2018 so far.

The breach is particularly relevant against the backdrop of the EU General Data Protection Regulation (GDPR) that comes into force on the 25 May this year.

The Facebook and CA scandal has had wide ranging repercussions, not least of which is the $50 billion hit (17%) on Facebook’s share price between 16 March and markets closing for Easter on 29 March.

That has also proven to be the trigger for a wider loss of investor confidence in ‘Big Tech’. The FAANG (Facebook, Apple, Amazon, Netflix and Google-parent Alphabet) stocks and wider technology sector have taken heavy losses over the past couple of weeks.

Having been the most influential positive driver of US equity markets last year, in 2018 they have been the biggest drag. Other factors, such as Trump’s public gripe with how much tax Amazon pays, have also had an influence.

However, the Cambridge Analytica scandal looks set to go down in history as a turning point in both the history of Facebook as a company and the attitude of regulators to the world’s “mega cap” technology companies.

The US Federal Trade Commission announced it has launched an investigation into Facebook data practises, and regulators may seek to place restrictions on how the company, and others which use a similar model, monetise data.

This, along with the #DeleteFacebook campaign that is resulting in millions of accounts on the social media platform being closed, threatens the company’s business model.

Data breach controversy

The Cambridge Analytica data privacy breach has provoked particular public ire due to the nature of the company and how the data was subsequently used. Profiles of 50 million Facebook users fell into Cambridge Analytica’s hands via a collaboration with Global Research Science (GSR), a commercial enterprise owned by Cambridge researcher Aleksandr Kogan.

Funded by Cambridge Analytica, GSR paid hundreds of thousands of users to take a personality test, with the agreement that the resulting data could be used as part of an academic study.

What was not divulged to these Facebook users was the fact that the personality test conducted through also gave GSR access to the data of all of their Facebook ‘friends’.

This harvesting of ‘friends’ data was against Facebook ‘Platform Policy’. As was the subsequent transfer of the data to Cambridge Analytica and commercial use of the, by then, data set consisting of tens of millions of user profiles.

Cambridge Analytica used the data to build an algorithmic system to profile individual US voters. These profiles were then used during President Trump’s 2016 election campaign, which hired the British company as a service provider.

Users were targeted with personalised political ads designed to, as explained by whistle-blower Christopher Wylie, exploit what we knew about them and target their inner demons’.

Facebook culpability is considered threefold – Firstly, the social media giant failed to have the necessary security procedures in place to prevent the GSR app from harvesting the profiles of users’ ‘friends’.

Secondly, the company did not ensure the personal data, which users agreed on to be used for ‘academic purposes’, was not controlled and subsequently destroyed.

And thirdly, that by late 2015 Facebook was aware of the data privacy breach but both failed to alert users or take any real actions to recover and secure the personal data of the 50 million plus users.

Facebook under GDPR

But how does the Facebook and Cambridge Analytica scandal relate directly to GDPR and why is it considered a ‘godsend’ for the EU new data protection regulation? It centres on Facebook collecting personal data far beyond what most users realise, often without explicit consent.

A recent article in Adweek details one user who downloaded a file of the data Facebook had gathered on him finding a detailed history of his telephone record. This contained two years of calls including numbers, names and the length of calls. This took advantage of Android granting permission to applications to access call logs.

Facebook’s statement of justification, as made to The Guardian newspaper through an official spokesperson, is that when its apps are first opened these permissions are requested. Facebook also stated in a subsequent blog post that users can turn off these permissions in their settings.

Within the context of GDPR, Facebook’s historic approach to how users give ‘permission’ to their data being gathered will be deemed insufficient. ‘Willing consent’ is not considered to be given by hitting ‘I Accept’ at the bottom of “long illegible terms and conditions full of legalese”.

Instead it must be “as easy to withdraw consent as it is to give it” and data collection permission must be provided in response to a direct and “intelligible” request for it.

GDPR also means users can always request to see data being held on them. They also have the right to, at any given time, request it is destroyed and/or handed over to them. At its core, GDPR is about Privacy by Design.

Users of any service that collects personal data must provide consent willingly and in full knowledge of how and to what purpose that data will be used.

The Facebook and Cambridge Analytica scandal has clearly strengthened the case for why GDPR is necessary and may well prove to help bolster public support and participation around its introductions.

It’s no longer just a ‘boring data law’. Crucially, the damage to Facebook brand and the viral spread of the #DeleteFacebook movement should provide a wake-up call to any digital services or marketers that questioned how much they would really have to worry about the introduction of GDPR.

It has demonstrated that regulatory action for infringements will entail huge damage to brand trust in addition to a fine of €20m or 4% of global turnover.

Privacy by Design and Data Exchange

GDPR means that companies must offer users a fair exchange in return for their data. They will have to be convinced that what they will receive in return is a deal they are ready to make.

The Facebook scandal will have brought this into sharper focus and mean other companies prepare better for GDPR. They will now understand they don’t own their customers’ data but are being allowed to use it temporarily in exchange for providing them with clear benefits.

Managed in the right way, this added incentive to companies to cater more to their clients’ needs should lead to a win-win situation and help GDPR get off to a flying start.

South Korean insurer denies claim from bankrupt crypto exchange Youbit

Rasmus
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South Korean insurer denies claim from bankrupt crypto exchange Youbit

Seoul-based cryptocurrency exchange Youbit has reportedly had its cyber-insurance claim denied by South Korean Dongbu insurance company. This comes after Youbit experienced several hacks during last year, and which the recent one erased 17% of Youbit funds leading it to bankruptcy.

Youbit, formerly known as Yapizon, was initially targeted back in April 2017 where 3,816 bitcoins ($5 millions) were lost in a dexterous cyber hack. South Korean officials believe it was conducted with the support of North Korea. This incident subsequently saw Youbit make every effort to strengthen security, recruit personnel, and reduce hot wallets storage.

However, it would seem these measures were not sufficient, as Youbit was the victim of a second hack in mid-December 2017. Whilst the first hack was relatively minor in the grand scheme of things, the extent of the December hack was truly devastating for the cryptocurrency exchange, with Youbit filing for bankruptcy soon afterward.

The security breach in December saw Youbit lose approximately 17% of the company’s assets, after which the company has gone through formal bankruptcy proceedings to minimize customer fallout.

This has seen a grand total of 25% of customers’ holdings being frozen, in the hopes of being able to refund clients as much as possible once the bankruptcy procedure is completed.

Whilst those afflicted by any cryptocurrency coin hack are usually faced with a grim outlook, Youbit is in somewhat of a unique position, since the exchange was covered by a crypto-insurance from Seoul-based Dongbu Insurance.

The insurance was filed on 1 December 2017, meaning the policy was registered no more than a few weeks ahead of the major December hack that ultimately put Youbit out of business.

The cyber comprehensive insurance policy reportedly covered up to $2.8 million (£2.4 million), for a yearly premium of around $244,400. Following the hack, Yapian applied for the maximum amount of nearly 3 million dollars – however, it is this claim that Dongbu Insurance has now declined.

The insurer decided to refuse payment on the claim for the reason what Dongbu Insurance calls “a failure on Youbit’s part to disclose pertinent information before purchasing the insurance policy,” according to a press release.

Yapian, on the other hand, is accusing Dongbu Insurance of using the hack as an excuse to avoid having to cover any losses that they claim should be covered by the insurance policy.

The cyber ​​comprehensive insurance policy guarantees eight cyber related risks such as data loss or theft, information maintenance violation liability, personal information infringement damage, cyber threat, and network security liability.

It seems that Youbit did not adhere to one of the covers in the insurance policy, which indicates the reason for the insurer refusal of the payout.

A commonly held misconception is that comprehensive insurance covers everything and anything. Although, cyber-insurance is still evolving as an insurance product, insurers will closely examine risks and will reward the clients with the most robust cybersecurity programs.

In light of recent attacks (e.g. WannaCry, Equifax), businesses must prepare to be scrutinized in their levels of security and internal policy controls. Nonetheless, businesses will avoid becoming the next Equifax, and they are increasingly aware of just how costly cyber-attacks can be.

Cybercrime may now costs the world $600 billion according to recent estimations from security firm McAfee in collaboration with the Center for Strategic and International Studies (CSIS). And Willis Towers Watson identified five different cyber insurance trends that could very well increase in 2018 in their latest Marketplace Realities 2018: Cyber risk report.

Cyber insurance growth

These include the fact that yearly premiums will most likely keep increasing, as more crypto companies become aware of their existence. The worldwide premiums are already pegged at around $2.5 billion and are projected to hit an absolutely massive $10 billion as early as 2020.

Furthermore, as more people adopt cryptocurrencies and become accustomed to the technology, it seems likely that more powerful attacks will continue to surface as well, prompted by the increasingly lucrative sector.

Moreover, capacity is forecasted to mimic the rising demand, which would stop prices from inflating too much. The report notes that “the supply of capacity is more than keeping up”, meaning that the effects of dramatically increased demand should be somewhat alleviated.

In addition to this, the report assumes that demand will shift – whilst current coverage is slanted towards the US market, this might very well change as China and the European Union see increased privacy regulations, such as the GDPR (General Data Protection Regulations) enforced from 25 May 2018.

The report also notes that coverage will ultimately expand, which might seem like a foregone conclusion, but is still important to note. Different actors and carriers will address different segments of cyber insurance, forming a comprehensive coverage system that gives the option to safeguards against any eventuality.

South Korea is one of the most Internet-connected nations in the world, made evident in the meteoric rise and early adoption of cryptocurrencies in the country. However, the cyber insurance sector in South Korea is currently believed to be worth an equivalent of $26.5 million – which South Korean authorities are suspecting that this might be a massive undervaluation.

This has prompted the South Korean Ministry of Science, ICT and Future Planning to recently sign an agreement intending to boost the growth of the Korean cyber insurance market.

The Korea Insurance Research Institute believes that the American cyber insurance segment will grow at a pace of up to 50% per year, meaning South Korea will have to dramatically accelerate its own cyber insurance growth in order to catch up.

Professor Kim Tae-sung of the Chungbuk National University is convinced that this disproportionately small South Korean cyber insurance sector stems from systematic problems.

”South Korea’s insurance market is less developed than its IT industry and, as such, cooperation between its security and insurance sectors is essential as of now, and the cooperation can start from the development of a standard glossary for more communication between the two sides”, he recently told Business Korea.

EU planned digital tax risks fuelling tensions with tech giants

Daniel
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EU planned digital tax risks fuelling tensions with tech giants

The European Union new tax policy for multinational corporations is a direct threat to all companies that operate in the Eurozone and beyond.

The European Commission is considering a plan to tax corporate profits where they are generated, rather than in the nation where the company’s headquarters is located. That means Microsoft would be taxed on the amount of revenue it generated in Germany and France, rather than the tax rate in Ireland where its European headquarters is located.

The EU is bending to popular sentiment against foreign, mostly American and Chinese corporations, and is trying to make up for the revenues it is forecasted to lose through Brexit. A draft plan reviewed by The New York Times indicates that the cost of doing business in Europe would increase under the plan.

Corporations like Google would have to pay different tax rates in different member states. That will increase accounting costs, legal expenses, and administrative costs because a company that operates in the EU might have to file 28 different tax returns. Companies might have to hire separate law and accounting firms to handle tax issues in different nations.

The tax is designed to generate more revenue from businesses that make money from digital means, an EU press release indicates. Additional taxes will cover digital intermediaries, e-commerce platforms such as Amazon, and revenue from digital advertising. The EU is also planning to tax data mined from user-provided information.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs in video below said “The digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms. But this win-win situation raises legal and fiscal concerns… That’s why we’re bringing forward a new legal standard as well an interim tax for digital activities.”

Digital companies tax rates increase

Effective tax rates on digital businesses might increase from 9.5% to 23.3% under the measure, The New York Times estimated. That would be in addition to VAT (Value Added Tax) and other sales taxes, and higher than the current US corporate tax rate of 21%.

Silicon Valley tech giants like Apple and Amazon would be most affected by the new taxes. Other enterprises at risk from the new taxes include insurance companies, banks, social media platforms and gaming platforms.

Banks were particularly vocal to the proposals and deplored the digital taxation. In a press release, the European Banking Federation (EBF) emphasised that only a global approach would have the potential to ensure a level-playing field and avoid unintended double taxation.

EBF, CEO, Wim Mijs said “Digital activities carried out by banks and banking groups are exercised in a very strict regulatory framework and do not induce base erosion and profit shifting by nature.”

Other risks from the new tax policy include decreased trade and economic activity and the breakup of large companies. Some companies might try to avoid the higher taxes by pulling out of certain nations or setting up subsidiaries to conduct business in specific countries.

The segment of the insurance industry most affected by the EU’s action will be those companies that sell policies online. Online insurance brokerages and companies that market or mine insurance and risk data would pay higher rates under the EU’s proposal. It specifically covers digital intermediaries and profits from the sale of data from user-provided information. Also affected will be those companies that insure tech enterprises.

To become law the proposed tax increase will need to be adopted by the European Council and approved by the European Parliament. No timetable for those actions was provided by the EU press release.

More taxes on digital products and services

The risk of increased taxation is growing as popular sentiment against income inequality and the rich increases. The EU proposal is simply one of many suggestions for increasing taxes on digital businesses.

Companies like Google and Facebook should be required to redistribute part of the profits made from users’ data to everybody, Steve Fuller, a professor of sociology at Warwick University suggested. Fuller offered such a tax as an alternative to universal basic income (UBI) in a debate in Budapest in 2017.

Most UBI proposals involve significant tax increases in taxes on individual or corporate income. American presidential candidate Andrew Yang’s platform includes a $1,000 a month UBI paid for by a 10% value-added tax (VAT). Yang’s platform is essentially one of class warfare against wealthy Americans whom he blames for the nation’s problems.

The risk of new taxation is growing dramatically especially to companies that operate in many different nations. All businesses should prepare for higher taxes and increased expenses from taxation. Insurers will need to amend policies and modify sales practices to deal with an increased risk of taxation.

Fatal Uber accident exposes risks and challenges with autonomous driving

Rasmus
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Fatal Uber accident exposes risks and challenges with autonomous driving

Uber’s recent tragic driverless car accident that saw a woman lose her life exposes the risks and challenges of self-driving cars technology.

The past week saw one of Uber’s self-driving vehicles hit a female resident of Tempe, Arizona, who later passed away due to her injuries at a nearby hospital.

While this is not the first time an assisted-driving vehicle is involved in a fatal accident (some may recall the Tesla Model S with Autopilot engaged that crashed into a trailer back in May 2016), it is the first time a vehicle labelled as supposedly ”autonomous”, or self-driving does so.

Arizona has long been a haven for the testing of self-driving cars, both due to the state lenient regulations as well as its favourable weather conditions. This incident comes just weeks after Arizona Governor Doug Ducey revised an executive order to allow fully driverless cars on the state roads.

Safety questions raised

The accident happened on Sunday evening when the Uber Volvo XC90 equipped with self-driving technology travelling at a speed of 40mph (64km/h) struck the 49-year old woman. At that time, 44-year-old Uber test driver, Rafael Vasquez, was behind the wheel and the car autonomous mode was engaged.

The victim, Elaine Herzberg, was walking her bike along the road. As the self-driving Volvo XC90 approached, Elaine decided to cross the street without using the crosswalk. The crash then followed as she stepped out in front of the vehicle.

The accident is still under investigation by the Tempe Police Department who have released a video showing the fatal collision from the vehicle’s cameras.

The video shows that the accident seems to imply it was unavoidable, as neither the car nor the driver was able to anticipate the woman stepping out into the road.

Uber has nonetheless grounded its fleet of self-driving vehicles, halting testing at all its four North American locations. Regardless of what the Tempe investigation findings, there are some very real and pressing issues related to self-driving cars.

On one hand, the successful implementation of autonomous vehicles holds great allure for society as a whole. Autonomous vehicles would allow drivers to become passengers, freeing up time otherwise spent doing nothing else but driving.

This would allow drivers to be more productive, recreational, or even sleep during the daily commute to work. Moreover, it would enable for large fleets of self-driving cars that enable efficient ride sharing. Looking ahead, a society with fully automated cars would allow for faster transports that never get gridlocked, as well as fewer highway lanes.

On the flip side, one first needs to clear some significant hurdles. The perhaps most obvious obstacle to the successful self-driving cars is the technology itself. Whilst the technology has evolved a lot during the last few years alone, it still has a long way to go.

Currently, a self-driving vehicle cannot improvise or interpret new situations. This is why extensive testing is still needed. Furthermore, the advent of artificial intelligence (AI) and machine learning (ML) allows for cars to learn from the testing how to share information between themselves and to handle a myriad of different events.

This is sometimes referred to as a “Neural Net”. However, huge strides are already being made in regards to the technology required. The main barrier to the widespread use of self-driving cars might, in fact, be people.

Hacking risks worries

Two-thirds of Americans are uncomfortable about the idea of riding in self-driving cars, according to a Reuters/Ipsos opinion poll.

In another survey, French insurer AXA found that more than 90% of today’s roadway deaths and injuries are due to human error. Therefore, self-driving cars would naturally be a good way to eliminate the risks. However, one challenge that stands in the successful widespread rollout, rather than physical safety, is the computer operations security aspect.

As cars become increasingly connected and digitized, they become more vulnerable to hacking attacks.

Matthew Channon, an insurance expert on driverless cars from Exeter University, has been sounding the alarm on the real risks of connected autonomous vehicles. This comes after several high-profile hacking cases, where hackers have been able to disable breaks or even remotely control cars.

These risks increase exponentially as cars approach full autonomous status. However, as the issue is becoming increasingly prominent, there is a large amount of work going into securing the integrity of autonomous cars’ systems, making it dramatically harder, if not impossible, to remotely compromise them.

While the Tempe incident understandably has many worried about the future of autonomous driving, the Association of British Insurers (ABI) is defending self-driving cars. A spokesperson for the ABI pointed out that whilst autonomous driving is still in the early stages of testing, most crashes are still due to human error.

Though, even the Uber vehicle in Tempe had a human driver present, the driver still failed to prevent the crash. Clyde & Co law firm partner, Nigel Brook, pointed out that a major advantage for autonomous vehicles is that they continuously record, collect, and share masses of data even when involved in accidents, allowing them to avoid future incidents.

Autonomous cars present some major hurdles to clear – however the future potential is too great to stop exploring the technology.

PayPal Venmo settles FTC charges over security and privacy flaws

Walid
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PayPal Venmo settles FTC charges over security and privacy flaws

PayPal settles Federal Trade Commission (FTC) charges over security and privacy flaws in its peer-to-peer (P2P) payment app Venmo.

As part of the settlement, Venmo agrees to prevent any misrepresentations and to protect the privacy, confidentiality, and security of the information involved in using its service. In addition, the company commits to make explicit disclosures to its users about how it handles their transactions.

It also pledges compliance to the Gramm-Leach-Bliley Act, which requires financial companies to explain their information sharing practices to their customers and to safeguard sensitive data.

Thirdly, Venmo agrees to obtain biennially third-party assessments of its compliance with the settlement rules for the next 10 years.

This ends a two-year investigation by the Federal Trade Commission that started back in early 2016 when PayPal revealed through a SEC (US Securities and Exchange Commission) filing that the FTC was looking into its business operations.

Venmo security flaws

Venmo is a free digital wallet that allows users to transfer money to one another (within the US only) using a mobile phone app or web interface. Users sign up and create an account which they link to their bank accounts, debit or credit cards.

Venmo claimed it uses bank-grade security systems and that personal and financial data are encrypted and protected on secure servers to guard against any unauthorized transactions. These security claims have been questioned by security researchers, journalists and consumers.

In his blog, security geek Martin Vigo explains how to steal $2,999.99 in less than 2 minutes with Venmo and Siri (Apple intelligent personal assistant). The scheme is to use the Siri voice activation on locked iPhones to send a payment request via SMS and then steal the person’s funds.

In another case, professional poker player Mohsin Charania told ABC News that his account was hacked and funds stolen. He said “It was frustrating. I had over $2,000 on there from various transfers that I received from friends and I had no way of finding out what happened to my account,”

Despite Venmo security representations and the many cases reported, the FTC had reasons to believe that Venmo failed to implement sufficient safeguards to protect the security, confidentiality, and integrity of consumers’ information.

The regulator cited an instance where Venmo failed to provide their customers with security notifications regarding changes to settings from within their account. In addition to not informing them that their password or e-mail address had changed, or that a new email address had been added, or that a new device was added to their account.

As a result and in some instances, unauthorized users successfully took over customers’ accounts, changed the passwords or email addresses associated with their account and withdrew funds, all without any notifications to them.

Acting FTC Chairman Maureen Ohlhausen said that Venmo did not live up to the promises it made to its users who suffered real losses. Before adding “The payment service also misled consumers about how to keep their transaction information private. This case sends a strong message that financial institutions like Venmo need to focus on privacy and security from day one.”

PayPal has agreed to be more transparent and honest about Venmo’s vulnerabilities in the settlement.

The Venmo investigations and settlement strongly reveal that potential security risks from peer-to-peer (P2P) payment apps are greater than most users realize.

Fraud risks on P2P payments apps

Zelle, another popular P2P payment solution touted as the Venmo alternative and backed by a consortium of American banks is also plagued by security flaws and frauds.

In a recent article, TechCrunch explains how Zelle users are finding out the hard way there’s no fraud protection they would expect from banking institutions or PayPal.

Fraudsters actually encouraged their victims to use Zelle for payments. Criminals directed people to open Zelle accounts for transactions advertised on Craigslist.

The victims transferred the funds in order to buy something like concert tickets using Zelle, believing the banks would stop fraud or the transactions were insured. Once the fraudster received the money he or she shut down their Zelle account, and no tickets were delivered.

When victims contacted their banks they learned that the transaction was uninsured and the money was gone. Some victims were upset because the Zelle app was actually recommended on some banks’ websites.

Whether Zelle, Venmo, PayPal or any other peer-to-peer payments service succeeds in winning consumers’ heart or not, they will certainly need to embed the most important feature in their service – Security.

World Bank issues historic $1.36bn catastrophe bond covering Latin American earthquakes

Rasmus
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World Bank issues historic $1.36bn catastrophe bond covering Latin American earthquakes

The International Bank for Reconstruction and Development (IBRD), the main component of the World Bank Group, has issued Latin American earthquake-linked catastrophe bonds (known as Cat bonds) of nearly $1.4 billion.

The issuance is composed of five classes of World Bank Bonds, and offer natural disaster protection to the Pacific Alliance trade bloc – Chile, Colombia, Mexico, and Peru.

The Pacific Alliance catastrophe aggregates to a massive $1.36 billion, making it the largest insurance-linked security (ILS) ever issued by the World Bank. This issuance is notable as it constitutes a significant part of all the World Bank’s combined catastrophe risk transactions, bringing them to a total less of $4 billion. The bonds act as risk-transfer transactions, essentially moving the earthquake risks from poorer countries to interested investors.

Latin America is especially susceptible to natural hazards of this nature. A veritable myriad of separate tectonic plates converges in the area, leading to frequent and potentially devastating earthquakes. Colombia, Peru, and Chile, in particular, are located on the verge of the oceanic Nazca Plate, placing the countries in an area of recurrent seismic activity.

Mexico, on the other hand, is bounded by the Cocos Plate which is probably responsible for both the 1985 Mexico City earthquake and the more recent 2017 Chiapas earthquake.

CocosPlate

Being located in regions plagued by this type of tremors is a major source of uncertainty in Latin America, the risks of which serve to deter long-term investment.

The insurance-linked security is intended to counteract this inherent uncertainty. If triggered, the Cat bonds will give the affected Pacific Alliance member states a reliable and readily available source of capital, to expedite relief delivery and necessary reconstruction. Historically, post-disaster financing and relief funding have been notoriously sluggish, prolonging the amount of time it takes for disaster-stricken countries to get back on their feet.

The entire issuance is divided into five classes; two tranches of two-year classes for Mexico and one three-year class each for Chile, Colombia, and Peru. The classes are the Chilean CAR 116, the Colombian CAR 117, the two Mexican CAR 118 and CAR 119, as well as the Peruvian CAR 120. Notably, the capital-at-risk notes are all differently sized, with different terms, however, all specifically provide earthquake coverage.

The largest of the Cat bonds is Chile’s CAR 116, sized at $500M. This large amount is motivated by Chile’s long coastline, which stretches from Peru to Cape Horn, making the country exceptionally prone to earthquakes.

Colombia’s CAR 117 is the runner-up bond, weighing in at $400M, and the issue size of Peru’s CAR 120 is $200M. Mexico’s larger Cat bond, the CAR 118, is pegged at $160M, whilst the smaller CAR 119 is sized at a still notable $100M.

Moreover, the bonds’ triggers are dependent on datasets supplied and analyzed by the US Geological Survey, ensuring that the risk-transfers are backed by a recognized and trusted geological agency.

The issuance is arranged by Aon Securities and Swiss Re, who are the joint structuring agents for the deal. They are joined by Citi (aka Citigroup) in acting as the bookmakers of the bonds. The web-based catastrophe modeling software developer AIR Worldwide is the modeling and calculation agent supporting the transaction.

Aon Securities CEO, Paul Shultz, expressed his gratitude over partaking in the issuance and highlighted the importance of securing efficient fund of emergency capital. He went on to mention that this deal may very well help lay the foundation for establishing similar bonds for other countries. Coalitions of nations working together to set up Cat bonds, such as the Pacific Alliance, allows for costs to be cut in developing the risk-transfer transactions.

Swiss Re’s Chairman of Global Partnerships, Martyn Parker, noted that Pacific Alliance working together to manage their financial exposure to natural disasters make a powerful statement. Through actively seeking a way to lessen the risks of natural disasters, it can be argued that the leaders of the Latin American countries made significant strides in promoting long-term economic development in the area.

John Modin, Citi Managing Director, stressed that Citi was proud to be a part of the record-breaking issuance. He also emphasized that although a Cat bond of this size is an important milestone in itself, the largest gains are the humanitarian ones; access to funds and capital can be absolutely vital if disaster happens to strike. Furthermore, this sort of economic protection acts as a powerful incentive for long-term funding, alleviating the inherent risk associated with making investments in disaster-prone areas.

The large, five-part issuance essentially serves as reinsurance for the covered Latin American economies. By transferring some of the risks present in zones of recurring seismic activity from comparably poor, developing countries to investors, the IBRD is able to create a more favorable investment situation in the protected countries.

While the Pacific Alliance issuance specifically relates to earthquakes, it is easy to see potential applications for similar forms of reinsurance in other parts of the world.

Floods, hurricanes, storms or volcanic eruptions are just some of the many natural hazards that can seriously discourage long-term investments. Developing economies all around the world would be able to benefit immensely from transferring natural disaster risks to investors.cat

Catastrophe bonds of this nature can serve to give poorer countries a form of ”breathing space”, allowing them to construct infrastructure and companies to make considerable investments without worrying about potential natural hazards.

On the other side of the balance, investors appreciate extremely this form of investments. Because they offer significantly higher returns than corporate bonds – as they are detached from economic crises and trade cycles and therefore can act as an effective diversifications in their portfolios.

China regulators tackle systemic financial risk with Anbang takeover

John
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China regulators tackle systemic financial risk with Anbang takeover

China is concerned about the dangers of its financial system. The recent takeover of Anbang, a Global Fortune 500 financial services conglomerate, attests the importance of the task the country embarked on.

A central pillar to President Xi Jinping’s latest 5-year plan is to de-risk China’s financial system. Concerns that the country’s big private sector companies, especially those in the financial sector, have been building up their balance sheets’ risk exposure have been circulating for some years now.

President Xi is starting his second mandate as leader of the Communist Party of China, potentially for life with the recent removal of term limitations. He is widely regarded as the most powerful Chinese leader since Chairman Mao and has vowed to put China back at the centre of the world.

While the potential return to one-man-rule by a strongman is controversial, President Xi is concerned about his popularity. With the likelihood that his second term in office is not planned as his last, he arguably has more to lose than if it was to be. He is clearly determined to avoid any possibility of a systemic financial crash hitting the country on his watch – something which would likely lead to social unrest and undermine the iron grip he currently has on his Party.

Troubled insurance company

Anbang Insurance takeover was the culmination of the China Insurance Regulatory Commission (CIRC) 8-month investigation into the conglomerate’s opaque finances. This was triggered several months earlier when the company’s former chairman, Wu Xiaohui, was detained on charges of fundraising fraud and embezzlement.

a worried Wu Xiaohui
a worried Wu Xiaohui

CIRC concluded that the company’s aggressive move into high risk consumer investment products had violated laws and regulations that “may seriously endanger the solvency of the company”.

The move is not a government bailout and will facilitate the injection of private capital.

The takeover is being considered as a marker being laid down before new CIRC rules on transparent ownership structures come into force on 10 April.

These include a reduction of the current 51% cap on single shareholder ownership of an insurer down to 33%. Ownership stakes must also be acquired by the owner’s own funds and not a proxy such as a holding company or leverage based on expected future returns.

Insurers will also no longer be allowed to ‘repurpose’ funds acquired through the sale of insurance products into investments. Anbang appears to have been considered by Chinese authorities as a prime example of what it sees as risk-taking private companies endangering the country’s financial markets.

Questions were raised over discrepancies between the insurer’s registered capital, 1.97 trillion Yuan ($310bn) in assets, and relatively low ranking in the insurance business.

Financial risks under control

The private insurance industry has become a key area of concern to the Party and independent analysts agree. A Standards & Poor’s (S&P) Global Ratings report outlined how insurers’ increasingly high risk strategies meant they appeared ‘intent on adding to systemic risks’. It adds that ‘officials are seeking more market discipline, in both investment allocation and product offerings’.

The S&P report surmised that “China’s insurance sector is integral to the country’s deleveraging-related reforms. This is because broadly speaking, insurers can either add to the country’s financial risks, or help offset them”.

Chinese authorities, now, appear to be actively stepping in to ensure that the former is not the case. An increasing trend among the country’s insurers has been a move towards high-yield, short term investment-type products.

The kinds of returns being promised by high risk investment products sold by insurers have been higher than anything else on the market. They also often come with short redemption dates of as little as two years and little to no penalties.

However, a large percentage of the capital invested through these products is said to be reinvested by insurers in long term and illiquid assets such as real estate. This creates a liquidity risk in circumstances market conditions turn and large numbers of product holders move to redeem their policies. In that scenario, there would be a significant risk of assets being sufficient liquid to keep the insurers solvent.

With Chinese insurers also heavily invested in the domestic banking and real estate sectors, their financial fragility is considered by authorities as a potential systematic risk.

Anbang had also made a series of high profile investments in foreign assets, including New York’s emblematic Waldorf Astoria hotel. Other big private insurers have also made major international investments and the Chinese government is determined to avoid the reputational blow of having a company default on foreign debt.

Another consideration is the fact that China has huge infrastructure investment plans and heavily-indebted SOEs (state-owned enterprises). While regulations around investments insurance companies can channel funds into are generally tightening, other rules are being liberalised to encourage the underwriting of infrastructure investments and shoring up of SOEs.

For the next year Anbang Group will be managed by officials from CIRC, the central bank and other key government bodies. As well as equity restructuring to meet the new rules, a major assets disposal process is expected to occur with real estate and shares holdings in private listed companies expected to bear the brunt of the sell-off.

It would not be a surprise if reallocation of the cash raised by disposals sees reinvestment weighted towards domestic infrastructure projects and SOEs. The S&P report states that its expectation that state planners will have an increased role in the private insurance industry’s investment allocations strategy also entails risk.

There is general international consensus among analysts that Chinese insurers had started to play a risky game with the aggression of the products they have been marketing and their investment strategies.

Systematic risk to China’s financial sector is not in anyone’s interests and tighter regulation of balance sheet exposure of insurance companies can be welcomed.

Two major risks to sway the uncertain ICOs market future

Walid
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Two major risks to sway the uncertain ICOs market future

US Commodity Futures Trading Commission (CFTC) followed regulators around the world in issuing a stern warning regarding the potential pitfalls of cryptocurrency speculation.

The regulator urges investors to be wary of participating in the latest digital cryptocurrency schemes, and that they should not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes.

In doing so, the CFTC follows other international actors in issuing warnings to speculative investors. The United Arab Emirates’ financial regulator, the Securities and Commodities Authority, urged caution regarding ICOs not long ago, and the International Organization of Securities Commission released a notice alerting investors to the risks associated with ICOs.

China’s central bank was the first in the world to entirely ban ICOs, a seemingly radical solution to solve the shortcomings of token sales. Even South Korea – a market which was initially quick to embrace cryptocurrencies – followed suit in implementing an ICO ban, leaving many to wonder how the regulatory frameworks in western countries might be shaped.

These bans are the result of practically uncontrollable structural security failings in the crypto community. As hackers and scammers are attracted to the amount and velocity of transaction in the crypto sphere, a large percentage of funds raised in ICOs never reach the ICO arrangers. In banning ICOs altogether, China and South Korea seek to eliminate this uncertainty.

ICOs security inadequate

In a recent publication by EY (formerly Ernst & Young), these dangers of poor security infrastructure were highlighted, as it can lead to a loss of funds and personal data. When personal data is hacked, it often ends up making its way to the black market, where it can be used for identity theft or fraud.

The US Commodity Futures Trading Commission recently joined other regulatory bodies in highlighting the possibility of “pump-and-dump” schemes in the cryptocurrency market. However, this came just a day after CFTC Commissioner Brian Quintenz and CFTC Chairman Christopher Giancarlo publicly implored crypto-companies to take the matter of regulation into their own hands.

In a testimony to the Senate Agricultural Committee, Giancarlo stated that crypto companies should scramble to sanitize the crypto sector. ”They need to know they’ve got a responsibility in cleaning up this industry if they really wanted to be something that bears the respect and becomes part of not only our future but their future as well”, he said in from of the Senate committee.

ICOs are not only under fire from governments and NGOs; they are also facing adversity from social media behemoth Facebook. Last month, Facebook decided that it would no longer be showing ads for cryptocurrencies or ICOs. In a statement, Facebook Product Management Director Rob Leathern explained that the move is the result of an “intentionally broad” policy against fraudulent marketing.

Whilst Google has not yet implemented any comparable bans on cryptocurrency ads, many are calling for them to take a similar stance. It would certainly not be unprecedented – Google has previously banned high-rate payday loan advertisements. However as of yet, not formal decision regarding cryptocurrency ads has been announced.

This range of different attitudes regarding how cryptocurrencies should be regulated has created a lot of uncertainty moving forward. Without any clear international strategy for whether cryptocurrencies should be encouraged, discouraged or even banned, stakeholders are in a state of limbo as they await a comprehensive regulatory framework.

In contrast, other countries are embracing the shift towards virtual currencies. The municipality of Zug in Switzerland is a gleaming example of this. Known as the Crypto Valley, Zug has become a crypto hotbed during the last years.

Unlike the bans in China and South Korea, Switzerland has pushed for more lenient cryptocurrency regulations, spearheading domestic regulation for four different types of ICOs. This comes as Swiss economics minister Johann Schneider-Ammann recently stated that he wanted Switzerland “to be the crypto nation”.

Notwithstanding the uncertainty regarding how crypto regulation should look, there is an even bigger hurdle that the blockchain process needs to clear before reaching mainstream adoption. This is that of security.

The size of the cryptocurrency sphere has attracted the attention of hackers and scammers alike. The absence of a centralized authority, information chaos, and the blockchain’s irreversibility hold notable allure for hackers, and as a result, on average more than ten percent of ICO funds are lost.

A recent phishing scam that is symptomatic of the hit the decentralized home-sharing network Bee Token. Hackers posing as ICO operators managed to swindle potential investors of nearly $1 million dollars, in just 25 hours.

This is partly as a result of that blockchain project founders often focus on attracting investors leading up to the ICO, rather than prioritizing in building a secure platform infrastructure. The most common form of ICO theft is through phishing, since a phishing website clone can be virtually impossible to distinguish from the original.

Cryptocurrency startup LoopX recently performed an “exit scam”. After raising $4.5 million in a series of ICOs, the company went dark – deleting all of their social media accounts, and taking their website offline.

A similar story is that of Prodeum. This company promised to “revolutionize the fruit and vegetable industry”, before wiping their entire website – leaving only written profanity behind on a white background.

ICOs regulation exigency

This makes it clear that the blockchain has some major bumps in the road to pass, before reading the mainstream adoption highway. However, any solution would have to be a multifaceted one. Whilst blockchain technology seems to urgently need more regulation, many fear that overly tight regulations might end up stifling the budding industry as a whole.

As cryptocurrencies might very well symbolize the next step in digital payments, this is something that policymakers want to avoid. Even if global regulations were implemented in a satisfactory and consistent manner, there is still the question of security.

With large amounts of money ”leaking” from ICOs due to chronic issues with hacking, this might dissuade large actors from conducting ICOs. For example, Telegram is reportedly about to launch an ICO with so-called GRAM tokens.

Such a crowdsale could, according to some, raise as much as $2.55 billion. The risk that around 10% of this could go missing due to hacking is simply unacceptable for Telegram.

Phishing attacks are hard to defend against, and calling on developers to improve the security in their new-born ICO blockchain platforms is simply too costly to be an effective solution.

The blockchain represents a fascinating segment of new technologies – albeit one that needs scrutiny both regarding regulation and security.

Ending NAFTA risks hurting North American economies

Daniel
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Ending NAFTA risks hurting North American economies

Every insurer needs to ascertain the potential risks of the sudden termination or modification of international trade agreements. The havoc wreaked by the Brexit vote in the UK demonstrates the vast damage and great confusion that sudden changes in trade policy can cause.

A paradigm shift in trade policy that has the potential to be as dramatic and as disruptive as Brexit is possible on the other side of the Atlantic. There is growing speculation that US President Donald Trump might try to pull out of the North American Free Trade Agreement (NAFTA).

NAFTA is a free trade zone consisting of the United States, Canada, and Mexico. Ending it would disrupt international trade because Canada and Mexico are the second and third largest trading partners of the United States. Canada accounted for 16.4% of US foreign trade worth $636 billion (£458 billion), and Mexico accounted for 15% of America’s trade with an estimated value of $582.4 billion (£419 billion) in 2017, the US Census Bureau estimated.

NAFTA’s end would harm Mexico

Even speculation about the end of NAFTA can affect the international economy.

News that Canadian officials believed Trump would try to end NAFTA caused the value of US stock indexes to fall and the prices of Canadian and Mexican currencies to drop in the markets on 10 January 2018, Reuters reported. The S&P/BM IPC stock index in Mexico fell by around 1.8% because of NAFTA speculation.

The possible effects of NAFTA’s end are widely debated. Damage in Mexico might be vast because that country is heavily dependent on US trade. The economic crisis of 2008 caused the Mexican economy to contract by 9% in 2009, Luis Rubio of the Wilson Centre’s Mexican Institute noted. Mexico’s domestic economy nearly collapsed because of the fall in US trade.

“That event demonstrated that the NAFTA is the only engine of growth of the Mexican economy,” Rubio wrote. “Modifying the economic framework that is inherent to NAFTA would imply putting the engine of the Mexican economy at risk.”

NAFTA’s end a ‘Manageable Risk’ for Canada

The effects of NAFTA’s end in Canada would be a bad but “manageable risk,” a Bank of Montreal (BMO) study named The Day after NAFTA observed. The BMO concluded that ending NAFTA would cause Canada’s economy to contract by 0.7% to 1%, The CBC reported.

The major damage would be done by a weaker exchange rate which can lead to a cheaper Canadian dollar and inflation. That would benefit Canadian industry by lowering the price of its’ products on the world market – but hurt average Canadians by raising prices for imported consumer goods.

Canada would lose $15 billion (£10.79 billion) worth of buying power and between 25,000 and 55,000 jobs if NAFTA ended, Don Ciuriak of the C.D. Howe Institute told the CBC. Ciuriak also predicted that the US economy would be hurt.

“The United States suffers about as large a drop in its bilateral exports to NAFTA partners as it reduces imports from them,” Ciuriak is predicting.

Can Trump really end NAFTA?

The greatest risks presented by sudden changes in trade policy were demonstrated by the fallout from Brexit in the UK. Those risks are the fear, uncertainty, and doubt (FUD) generated by such an unprecedented event.

Uncertainty from NAFTA’s potential end would be greater because it is not unclear if Trump would be able to make good on such a threat. Current law gives Trump the power to end or renegotiate NAFTA by giving six months’ notice.

America’s Constitution gives the US Senate to simply override Trump’s decision at any time. The Senate has the power to undo any Trump decision on NAFTA with a vote of 60 of its 100 members. Any vote of less than 60 US Senators can be blocked by an arcane legislative stratagem known as a filibuster.

NAFTA’s fate in US Senate hands

What is unknown is whether 60 US Senators can be convinced to overturn NAFTA’s end.

Most members of the Senate are conservative Republicans and moderate Democrats that strongly favour free trade. There are a few outspoken critics of NAFTA in that body, including leftists Bernie Sanders and Jeff Merkley.

Something to keep in mind is that Border States like Texas and California, which benefit from NAFTA, each have two Senators. At least two influential border-state senators; John McCain and Jeff Flake are open political enemies of Trump.

A decisive factor in Senators’ votes will be Americans of Mexican descent. There are around 36 million Mexican Americans, who make up more than 10% of the nation’s population (327 million), Pew Research calculated. Senators from states with large Mexican populations are likely to vote for NAFTA and against Trump.

The probable risk from an effort to end NAFTA is a high level of FUD that will be made greater by a vicious and protracted political battle in the Senate. It is not known if Trump is willing to risk such a battle which would split his party, the Republicans, along ideological and regional lines.

Is Trump bluffing about NAFTA?

An outside event that might delay a NAFTA action is the US Congressional election scheduled for November 6, 2018. Some observers have predicted that the Republicans might lose their majority in at least one house of Congress in that contest.

Therefore it is unclear if speculation of NAFTA’s end is real or a bluff by Trump. Trump’s pushing of a decisive issue like NAFTA during such an election seems improbable.

The greatest risks created by speculation about NAFTA’s end or renegotiation are the FUD that talk of such an event generates. The high levels of FUD are likely to have negative effects on all three North American economies for the foreseeable future.

US drops MetLife case and abandons stricter regulation of insurers

Daniel
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US drops MetLife case and abandons stricter regulation of insurers

The US government is abandoning efforts to impose stricter regulation on insurance companies’ financial activities. The new policy is coming at a time when serious questions are being raised about the financial health of some American insurers.

The US Treasury Department is dropping an appeal in a court case involving MetLife and the Financial Stability Oversight Council’s (FSOC), Pensions & Investments reported. The case; MetLife, Inc. v. Financial Stability Oversight Council, involved the FSOC’s designation of the insurer as a “nonbank financial institution.” Such a designation would have subjected MetLife to more oversight and regulation.

“I am pleased that the Justice Department has settled the MetLife case, consistent with the recommendation by a majority of FSOC voting members,” Secretary of the Treasury Steven T. Mnuchin said in an 18 January press release.

Instead of tightening regulations the Treasury will work more closely with nonbank financial institutions and try to fix their problems, the press release indicates. Under a new policy adopted in November 2017, the FSOC will analyse institutions’ level of risk and conduct a cost-benefit analysis before taking action.

Efforts to increase the transparency of nonbank institutions’ finances and enhance communication between institutions and the Treasury will be made. The hope is to reduce the cost of compliance and make the process more efficient.

Mnuchin’s action effectively ends the Obama administration’s policy of using regulation to reduce risks from nonbank financial institutions, Reuters pointed out. Instead, Mnuchin and President Donald Trump believe cooperation between government and institutions is a better means of managing risks.

The FSOC was the organization set up to monitor the financial health of large institutions in America after the crisis of 2007-2008. Its task is to identify risks of default or other problems at entities such as banks and insurance companies and take efforts to mitigate that risk. The Treasury Secretary services as chairperson of the FSOC.

The FSOC action is sure to generate controversy because MetLife admitted to “material weakness” in finances on 29 January 2018, Bloomberg Markets reported. The insurance giant admitted it had not set enough money aside to cover some annuity and pension payments.

Disturbingly, MetLife admitted to losing track of some annuity and pension beneficiaries. Such admissions are an indication of sloppy administration and poor recordkeeping.

MetLife boosted its reserves to $575 million in an attempt cover pension and annuity payments. The company also postponed its earnings call and the date of release for its 4th Quarter 2018 financial numbers to 13 February, for reasons not made clear.

US insurers seriously exposed to pension risks

MetLife is one of a number of American insurers that has taken on serious risks by acquiring pension obligations from American companies, Bloomberg Markets revealed.

The pension obligations MetLife absorbed might include those of the dying retailer Sears Holdings Corporation. Sears revenues fell by 22.22% during 3rd Quarter 2017 and has been selling off assets to cover expenses. Sears may have as many as 20,000 pensioners in the United States.

Retired Sears’ employees might be among those MetLife failed to pay. Such failure to pay can lead to expensive class-action lawsuits in the United States.

News of MetLife’s problems caused the company’s share price to fall from $54.77 on 26 January to $47.04 on 5 February. MetLife, or Metropolitan Life, is a major issuer of Life and other insurance policies in the United States. The company has been trying to raise cash over the past year by selling or spinning off subsidiaries such as Brighthouse Financial.

The problems at MetLife indicate serious structural weaknesses in the US insurance industry that might pose a threat to the American economy and insurance markets. Liquidity problems at another major US insurer, American International Group (AIG), helped trigger the global financial meltdown of 2007 and 2008.

At least other major US insurance company Prudential Financial Inc. is under strict oversight by the FSOC because of its finances, Reuters reported. Prudential is expected to ask for changes to regulations like MetLife did.

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