Month: October 2015

BankServe’s top tips for navigating marine insurance policies

Posted on by World Finance

Peter Mellet, Managing Director of BankServe Insurance Services, explains how to navigate through the paperwork of mortgagee’s interest insurance and innocent owners insurance, and gives his top tips for potential buyers.

World Finance: Insurance can be complicated and getting the right one to fit your company is paramount, especially when it comes to niche industries such as marine, oil and gas.

With me now is Peter Mellet from Bankserve Insurance Services the market leader in a number of insurance markets, to explain how to navigate through the paperwork and various services.

Well Peter I want to start with mortgagee’s interest insurance and innocent owners insurance. What exactly are these?

Peter Mellet: What they are, are contingent covers to protect lenders and investors in the event that owners’ policies don’t pay. When a loan starts, during the life of that loan the owner would buy insurance for hull and war liabilities.

Now sometimes those policies don’t respond and the mortgagee’s interest covers and the innocent owners policies are a second line of defence. And they will step in when the underwriter of the owners policies say: ‘No, we are not going to pay, and we don’t think we have a liability.’ That’s what they do.

World Finance: And are there claims?

Peter Mellet: Yeah, there a lot – people don’t think they are. With any insurance it’s a piece of paper until you make a claim. Maybe it will help you sleep better at nights, but you’ve got to make sure it works. They aren’t as many claims on mortgagee’s interest insurance or innocent owners as there is another forms of cover.

Marine policies get claims all the time. But we have done 80 claims in the last 15 years. Now it doesn’t sound a lot, but that is. And we collected nearly all of the claims in the market during that period of time. Aggregate total is about $160m and we just collected the biggest one ever at just over $64m.

World Finance: What are the differences between the policy forms?

Peter Mellet: I think the differences in the policy forms you can buy are some of the most extreme in the market. Marine policies are fairly concentrated in the middle. But mortgagee’s interest insurance particularly varies. There are two ends of the spectrum: there is a market wording, which is written by underwriters for underwriters. And at the other end of the spectrum, we’ve got a very user-friendly form, which is as wide as we can get it, and also very user-friendly for the borrowers. So it helps everyone during the process.

And it is important to remember that. You are going out, you are not just buying a product from a shelf. You are not buying some hull insurance or war insurance or liability cover. You are buying a product, which has got varieties of form available. And it is important to buy the right one.

World Finance: And policy wording, how has that evolved during the years?

Peter Mellet: It has evolved through claims. I think insurance is a product which does evolve through the claims process. It’s only when you have claims and someone looking at the liability end, lawyers looking at policy wordings and asking themselves: well, does this work? What these words say? What does this do? Is this what we intended the policy to cover? And by people examining those issues you get to a position where suddenly you says: ‘Right, well maybe this is a problem now.’ And you settle and you compromise but next time you look at the wording and you change it to make sure that problem doesn’t come up again. And that is the way it evolves through the claims process.

And mortgagee’s interest insurance hasn’t evolved as quickly because there haven’t been a lot of claims. I said 80. That isn’t many compared to other types of cover. But at the same time, each claim we’ve learned from, and changed the wording to make it more user-friendly the next time.

World Finance: Why should financiers and investors use their own broker to arrange cover rather than let the owner buy it for them?

Peter Mellet: Privity, basically. If they use the owner or the owner’s broker, they will be fixed with the knowledge that the owner or the broker has. And the whole idea of these policies is to protect an innocent mortgagee or investor.

Now they go and buy their own cover, the have to disclose things to underwriters and the covers will work provided they are not aware of the problem which is invalidating the owner’s policy.

Now the owner will know what he is doing wrong – his broker will have information about the owner. Now if the bank doesn’t have that and they place their own cover – they are clean – their policy is untainted. If they use the owner, then they have problems. And I think if they use the owner or the owner’s broker the policy is devalued in its effectiveness by more than 50 percent.

World Finance: Well finally, are there things that people should look out for when they are buying mortgagee’s interest insurance or innocent owners insurance cover?

Peter Mellet: The main thing, one of the main words, is disclosure. You’ve got to tell people the right things; you’ve got to disclose to underwriters any information you have.

Now I know that sounds simple but I think in mortgagee’s interest insurance, it becomes more complicated. And, as soon as you have a claim, the first thing that happens is the underwriters will instruct a lawyer. He will ask for the loan repayment history. If underwriters haven’t been told that maybe the loan is in default; the owner’s missed payments: they will scream non-disclosure.

They’ll say we should have hard worn liability been told this, this is information we should have been provided. And non-disclosure is one of the hardest defences to overcome, to marine claims; it is a very subjective issue.

What would have influenced an underwriter’s decision-making process and that is something which immediately put you into compromise territory. So I think disclosure – and then I think; look at the policy forms. And going back to one of your previous questions, to look at who’s doing it.

Make sure the bank is buying their own cover. The owner buys his cover, the bank should buy theirs; and if you keep the two separate, then you should give yourself the best chance of making policies work when you need them.

World Finance: Peter, thank you.

Peter Mellet: A pleasure.

Bill Gross sues Pimco for $200m

Posted on by Ashton Wenborn

Bill Gross, known often as the ‘Bond King’, has sued Pimco – the company he helped found in 1971 – for its part in driving him out the firm last September. The suit, filed on October 8 in Orange County, alleges that younger executives at the firm ousted him in order to cash in on his 20 percent stake in a $1.3bn bonus pool.

Since his departure, investors have pulled billions of dollars out of Pimco funds

According to the lawsuit, Pimco “wrongly and illegally” withheld hundreds of millions of dollars in compensation owed to Gross. “Driven by a lust for power, greed, and a desire to improve their own financial position and reputation at the expense of investors and decency,” the document goes on, “a cabal” of “managing directors plotted to drive founder Bill Gross out of Pimco,” according to documents seen by The Wall Street Journal.

Since his departure, investors have pulled billions of dollars out of Pimco funds – although the scale of the outflows has diminished in recent months. Assets held by the firm’s flagship fund have slumped to $100bn, down from a 2013 high of $300bn.

Gross’ case marks an attempt on his part to restore his damaged reputation. In the time since his departure, the former executive has been portrayed as a disruptive influence on the firm he helped create, although the lawsuit, if successful, could clear some of the marks against his name.

Gross’ version of events are that Mohamed El-Erian, chief executive at the time of his departure, and he were at odds over the direction of the firm – with Gross opposed to El-Erian’s intentions to pursue riskier investments, away from its core bonds business. The suit also claims Gross was set to receive $250m in bonus payments last year, adding that the firm denied him an $80m bonus for the third quarter, despite him leaving a matter of days before the quarter’s end.

Iran seeks international oil partners

Posted on by Ashton Wenborn

The softening of relations between Iran and western governments over the last six months could allow some of the world’s leading oil companies access to the country’s vast and untapped reserves, according to a senior Iranian official.

Mehdi Hosseini, the head of the Oil Ministry’s Oil Contracts Revision Committee, told a conference in London this week that government-linked Iranian oil companies could partner with international firms to fully develop the country’s reserves; something that has been banned since the 1979 revolution by the Revolutionary Guard.

Companies looking to enter the Iranian market in the coming months include Royal Dutch Shell, Total, and BP

The Revolutionary Guard – the military wing of the Iranian regime – has influenced many of the country’s industries for many years. It has been vehemently opposed to relations with the west, but that stance seems to be relaxing now that a deal has been struck over Iran’s nuclear capabilities.

Hosseini told reporters that the Revolutionary Guards had considerable experience in Iran’s engineering markets, and so it made sense for international oil companies to seek partnerships with them. “It depends on the quality and selection of the IOCs [international oil companies]. If the IOCs want to work with them, we have no problem. We are not going to interfere in the private negotiations between private companies and the IOCs on what kind of arrangement they have,” he told the FT.

Companies looking to enter the Iranian market in the coming months include Royal Dutch Shell, Total, and BP. With the country having huge resources of oil and gas, but comparatively outdated equipment to extract them, the time seems right for a partnership between western petroleum giants and Iran’s domestic players.

It also comes at a time when the global oil price has sunk to insustainably low levels, alongside difficult geopolitical troubles in traditional markets. The low price has led to Shell scrapping its drilling efforts in the Arctic as it was seen as not financial viable. However, Iran’s resources appear to be far easier to access, and once sanctions are lifted, Hosseini believes that production could increase by 500,000 barrels a day.

India’s Rajan calls for IMF and World Bank reform

Posted on by Ashton Wenborn

Policymakers from the Group of 20 are meeting in Lima as part of the IMF and World Bank’s annual spring meeting. On the eve of the event, the governor of India’s Central Bank, Raghuram Rajan, has called upon the two Bretton Woods institutions to commit themselves to a number of reforms.

There is often a perception among the developing world that the IMF and World Bank are biased

Rajan, himself a former chief economist at the IMF, has repeated his previous calls for a “global safety net,” to assist economies deal with liquidity dry ups and sudden outflows of capital, backed by the IMF. In September, the IMF, in its Financial Stability report, did warn of a growing threat to liquidity levels in the global economy, while the Institute of International Finance estimates that emerging market economies will see an outflow of $540bn worth of capital in 2015, which would be the first net outflow since the late 1980s.

The recent call by the president of the World Bank, Jim Yong Kim, for the capital base of the bank to be increased was also endorsed by Rajan. It is argued that the bank’s chief arm, the International Bank for Reconstruction and Development should see its $253bn capital base increased, partially as a response to slowdown in emerging markets.

There is often a perception among the developing world that the IMF and World Bank are biased towards the advanced economies of North America and Europe, which has resulted in growing emerging market support for the Chinese-led Asian Infrastructure Investment Bank. To counter this bias in both perception and practice, the governor called for further reforms to both institutions.

“There is no substitute to reforming the global multilateral institutions and making them work more broadly for the membership,” said Rajan, reports The Financial Times.

Emerging markets on for a five-year slump, says IMF

Posted on by Ashton Wenborn

The IMF has, in its latest World Economic Outlook (WEO) Update, set out reduced expectations for global growth, with the organisation warning the economy this year will expand at its slowest pace since the financial crisis struck. The report points to a continued slump in emerging markets and weaker prospects all-round for oil-exporting countries.

The hysteria surrounding the Greek debt negotiations and a spike in volatility this August have bred uncertainty among investors

“Global growth remains moderate – and once again more so than predicted a few months earlier,” according to the report. “In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies.”

The hysteria surrounding the Greek debt negotiations and a spike in volatility this August have bred uncertainty among investors. “Emerging market and developing economies face a difficult trade-off between supporting demand amid slowing growth – actual and potential – and reducing vulnerabilities in a more difficult external environment.”

This year, should the IMF findings prove accurate, could mark a fifth consecutive year of declining growth for emerging economies. Falling commodity prices, depreciating emerging market currencies and on-going financial volatility have each hampered growth in this area and will continue to do so late into the year. Brazil, Nigeria and Russia are among the worst affected, and the Chinese slowdown has done much to dampen spirits among major exporters.

According to the IMF, global growth for this year is projected at 3.1 percent, 0.3 percent shy of 2014 and 0.2 percentage points less than predicted in July. The outlook is not all doom and gloom, however, and, relative to last year at least, the recovery in advanced economies is expected to gather steam, and global activity is forecast to pick up in the coming year.

Japan dangerously close to recession

Posted on by Ashton Wenborn

After recently seeing its predicted GDP growth figures revised downwards by the Asian Development Bank in its latest report, Japan’s economy faces further woes, as new figures show a continued decline in the East Asian nation’s industrial output. Industrial production unexpectedly slid by 0.5 percent in August, following a decline by 0.6 percent in July.

The fear now is that this fall in production will tilt Japan to negative growth

The fear now is that this fall in production will tilt Japan to negative growth. With industrial output forming a large component of GDP, the recent disappointing figures may result in a contraction of growth for Japan’s third quarter, which, following the country’s negative growth in its second quarter, would amount to Japan entering a recession. As The Wall Street Journal notes, there is a “possibility that the world’s third-largest economy will fall into a recession for the second time in as many years and adding to fears about global growth.”

The poor showing is the result of both weak domestic and external demand, although exporting industries led the decline – with the slowdown in China playing a large role. “Japan’s recovery has ground to a halt,” said economist at Capital Economics Marcel Thieliant, reports Market Watch. As a result of the shrinking, “additional easing by the Bank of Japan next month looks all but inevitable,” he added.

Further, Japan’s quarterly business attitudes survey shows many firms are pessimistic about the short term economic prospects of the country. Large firms in particular were most pessimistic, lower their profit forecasts. As Charles Nishikawa, a management consultant in London and lecturer at Mejiro University, tells World Finance, “recent result shows some concern in manufacturing industry particularly with companies exporting to international markets (mainly large corporates). It is surely due to the slowdown of China economy.” The picture, however, is not all gloom. As Nishikawa continues, “businesses mainly serving domestic markets (i.e. service and Small-medium size manufacturers) are still optimistic and they believe in the solid fundamentals of the Japanese economy and future recovery.”