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Sunday, November 9, 2008

Insurance Industry: Fiancial Crisis has Premium rise Asset/Liability Management, Outsourcing

© Thomas Ramseyer
Financial crisis causing losses on capital investments leads to premium rises in the non-life sector, insurance company’s spokeman says…

Once again customers have to suffer from top management’s bad decision making

It is too easy to blame the actual financial crisis for substantial losses occurring throughout the insurance Industry. They would rather blame the managements’ decision-making on the basis of some myriad of guys populating the financial community. Firms recommending themselves as riskmanagers prove to not even be capable to manage their own risks. I.e. Balance sheet, Profit and Loss.

1) MARKET PARTICIPANTS: Like lemmings everybody is moving in the same direction at the same time instantaneously. Assisted by the pabulum of anybody’s knowledge almost every market participant of the financial community is feeling at ease. (If I am to drown, everybody is also to drown.)

2) BEHAVIOUR: The growing dispersion of sapience and behaviour has led us to the actual debacle. Nobody – not even Greenspan – foresaw the devastating impact of the longtime cheap money policy on the mislead consumers thus the whole economy.

3) DIVERSIFICATION: The magic word “diversification” promises to level results. Only… everybody is diversifying in the same variety of globalised economies which irrevocably are linked together. What is the value of VaR – Value at Risk – only showing the deviation of shareholders’ equity due to volatility observed in the past while market liquidity is neglected.

4) ALLOCATOR: It is in the line with the market that decisions as to how investment money is to be allocated are made by the investing owners. This makes sence. Decisions agreed upon concerning strategic as well as tactical allocation by the board of directors are very difficult to alter. Trying to do this is very time consuming. Another reason is the fact that the first ten percent loss is pretended to not affect tough lower level managers. The second ten percent has them only catch a slight cold whereas the third ten makes them jump, shout and run.

5) STOCKPICKING: It is also in line with the market to outsource the hard-labour stockpicking activity to one of the numerous asset managers around the globe. Choosing the accurate benchmark here is the most important task. Lack of time as well as too many graduates in the same disciplines – being rather econometrics than economists – lead to failing decisions. Also it is common sence the asset managers to force into relative performance.

6) ASSET MANAGER: Relative performance of a portfolio means that the active manager achieves a better result than the benchmark universe. The as riskfree glorified passive management promises a performance equal to the benchmark’s. As risk is defined to be the portfolio’s deviation from the benchmark also active managers do not dare taking too much risk. As a matter of fact both ways of portfoliomanagement lead to more ore less the same performance; they simply follow the market. The cash portion of a portfolio is defined by the owning mandators. They usually allocate only a small percentage of cash to the outsourced part of the investments. If a stockpicker foresees a heavy bearmarket he will only sell stocks until the limit of cash is accomplished. In every market – bullish or bearish – the picker is trying to outperforme the benchmark by simply rotate sectors as well as choosing promising stock within the same sector. Normally a professional stockpicker is resistant to any market movement; he is immunized. Just in case the portfoliomanager is allowed to run covered short call positions to “enhance” performance he actually provokes further selling by investors cutting their risks by acquiring call options while selling the underlying stock.

CHANGE OF PARADIGM: The foreseeable trend will be answering the real needs of the end investors; back to the roots. All acrobatic as well as complex constructs are presumably going to be downsized.
Asset/Liability will be managed in an other way than up to now. Real needs are going to determine the strategies.

copyright Thomas Ramseyer