Standard Insurance is one of the leading non-life insurers in the Philippines, and the country’s largest car insurer. The Philippines is ranked fifth in the long-term climate risk index, so it really is at the sharp end of risk management. John B Echauz, Standard Insurance’s president and CEO, explains the challenges that insurance companies are facing today, the ways his company is adapting, and the innovative products it’s bringing to market in order to be ahead of the curve of customer expectations and disruptive competitors.
World Finance: John, what are the big challenges you face as a general insurance provider today?
John B Echauz: All major insurers are going through the same thing. Number one: competition. It’s not going away any time soon. Prices are coming down, rates are coming down, margins are getting compressed.
Number two: catastrophic events. Climate change is here to stay. The return period of a bad typhoon used to be centuries, then decades, now maybe years.
Third would be disruption. Customers want new things. Is our team prepared to provide them these things, or will they be provided by new companies that are not even on our radar screens today?
Number four of course: the business cycle. Things aren’t always good; when will it turn bad again? When is the turbulence going to hit?
These four things are our reality. We deal with them every year. So the question is: what must we do to adapt? How do we take our tools, take our people, take our know-how, to convert these into opportunities?
World Finance: Answer that question for me: how has Standard Insurance adapted to overcome or mitigate these challenges?
John B Echauz: The first order of the day is to take care of our customers very well, today. That’s very important. With no customers today, there is no future to speak of.
Number two I would say is to keep our operating systems contemporary and modern. They must be ready all the time to meet the needs of customers today, and tomorrow.
Number three: we take number one and two, and try to do it outside the Philippines. Our group chairman is an avid fisherman, and he knows what it means to look for new fishing grounds. We’re always up for a new adventure.
Number four: we take bits of everything we’ve learned, and how do we make these into new commercial enterprises? The products of tomorrow may look like toys today, so we need to make sure that all those things we can convert into something that is viable for the future.
And number five I would say is, follow our instincts. As businesspeople, as entrepreneurs: they should lead us to very good things.
World Finance: The toys of today that may be the products of the future: what innovative products are you bringing to market?
John B Echauz: We’ll talk about three things that we kind of like.
The first one is our technical centre. It’s a seven hectare facility to take on vehicles that should be total losses. But in this case, no: we can fix them, and minimise our costs. So if you have a total loss vehicle, it would otherwise be scrapped, we can restore them here. Interestingly we take the vehicles that don’t get resold and we can chop them up and sell the parts online.
Number two is we have an insurance policy that’s bundled with a term life insurance policy. Back home, many people have car insurance, but many people don’t have life insurance. Term life… no one really wants to sell it anymore, but it’s a good product, it’s affordable. So what we do is we bundle the two – motor and term-life – and then it makes it easier for our customers to have life insurance cover.
Number three is for climate change. So, every car generates about two tonnes of carbon dioxide. We have a service: pay us an extra $20 and we will plant enough trees to offset your carbon footprint. That’s about one hectare.
It’s important for us that we try these things. Some of them work, some of them don’t work. But we have to try. We want to make sure that we don’t miss any major trend.
World Finance: Is this helping you grow? And how are you keeping your variable costs low?
John B Echauz: So far so good. But, we look at our total cost per policy, which means its variable cost and fixed cost.
The first thing to keep variable costs and fixed costs low is to keep our people happy. We have to make sure that each associate feels loved, invested in, engaged. Then everything is possible. Sales go up, waste goes down; and each one is able to contribute to create programmes that will make our company better, and keep variable costs low.
World Finance: And what else does the future hold for Standard Insurance?
John B Echauz: We don’t know what the future will bring for us, but what I find is that the better we are to our people and to our partners and to our customers, the opportunities come.
Having a nice conversation with someone, whether the person is in Manilla, or in a province, or here in London; it leads to many, many new things.
The things we can predict, I would say, on the best day will be just 30 percent. The 70 percent are the things we can’t predict. Of those, half can be considered threats, but half can be considered very good opportunities. So that’s how we roll.
Following seven years of recession, the Greek economy is finally showing signs of recovery. Amid a number of structural reforms, GDP stabilised in 2016 and is on track to have grown by 1.1 percent in 2017, according to the Organisation for Economic Cooperation and Development. This upturn includes progress in the labour market and a gradual increase in investment.
Eurobank has made a strategic choice to embrace technology in order to become the premier digital retail bank in Greece
Although challenges are ongoing – especially with regards to high public debt – Greece is slowly getting back on track. Local banks are working hard to reduce the high percentage of non-performing loans (NPLs) and recover a significant volume of deposits. World Finance spoke to Iakovos Giannaklis, General Manager of Retail Banking at Eurobank Ergasias, to find out how the sector is addressing Greece’s persistent economic issues, and how the bank is preparing to lead the way in the digital era.
How did Eurobank Retail Banking tackle the crisis in Greece?
In an unstable economic environment, Eurobank’s retail banking arm has focused on the needs of its customers in order to develop a relationship based on trust. The bank has made constant efforts and taken various steps to counterbalance the effects of the crisis. For instance, the bank has increased household deposits to ensure liquidity, safeguarding and better profitability. Moreover, Eurobank has supported innovative enterprises, and has focused on strategic sectors of the economy through customised financing programmes and dedicated propositions.
Furthermore, Eurobank has been keen to back the expansion of SMEs abroad. Specifically, the bank opened a new digital gate that allows firms to access global trade and business networks, and has been further enhanced by a strategic agreement with Banco Santander, named the Trade Club Alliance. The alliance is supported by a customer-centric model and our new, modern branch-operating strategy, which is based on the micro-market approach, along with the rationalisation of our network footprint.
What are the main challenges the Greek banking sector is facing at present?
The high percentage of NPLs, the recovery of deposits and achieving steady profit are the three main challenges facing the banking sector in Greece. Our main goal is to reduce the NPLs portfolio. To do this, we are cooperating with our customers, both individuals and businesses, to find viable solutions. Eurobank aims to provide the most efficient and effective troubled assets management service in the country by employing best-in-class strategies, along with human capital. For us, enhancing the bank’s profitability is not detached from being socially responsible.
The return of deposits remains one of the key hurdles for the banking system in Greece, which is now working hard to rebuild stable funding lines in the wholesale market. Beyond this goal, Eurobank seeks to further encourage business banking and fee business, while meeting customer needs by taking advantage of the recent shift towards electronic transactions.
How do you support customers facing difficulties?
Eurobank successfully managed non-performing exposures throughout the prolonged recession. Since the beginning of the crisis, the bank has supported customers facing difficulties by providing them with personalised solutions, which in turn ensured the affordability of their loans. The in-depth interviews we carry out with our customers are not only crucial to understanding the reasons for their financial difficulties, but they also enable us to give invaluable advice going forward. Based on the information they provide, we recommend long-term restructuring programmes that match with their financial capacities and assets. We address every case with sensitivity, respect and appropriate attention, all in accordance with the legal and institutional frameworks.
Helping customers cope with their financial difficulties is just one side of the story. On the other side are ‘strategic’ defaulters who decide to stop paying their debts, despite having the financial capability to do so. At present, we are accelerating legal action against these borrowers to recover funds from them.
How has Eurobank’s Retail Banking transformed over time?
Since its inception, the bank has been a pioneer in the Greek market in terms of operating models. We were the first to introduce the segment-orientated approach in personal and small business banking services. This model has been implemented in our operating structure, as well as in the set-up of branches and the financial plans we create for our customers. Recently, we implemented a new branch operating model, which is the basic ingredient for upgrading the bank’s customer service model.
What are the benefits of the new operating model?
Over the last few years, the bank’s branch network has been reformed. New infrastructure was put in place to upgrade our customer service system. The new model is based on the concept of a micro market: a defined geographical area, composed of a small number of efficient bank branches, which allows for better rationalisation in operating costs. All of these efforts have resulted in a client-centric bank, with all personal banking and small business banking relationship officers centralised in main branches. We are conscious of the integral role our employees play in helping the company achieve its goals, and so we spend time training our staff on customer-centric approaches and service methods, with a focus on providing customised solutions to clients.
How does the bank’s client-orientated approach affect its strategy and daily work?
The bank’s strategy is summarised by its motto: “Putting you first.” By providing customers with top-quality services and the latest technological solutions, we are able to cultivate a stable, long-lasting and mutually beneficial relationship with them. Cooperation, empathy and trust, along with innovation and dynamism, are the values we follow in our relationships with customers.
What customised solutions does the bank offer to each segment?
To begin with, in the small business banking segment, Eurobank offers SME customers the technical expertise needed to help them achieve higher turnover and a better cross-sale potential. The bank recently made a series of strategic choices that have enriched its approach. For example, Eurobank introduced a virtual banking service, a first in the country, which allows customers to hold conference calls with their business banking consultant, wherever they are, whenever they want.
What does the bank offer in the affluent and mass segments?
Regarding affluent banking, we aim to provide top-quality customer service. In 2017, our dedicated personal banking relationship managers served more than 100,000 customers in this market segment. Services such as monthly informative communications and tactical economic reports were provided to our clients, along with special services in travel and real estate.
Eurobank’s mass segment represents the biggest number of customers – approximately 4.5 million. In order to meet specific needs, we have subdivided the clientele base into groups: high-net-worth individuals, salaried employees, pensioners, professionals and youths. We have developed different bundling products for each group.
An increasing number of tourists are visiting Greece. What products and services do you offer the tourism industry? Greece has seen a tremendous increase in tourism in recent years (see Fig 1). Eurobank is supporting the burgeoning industry by working with professionals and SMEs in the tourism industry, and even those that simply operate in areas that receive a significant number of tourists.
We offer a customised package that covers businesses’ daily transactions and operational needs with our existing financing products and consulting services. Finally, the bank, in cooperation with specialised partners, offers players in tourism the possibility to take advantage of social media by promoting themselves and creating networking opportunities on media platforms.
One of the main challenges following the crisis in Greece is the return of deposits in the banking system. Have you seen an increase in household deposits? We have seen an increase in household deposits, which is very positive considering unemployment is still high and the accompanying tax burden reduces people’s capability to save. Despite this, depositors’ trust is increasing, resulting in a partial return of deposits into the system. This is in part due to banks’ multiple efforts to incentivise household deposits with specific products and services.
In the case of Eurobank, our new offers are designed with a forward-thinking approach and aim to support the bank’s future development in relation to deposits. The strength of our campaign has already seen a positive result; the bank’s market share for deposits increased in the first half of 2017, as did the number of salaries and pensions among its client base.
What are the digital tools you offer and how do they engage customers?
Eurobank has made a strategic choice to embrace technology in order to become the premier digital retail bank in Greece. With this goal in mind, we launched a three-year programme that aims to fully digitalise basic processes to ensure efficiency and give our customers an omni-channel experience.
As part of our digitalisation process, we’ve recently introduced tablets in all branches to ease signature procedures when carrying out transactions. The e-signature service will soon include contracts too. Furthermore, we have extended our ATM network across Greece, and increased the number of automated payment system machines in our branches. Eurobank has also improved the mobile app it launched in 2016. New features include innovative tools like peer-to-peer payments that make it possible to transfer money without an account number. With all of these innovative services, and those that are still to come, Eurobank is ready to lead the way as the bank of Greece’s future.
With Donald Trump imposing tariffs on steel and aluminium imports, now seems as good a time as any to reiterate the benefits of the global system of trade that the US helped to create.
Between 1950 and 1973, global trade grew by 8.2 percent in real terms, helping many countries to recover from the devastation of the Second World War. While technological advancements have, of course, played a key role in the development of international trade networks, political will has proven equally significant.
Trade agreements provide the legal framework that enables goods and capital to flow from country to country; they are the enablers of the global economy.
While technological advancements have played a key role in the development of international trade networks, political will has proven equally significant
Over the centuries, these deals have opened up new markets, boosted growth and created new employment opportunities. Although their detractors rightly point out that free trade agreements have not benefitted everyone equally, their international impact cannot be disputed. Here are five of the most important:
Convention of Kanagawa (1854)
Trade agreements can prove significant not only because of their direct economic effects but because of their longer-term impact as well. This was certainly the case with the Convention of Kanagawa.
The convention, which was signed under threat of US military action, ended Japan’s period of economic and cultural isolation that had begun in the early-17th century.
Prior to signing the convention, the only foreign trade that Japan engaged in was with the Netherlands and China, exclusively at Nagasaki and under strict government control. Although the Convention of Kanagawa did not immediately result in a huge increase in trade, it led to the subsequent signing of many other treaties between Japan and other Western powers.
The so-called ‘unequal treaties’ often imposed unfavourable clauses that heavily favoured the other party and weakened Japanese sovereignty. These trade agreements showed subsequent Japanese governments how far the country had fallen behind the rest of the world. In doing so, they played a pivotal role in Japan’s rapid period of modernisation, which would become known as the Meiji Restoration.
Cobden-Chevalier Treaty (1860)
International trade may have existed for thousands of years, yet formal free trade agreements are a relatively recent development. In 1860, with the UK and France committed to a naval arms race, two diplomats, Richard Cobden and Michel Chevalier, negotiated an agreement that would have a huge influence on Europe’s economic landscape for the remainder of the 19th century.
Under the Cobden-Chevalier Treaty, tariffs between the UK and France were significantly reduced, causing the value of British exports moving across the Channel to double over the course of the decade. The treaty is also significant for including one of the earliest examples of the most favoured nation clause – a mainstay of global trading legislation to this day. Similar trade deals between the other major European nations quickly followed the passing of the Cobden-Chevalier Treaty.
As well as giving British and French producers access to a new market, the treaty helped significantly improve relations between the two countries. Today, the idea that increasing trade helps promote peace is well established, but that might not be the case if it wasn’t for the Cobden-Chevalier Treaty.
The European Coal and Steel Community (1952)
During the first half of the 20th century, the continent of Europe set about tearing itself apart. Nationalist sentiment was used to accentuate the differences between countries while dismissing their common history and values. The European Coal and Steel Community (ECSC), which came into force on July 23, 1952, was an early attempt at making sure this never happened again.
The launch of the ECSC created a common market for coal, iron ore and scrap metal across its six member states (Belgium, France, West Germany, Italy, the Netherlands and Luxembourg). This greatly increased economic co-operation between the signatories – steel trade increased tenfold following the creation of the community – while also showing them the importance of supranational collaboration. In this regard, it paved the way for closer European integration and, as such, is viewed as a precursor to the European Economic Community and its successor, the EU.
CETA (2016)
Despite its reputation as a champion of free trade, the EU has found that completing new trade deals is a complicated task. With the European Parliament, the European Council and national governments (plus some regional ones) all able to veto any potential deals, there are a lot of hurdles that must be cleared before pen can be put to paper.
Given this complexity, it is hardly surprising that the EU’s free trade deal with Canada, the Comprehensive Economic and Trade Agreement (CETA), took seven years to negotiate. The agreement includes an ambitious tariff reduction package, eliminating tariffs for 98.6 percent of Canadian goods and 99 percent of those originating in the EU. The deal is also predicted to result in GDP gains for both parties and has been cited as a potential model for the future trading relationship between a post-Brexit UK and the EU.
CPTPP (2018)
Donald Trump made plenty of threats during his election campaign: he vowed to build a wall along the Mexican border, suggested that he would pull the US out of NATO and said that he would look to prosecute Hillary Clinton for her use of a private email server. Those promises, among others, have failed to materialise but he did fulfil one of his campaign pledges after just a few days in office when he pulled the US out of the Trans-Pacific Partnership.
The loss of the world’s largest economy was certainly a blow and could have derailed the entire proposal. However, the remaining eleven members (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) ultimately decided to persevere with the agreement. The re-named Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) still covers a market of almost 500 million people and additional nations have indicated that they may join at a later date.
There is also a chance that Trump will reverse his decision. If he does not, and it seems unlikely, the CPTPP shows that there are still many other countries around the world willing to defend the global trading network.
Argentina, the world’s largest exporter of soymeal, is suffering its worst drought in at least a decade. Meanwhile, on the other side of the world, South Africa has declared a national disaster as extreme drought ravages the Western Cape region.
The effects of water scarcity on a country’s agricultural sector can send ripples across domestic economies, and are reflected in national economic indicators. In the case of a major agricultural exporter like Argentina, a drought can also reverberate across international markets as global commodity prices react to changes in production.
According to Christopher Decker, a research fellow specialising in economics and law at the University of Oxford, the economic effects of drought can depend on a number of factors, including: how much of the country’s GDP is composed of water-intensive industries; the amount of stored water that can be tapped into in times of scarcity; and how water users adapt their behaviour in response to drought.
The cases of Argentina and South Africa bring into sharp focus the need for policymakers to shield the economy from future droughts, particularly given the threat of a changing climate.
Damaging Argentina’s cash crops Agriculture is a crucial pillar of Argentina’s economy. Soybean meal is Argentina’s top export, followed by corn, soybean oil and raw soybeans. Together they made up 38 percent of all exports from Argentina in 2016, making the economy particularly vulnerable to extreme weather. As a result of the current drought, the government’s budget forecast of 3.5 percent growth may actually be be significantly lower.
In the case of a major agricultural exporter like Argentina, a drought can also reverberate across international markets as global commodity prices react to changes in production
As recently as October, Argentine farmers were expecting to expand their corn planting, but are now braced for the worst harvest since 2009, which at the time was heralded as the worst drought in 100 years. This year, Argentina has registered between 100mm and 400mm less rainfall than the post-1973 average, worse than in 2009. In the area around Marcos Juarez, a city in the corn and soy-producing Cordoba province, only 22.4mm of rain had fallen by the end of February.
In January, the US Department of Agriculture (USDA) lowered its estimate of annual soy production in Argentina to 54 million tons, a two million ton decrease from its previous projection of 56 million. This also represents a fall from 57.8 million tons in 2017. The Buenos Aires Grain Exchange is more pessimistic, putting the figure at 50 million tons.
Corn production, meanwhile, is expected to fall by 12 percent relative to last year, according to USDA. Each hectare of land is predicted to yield 6.92 tons, a decrease of 17 percent year on year.
“Drought during a critical time in the growing season can lead to famine and other issues,” said Brian Fuchs, Associate Geoscientist and Climatologist at the National Drought Mitigation Centre at the University of Nebraska. “Even with irrigation, there is a level of vulnerability due to the fact that the water shortages, which are usually associated with droughts, can impact irrigated agriculture as well.”
While famine is not a risk here, the drought has severely impacted farmers’ growing schedules. Keeping to a timetable is crucial to a good harvest, as planting is synchronised to coincide with seasonal weather at important stages in the crop cycle.
12%
Fall in corn production this year compared with 2017
7.8 million
Decrease in amount (in tons) of corn this year compared with 2017
During normal years, corn planting in Argentina begins in September, with the late corn planted by December. It is done in this way to take advantage of the abundant summer rains in December and January, with harvests scheduled to take place between January and April. Likewise, the first of the soy is usually planted in October and the late crop is planted in December, with harvests between March and May.
This year, both soy and corn have suffered severe delays that have been the worst in recent memory. As of January, only 72 percent of the 44.7 million acres in the country dedicated to soy crop had been planted. Corn saw similar delays, as the lack of moisture in the ground prevented the planting of much of the late crop.
While the financial impact on individual farmers has been significant, it has been slightly blunted by President Mauricio Macri’s incremental elimination of export controls on agricultural products. Export tariffs on most products were scrapped entirely shortly after he took office, but reduction schedules for soy were delayed due to tight fiscal budgets. Tariffs are now on track to reach 18 percent by the end of 2019, down from 35 percent when Macri was inaugurated.
Corn and soy may be the most impacted crops, but damage from drought is not isolated to the agricultural sector. “A key point to emphasise is that in addition to the direct effects of a drought, there are obviously indirect spillover effects as well between sectors,” said Decker. Both corn and soy are important sources of animal feed, so a shortage means higher costs of production for meat, poultry and dairy products. This in turn has put a roadblock in Argentina’s plan to rein its stubbornly high inflation rate.
While drought punishes Argentina, however, competitors are taking advantage. As global importers are shifting demand away from the South American country, demand from North American markets is increasing. Grain prices in US are going up, leading farmers to sell their stockpiles to capitalise on better returns. Corn sales from US growers to foreign markets over the past two months have exceeded 12 million tons, levels not reached in over two decades in that short window of time. Global prices will also depend on what kind of yields will be seen in neighbouring countries like Brazil, which is stepping up to fill the production gap left by Argentina.
The Theewaterskloof Dam at its lowest usuable level, Western Cape, South Africa
All trouble in the Western Cape The drought plaguing South Africa’s Western Cape region has diminished its projections of agricultural output by a fifth compared with last year. This translates not only into decreased macroeconomic revenue, but also into employment losses, as smaller harvests means less labour.
“Early assessment of the socioeconomic implications shows that the Western Cape agriculture and agro-processing sector will suffer an [almost $500m] loss in output and lose as [many] as 30,000 jobs in the current season because of the current drought,” Sifiso Ntombela, Head of International Trade and Investment at Agbiz – an agricultural business chamber for South and southern Africa – told World Finance.
“At a national level, this will have negative consequences because [the] Western Cape is a main producer and exporter of agricultural products likes fruits and beverages. The province accounts for over 20 percent of national agricultural GDP, which suggest the county will be significantly affected by the drought,” he told World Finance.
Water is such a basic resource that its presence is taken for granted, but its absence is felt very strongly
Wheat production is especially hard hit, with yields projected to almost halve, from 1.1 million tons in 2017 to 586,000 this year. This will also cause South Africa to increase its wheat imports to 2.1 million tons in 2018, up from 935,000 tons 2017. The increased imports will widen what is, as of January, the largest trade deficit in the country’s history.
South Africa is also the eighth-largest exporter of wine in the world, but is on track for its lowest production since 2005. In January, the dams that supply irrigation to the vineyards in the Western Cape were at 24 percent capacity, a fall of almost 50 percent year on year. This means the vines do not have enough water for a proper harvest, and the grapes that are produced are smaller and have less juice, affecting a major regional export.
The effect of the drought is perhaps crystallised in Cape Town, the biggest city in the country, where water scarcity became so severe that the city was predicted to run out altogether unless citizens stuck to strict rations. While the prognosis has improved, Cape Town is still in danger of running out of water early next year if rainfall is insufficient.
The prospect of a metropolis running out of water should be a wake-up call, not just because of the economic impact – which would be severe – but also because of people’s basic need for water. “It is difficult to predict [the impact], but the economic implications could be significant given the reliance on water as an essential service, and its critical relationship with human health and wellbeing,” Decker told World Finance.
30,000
Potential jobs losses in the Western Cape due to drought
514,000
Projected reduction of wheat yield (in tons) this year compared with 2017
“If an urban area runs out of water completely, then in terms of economic implications there will be a need to source water and food from elsewhere, which will raise costs. For example, there may be a need to tanker in water from elsewhere,” Decker said. “Moreover, some sectors and activities such as schools and hospitals may have to shut down, which will have wider spillover effects on economic growth.”
Additionally, water is crucial for generating electricity because of its extensive use as a cooling agent in power plants. This is especially true for coal power, which provides around 77 percent of South Africa’s energy. If reduced access to water translates into reduced electric capacity, the economic effects are multiplied.
Mitigating future impact In the midst of a drought, the need for policy solutions is brought into sharper focus. Governments must prioritise the mitigation of such scenarios, particularly if the economy is agriculture dependent or if water infrastructure is underdeveloped. Having a plan in place to lessen the impact can prevent the worst of the economic damage that would otherwise be inflicted.
“There is a need for some governments to take a more risk-based approach to drought planning and management,” said Decker. “Put simply, they need to move beyond being ‘reactive’ to drought, to being more ‘proactive’. This is easier said than done, as risk-based planning can sometimes involve more investments in infrastructure, which can be expensive and politically unpopular.”
The threat of drought is compounded by the spectre of a changing climate that will make water scarcer and render larger swathes of land increasingly inhospitable to crops
The revamping of outdated water infrastructure is also crucial, particularly in a region like the Western Cape which is both an economic engine and prone to dry climates. “The primary lesson for policymakers is that current water infrastructure in [the] Western Cape and other provinces in the country needs urgent expansion to meet the growing population,” said Ntombela. “It must be emphasised that current water infrastructure in the country is old, dating back to 1960s, and it was not designed to service 6.4 million people in Western Cape or 55.6 million people nationally.”
The threat of drought is compounded by the spectre of a changing climate that will make water scarcer and render larger swathes of land increasingly inhospitable to crops. “As we see temperatures increase, the frequency and severity of drought does appear to be increasing,” said Fuchs. “It is too early to tell if this is a cycle we are going through, or something which is transitioning to a more permanent basis.”
Assessments from South Africa are less equivocal. “Climate scientists report that both the frequency and severity of climate-induced disasters are increasing in the Western Cape,” said Ntombela. “They have warned that the Western Cape is set to become relatively drier and will experience moderate to strong warming in the next 100 years, which will affect the agriculture sector the most.”
Water is such a basic resource that its presence is taken for granted, but its absence is felt very strongly. As climate conditions change, and in many places worsen, water security becomes an increasingly crucial issue.Governments need to take the lead in planning and prevention, but individual users also have an important role to play in managing a country’s water resources.
For decades now, the insurance market has been one of the most significant utilisers of both the accomplishments and the possibilities of digitalisation. Digitalisation has almost a decade-long history in the industry, in providing premium discounts for electronic payments and administration, managing claim files by electronic means, and its impact on the whole process of damage inspections. At Hungarian Post Life Insurance Company, we didn’t even advertise these processes at the time of introducing them, because we were just doing our jobs.
Our basic philosophy hasn’t changed, but our product range has grown exponentially. We offer a suitable insurance product for every life situation, from birth to death
During this evolution, we have witnessed large-scale changes in the life insurance market. As a result of our own reorganisation, and also the fact that we are pioneers at an international level too, we were the first to introduce the total cost indicator in 2010. On this basis, the Hungarian National Bank, which also acts as the supervisory authority, regulated the cost system in the field of life insurance. It formulated the framework conditions of ethical life insurance for a wider product range and, as a result, the market has been cleaned up significantly.
Hungarian trends
The Hungarian market is starting to find itself in a cautious space, as the insurance sector’s growth rate for gross written premiums remained below the level of GDP growth until 2016. At a recent conference, experts at the Hungarian National Bank expressed their opinion that it would be ideal if life insurance revenues represented a more significant part of the sector’s written gross premiums. The main driver of growth in recent years was unequivocally pension insurance, which clearly shows that an increasing number of people realise the benefits of schemes that complement the state pension system.
However, according to recent research, around half the population has no money for saving purposes. Indeed, an even bigger problem is the fact that around two thirds of the population expects the state to come up with a solution to the pension issue. Therefore, it is clear that tax incentives help a lot: through pension insurance, the profession has proved it can reach out to a broader range of people with long-term products. This is a message that the government should heed, as tax benefits on savings for old age and unexpected situations generally offer greater social benefits and lower subsequent state expenditure.
We are in a competitive market; it is clear that the goal is continuous reformation. Everybody is speaking about the digital revolution and the emergence of ‘insuretech’ players in the space. However, for Hungarian insurance companies, digitalisation did not just start. For instance, we have been keeping e-files for years, our claim adjusters work by electronic means, and we also offer significant discounts for electronic administration. We introduced these innovations to improve our workflow and also to meet evolving client demands.
As these examples show, we are ready to engage in continuous innovation. Furthermore, with regards to new challenges, although the financial technology sector is booming, the insuretech revolution is evolving more quietly. The reason for this may be the fact that insurance is a trust issue. According to Deloitte, less than one third of insurance customers would not consent to transferring their data to third parties, even for discounts.
A major part of our sales efforts is performed through a network of post offices. Naturally, digital developments have to be brought in line with the infrastructure of Magyar Posta, the Hungarian post office. Thanks to the commitment of the owners and our excellent relationship, we can structure our development strategy around the demands of the client. For instance, we have made it possible to report household insurance claims through a mobile application. We were also among the first in the country to introduce digital claims assessments, in which the camera of a client’s mobile phone is used to help with damage inspection. In terms of meeting the needs of Generations X, Y and Z, we introduced a new mobile application called Hello Bringás (Hello Cyclist), which, besides the function of taking out an insurance policy, provides further conveniences that help the life of cyclists. The development of Hungarian Post Life Insurance Company is also vital, in terms of both products and services, which is facilitated by our innovation lab: Hello Lab.
New opportunities
Undoubtedly, pension insurance is one of the greatest opportunities in the Hungarian insurance market at present. The other area could be health insurance; after the national elections in 2018, it would be worthwhile for the government to start reforming this sector. There are several hidden elements in this healthcare space that result in duplications, such as clients paying for services privately, which is also accounted for in the public sector.
Healthcare expenditure represents 7.4 percent of Hungary’s GDP, of which 2.4 percent accounts for those patients who visit private service providers. According to official statistics, Hungarians spent HUF 904bn ($3.4bn) last year on private healthcare, and in 2021 they are forecast to spend HUF 1.1trn ($4.1bn) on private medical practitioners. The involvement of insurance companies would bring more clarity to the situation: it would improve the level of service, reduce parasolvency (gratitude payments to medical doctors) and ease waiting lists.
The implementation of new legislation, namely the Solvency II regulation, went smoother than expected. In the case of Hungarian Post Life Insurance Company, I can report on more positive experiences regarding the introduction of ethical life insurance to the market. This is no coincidence, as our products were ethical even before the new supervisory requirements were published, so only minor technical changes had to be introduced. That said, it is true that some insurance companies had to withdraw several products, although changing client needs made this necessary in any case.
Furthermore, in November 2017, the Hungarian Parliament adapoted the Insurance Distribution Directive (IDD) into the Hungarian Insurance Act, something we have been readying ourselves for more than a year. New Packaged Retail and Insurance-based Investment Products (PRIIPS) regualtions will take effect on January 2018. Other legislative changes in the pipeline include those related to packaged retail and insurance-based investment products, the EU General Data Protection Regulation, and the International Financial Reporting Standards.
Overcoming challenges
In Hungary, there are several challenges we have had to face in the insurance sector. The lack of skilled personnel increasingly represents the biggest problem. Even though the financial sector is the highest paid industry in Hungary, international mobility is draining the country’s skilled labour force; we have to do a lot to make the insurance profession more attractive to young employees.
In our own sales network, we reward our colleagues for their work through different contests, promotions and awards. This way we also motivate them, so they really feel that they are important to us and they regard our shared success as their own. When we burst into the market 15 years ago, we offered products to our clients that we would heartily recommended to our families and friends. This basic philosophy has not changed, but our product range has grown exponentially with us. Today, we offer a suitable life insurance product for every life situation, from birth to death.
At the end of August 2016, we introduced a whole life insurance product for funeral expenses. The product was so well received among our customers and our own sales personnel that it exceeded all of our expectations. Considering our positive experience with this product, we find it important to take on more risk in life insurances across our product range, so that we can offer a suitable solution for any life situation. From an insurance perspective, the development of our PostaGyógyír insurance product for cancer patients, which was introduced towards the end of summer 2017, and our PostaNyugdíj Prémium pension insurance product, announced in November 2017 were important initiatives this year. Furthermore, we strive to stay youthful and dynamic by opening up to Generations Y and Z with additional services and tools.
In August 2017, we introduced another whole life insurance product for cancer patients. This was also important, because as the needs for self-care and for insuring owned goods grow steadily in an improving economic environment, people are also prepared to take more responsibility for the protection of their health.
Pension insurance with a savings element plays a key role in our product line, and it is also supported by the state through tax credits. Our newest pension insurance is a premium pension insurance product. It features annual premium payment and adapts to customer demands with full flexibility. It can be suspended for an indefinite period, but if our client gains extra income, they can choose to pay an additional premium as an extraordinary payment. This insurance is a flexible type of saving and can be adapted to any life situation.
Hungarian Post Life Insurance Company is committed to postal sales. As the classic postal services are becoming increasingly overshadowed and, besides CPE, financial services represent the main revenue-generating area at post offices around the world, we expect the role of modern financial services, including insurance, will gain more significance. The products of Hungarian Post Life Insurance Company have already been reflecting the needs of the post office’s clientele, and the fact that we know our clients so well will always be our most significant advantage in the market. Accordingly, we would like to develop in the fields of both life and property insurance. Indeed, pension and health insurance are certainly ahead of huge developments within the life branch, both in the short and medium term. We would also like to reach younger clients who rarely visit post offices and offer them relevant insurance solutions in the burgeoning digital space. The world is changing, but we will continue to change with it.
Irkutsk Oil Company was the first oil producer established in eastern Siberia. In 2010 it embarked on an innovative gas project; the first of its kind in Russia. It began with reinjection of natural and associated gas to improve its recovery rates and reduce emissions. Today the project is moving into gas process and polymer production; and in the future, explains chief financial officer Yuriy Rubin, may turn to electricity generation to power crypto-currency mining companies. He discusses the progress the business has made, and its competitive advantages selling polyethylene to China.
World Finance: Talk me through your existing gas facilities.
Yuriy Rubin: Our gas properties are not connected to any gas infrastructure. There is no gas infrastructure in the Irkutsk region, and that’s why we came to the solution that instead of selling – or trying to sell – gas into gas pipelines (which as I said doesn’t exist) we’d rather process it into various components, and market them separately.
It started with a gas cycling process, the first of its kind in Russia, to recycle gas, reinject it back into formation, to maintain zero pressure and simultaneously strip off condensate – the most heavy and valuable product that can be recovered from the gas.
This condensate is recovered and added to oil production to increase its quality.
World Finance: And you have extensive upgrades planned through to 2022?
Yuriy Rubin: Last year we installed a 3.6 million cubic metres per day gas processing facility, which allows us to recover LPG – liquefied petroleum gas, a common name for a propane-butane mix – which already started reaching the market. And when we increase capacity will be exported.
Next stage would be installing three additional gas processing units, which would allow us to separate ethane. We have very high content of ethane at our gas properties. Up to 13 percent of ethane. And that was the reason why we decided to consider a polymer plant.
Irkutsk polymer plant will have a capacity of 650,000 tonnes of polyethylene. There is a very big demand in this part of Asia – especially in China – for this product.
World Finance: You’ll be a new player coming into some busy markets; what’s your competitive advantage?
Yuriy Rubin: Our biggest competitive advantage is our proximity to the Chinese market, which is still the number one location in this part of the world.
Second would be our proximity to other Asian countries like Thailand, Vietnam, and other countries of south-eastern Asia.
Also we have cheap labour, cheap electricity, and the most important: cheap feedstock. So, we are ready for competition.
World Finance: You’re working your way up the hydrocarbons chain; do you have plans to monetise methane?
Yuriy Rubin: Sure. We studied almost all options available in the market, including production of fertilisers. But still the best would be of course production of electricity.
For instance, last year we were approached by many companies that were interested in mining crypto-currencies. That could be in general a very good solution for any stranded gas field, when you have no other means to monetise gas assets. So we are studying this option.
It doesn’t mean we will mine bitcoins – or any other cypto-currencies – ourselves! First of all we are a large oil company; it’s not our business. But when we see a gold rush, it’s so tempting to service those people who are participating in that gold rush.
World Finance: You are as you say, a large oil company; your oil production has also increased significantly over the last five years.
Yuriy Rubin: That’s right. Last year we produced almost 8.5 million tonnes – that’s quite a significant increase. Since our inception we’ve attained about 40 percent compound growth rate of oil production.
Unfortunately for next year it will be capped by the decision of Russia to join OPEC, and we might not increase our production as much as we desire or are capable of.
Last year we acquired several exploration blocks. It’s quite important for an oil company to grow its assets. And we hope that from exploration we will be able to maintain our production at least at the level of 2017, and hopefully bigger, especially when there will be no restrictions.
World Finance: Finally, how important to the region are all of these developments that you’re driving?
Yuriy Rubin: I would say it’s extremely important. Irkutsk Oil Company employs approximately 7,000 people, and many people in the Irkutsk region – not only families, but supplemental businesses – really depend on Irkutsk Oil Company.
Also we are registered in the Irkutsk region, and we pay local taxes. Last year over 10 percent of the regional budget was funded from taxes that Irkutsk Oil Company paid.
Also, Irkutsk Oil Company makes very big contribution in the social and economical life of the region. We support many activities, charitable organisations, and cultural events. We care about environmental issues a lot, and invest significantly into all activities related to protecting fragile Siberian nature.
Stretching out over 7,000 individual islands, the sprawling archipelago of the Philippines is one of South-East Asia’s most dynamic economies. Over the course of the past decade, the island nation has enjoyed impressive growth, bolstered by rapid industrialisation and modernisation.
Just two million Filipinos are insured out of a population of 102 million. These low levels of penetration may soon be a thing of the past thanks to the socioeconomic shifts occurring in the island nation
Transitioning from an agriculture-based economy to one driven by services and manufacturing, the Philippines has established itself as a leading member of South Asia’s flourishing group of tiger cub economies. Last year, a boom in exports saw the Philippine economy grow by 6.8 percent, overtaking its Asian neighbours Singapore and Malaysia. The World Bank now expects the nation to experience a similar level of growth over the coming year, making the island nation one of the world’s fastest-expanding economies.
As of 2017, the Philippines ranks as the 10th-fastest growing economy in the world, with falling unemployment and low inflation levels helping to further spur growth. While poverty and inequality remain a challenge for the nation, approximately 1.8 million Filipinos have been lifted out of poverty over the past three years, thanks in part to improved incomes and higher employment.
As an increasing number of Filipinos find stable and long-term employment, the nation is also experiencing a rapid expansion of financial inclusion. With wages steadily improving and poverty rates falling, many previously unbanked Filipinos are now considering how to better manage their personal finances and are beginning to access formal banking services across the nation. However, while the demand for banking services is growing rapidly among the Philippine population, the nation’s life insurance market has remained modest. Compared to its ASEAN neighbours, the Philippines has a very low level of insurance penetration, with just two percent of its population covered by active policies. And yet, this trend may soon be set to change, as new channels are now opening to bring insurance to the masses. World Finance spoke with Surendra Menon, CEO at BPI-Philam, about the country’s surge in bancassurance, which is fast becoming one of the most promising financial services in the Philippines.
Trend drivers
Currently, just two million Filipinos are insured, out of a population of 102 million citizens. This low level of insurance penetration may soon be a thing of the past, however, thanks to the many socioeconomic shifts currently occurring in the island nation. As the country enjoys continued economic growth, a thriving middle class is now emerging and this new demographic is particularly interested in protecting and building its newfound wealth. In addition to this budding middle class at home, Filipinos working overseas are also moving up the socioeconomic ladder and enjoying a greater level of personal wealth. Indeed, Filipinos working abroad send back approximately $31bn a year in remittances – equivalent to more than 10 percent of the nation’s GDP.
6.8%
Growth of Philippine economy in 2016
10th
Fastest growing economy in the world as of 2017
12th
Most populated nation on earth
Menon explained: “This prosperity eventually poses a need for financial literacy. These working Filipinos need solutions to guide them on how they can efficiently and effectively handle their finances with the future in mind.”
As the economy prospers and Filipinos enjoy more money in their pockets, the demand for insurance services is expected to grow significantly, as workers look to ensure continued financial security for their families. What’s more, the remarkable growth of the Philippines’ business process outsourcing market also presents a lucrative opportunity to expand insurance coverage. “Just 15 years ago, the industry was virtually non-existent in the Philippines, but today it represents around nine percent of the nation’s GDP,” Menon told World Finance.
Along with these profound economic shifts, the nation is also experiencing a radical demographic transformation. The population of the Philippines has been growing steadily for many years, with the nation now ranking as the 12th most-populated country on earth. While many other countries around the world are facing the challenges of an ageing population, the Philippines is a remarkably young nation. The country has one of the youngest populations in the South-East Asian region, with a median age of just 23 years.
As such, from now until at least 2050, the Philippines will be able to take advantage of this demographic window, as the clear majority of its population will be of working age. As the nation’s Millennials begin to enter the workforce and wield their economic power, the Philippines is in prime position to reap the demographic dividend. Furthermore, despite preconceptions that younger generations aren’t interested in buying insurance policies, many insurance companies believe that Millennials present a unique opportunity to expand policy coverage.
Menon explained: “Millennials are aware of the importance of being and staying healthy, and make it a priority in their lives. These young professionals are looking for solutions to protect their health and promote an active lifestyle, and insurance companies are now responding to this demand by offering programmes for health and wellness on top of their financial plans.”
Satisfying demands
With demand for insurance products steadily growing among the Philippine population, insurance firms across the nation are now looking to make insurance accessible for all. “Although the country has succeeded in expanding financial inclusion, many Filipinos remain unaware of the numerous insurance options available to them and lack a basic understanding of how to set up a policy that works for them,” Menon explained.
In order to bridge the gap between banking and insurance, many of the nation’s top insurance companies are now investing heavily in bancassurance. Having existed in the Philippine financial landscape for more than a decade, bancassurance allows banks and insurance companies to form a partnership, so the insurance firm can effectively sell its products to the bank’s client base.
Menon said: “As the demand for insurance products has grown, bancassurance has become the much-needed solution to a long list of financial needs; it provides easier access to insurance products that protect and grow citizens’ hard-earned money.”
By collaborating with established and trusted banks, insurance firms are able to essentially get their foot in the door and demonstrate that insurance policies can be both financially affordable and easy to understand. Using the bank’s network of branches, bancassurance sales executives can discuss policy options with potential customers, dispelling any preconceived ideas that insurance packages are non-essential products. One such strategic alliance is the BPI-Philam Life Assurance Corp, which has emerged as the leading bancassurance company in the Philippines. Thanks to BPI’s expansive network of more than 800 branches and 1,500 ATMs, the bancassurance partnership is able to reach a wide array of Filipinos, sharing their expert knowledge of insurance packages and addressing individual customers’ financial protection needs.
Menon said: “Filipinos are more aware of banks than insurance companies, so partnering with BPI has given Philam Life an advantageous stance.” He declared: “Our partnership allows us to be readily available and accessible to Filipinos across the country, making insurance more convenient than ever before. With more Filipinos reached like this, people will be able to live satisfactory and fulfilling lives, as they appreciate the increased security that insurance gives their families.”
Ahead of the curve
With bancassurance poised to be the next big trend in the Philippine financial market, the nation’s top players need to stay one step ahead of the competition. A wave of new competitors is now flooding the field, with each company attempting to appeal to an audience of increasingly financially literate banking customers. In order to stand out from the crowd, bancassurance companies must innovate and modernise their services.
Mobile internet usage is becoming commonplace in the Philippines, with more than 30 million Filipinos gaining mobile internet access every year. What’s more, the nation’s maturing Millennials have grown up as digital natives, and now expect digital banking solutions as standard. As such, bancassurance firms must make digitalisation one of their key priorities if they hope to attract the lucrative Millennial client base. Menon said: “Although BPI-Philam has already had some success in modernising its offerings, we recognise that further digitalisation is the key to future success in this increasingly competitive market.”
“Modernising our front-end transactions with clients has helped us reach our goal of making insurance easy and accessible,” he continued. “By letting financial technology transform the way we do business, we’ve given customers access to easy and hassle-free financial planning and future protection. This in turn has established us as a dependable partner, always there to protect clients, their families and their future.”
As bancassurance continues to gain traction in the Philippines and beyond, BPI-Philam hopes to build on its recent technological successes, and remains dedicated to improving the quality of its products and services through innovation and digitalisation. By using new technologies to communicate more efficiently with the nation’s swelling youth population, BPI-Philam is fulfilling its founding aim of making insurance accessible for all. Bancassurance is making insurance available to the masses, and BPI-Philam is empowering citizens more and more with each policy.
Fubon Life Insurance is proud to have been named the Best Life Insurance Company in Taiwan by World Finance again this year. Achievements like this don’t come easy, and Fubon Life has worked tirelessly to ensure it is at the forefront of the insurance industry. This requires more than just excellent products – it involves the company engaging with and becoming an integral part of the community it serves.
The company is able to help customers devise a comprehensive insurance plan, while also providing a one-stop shopping experience thanks to its cross-selling capability
Factors such as solid business performance, comprehensive customer service, development of local talent and the fulfilment of a corporate social responsibility strategy have made Fubon Life not just a business, but an active participant in the societies in which it works. These efforts mean Fubon Life does more than offer life insurance – it strives to make Taiwan a better place for everyone. This goes beyond the scope of the business, as the company has taken on a much-needed community service role.
Paving career paths
A successful company is built from the ground up, and depends on its employees to achieve ongoing prosperity. In 2016, Fubon Life posted brilliant performance in terms of recruitment. The average age of new agents is 30, and the percentage of agents under 30 now reaches an industry-leading 63 percent, which demonstrates Fubon Life’s commitment to building a career path for the young population, many of whom will have a long and successful career within the business.
30
Average age of newly recruited Fubon Life agents
63%
of Fubon agents are aged under 30
128
Offices established by Beyond the Border
Fubon Life also offers a systematic training and education programme for new agents to develop their expertise, ultimately improving their performance and increasing retention rates. In fact, through its Beyond the Border recruitment programme, agents who successfully move up in the business are able to start their own sales office. The programme encourages young agents to return to their hometowns and create job opportunities within the local community. In less than four years, the programme has helped more than 3,000 agents establish 128 business locations in 65 administrative districts around the nation. Fubon Life places an emphasis on business culture so that agents can teach each other to replicate their success and fulfil their own career goals.
Fubon Life has turned its business locations into friendly neighbours. Joined by cross-industry business partners with the same mission, Fubon Life brings resources that used to be exclusive to metropolitan cities to remote townships and villages in order to support the local community. The company has also introduced the Neighbourhood Service Programme and Charity Ambassador Programme, where local agents can propose charity projects to support, allowing them to target meaningful causes in the location they operate in. In 2016, the company executed more than 100 charity projects in local communities, covering areas such as elderly care, support for underprivileged children and public health services.
Fubon Life has identified the potential impact and risks of an ageing population, and has therefore leveraged its core competency in developing health insurance products that are ready for the demands of the future. Believing that prevention is better than a cure, Fubon Life launched the first usage-based health examination insurance policy in Taiwan. The company has partnerships with 20 health examination clinics nationwide to provide policyholders with health examinations and follow-up services across multiple locations. All of this is offered at an accessible cost so policyholders can better manage their health.
To promote a healthy lifestyle to its customers, Fubon Life has introduced a new insurance policy known as Healthy Walker. This product combines an insurance policy with the use of wearable devices, offering coverage for seven major diseases and encouraging policyholders to exercise more frequently. Those who walk more than 10,000 steps per day for 180 days can enjoy a 10 percent discount on their premium. It’s designed to encourage policyholders to exercise regularly and manage their health properly in order to reduce the incidence rate of major diseases, as well improve the survival rate for many other conditions.
Fubon Life also has access to the diversified financial and insurance product portfolio offered by other subsidiaries under the Fubon Financial Holding Company. The company helps customers devise a comprehensive insurance plan, while also providing a one-stop shopping experience thanks to its cross-selling capability.
Technological development
Fubon Life puts great emphasis on technological development and information security. As such, the company invests heavily in new technologies; it has cultivated an agile development environment and introduced training programmes on service design and user experience. Fubon Life also takes advantage of the latest fintech developments and tools to respond to change in a timely manner, providing services that are of increasingly high quality.
All of these technologies improve our products and services. Fubon Life intends to build tied agents into a ‘business ironman’ by incorporating mobile, cloud and social media services into its toolkits. With a mobile office and cloud service platform that incorporates the functions of marketing, service, recruiting and management, tied agents are able to enhance their productivity and management efficiency wherever they are. This includes facilitating real-time communication and offering administrative services remotely via mobile devices. Fubon Life has also established an online learning centre so agents can attend courses at a time and place that fits in with their personal lives and career planning. Fubon Life promotes innovative insurance technology applications, such as a dynamic customer management platform, blockchain, application programming interfaces, micro-services, data warehousing and analytics to satisfy its customers’ diverse needs.
Supporting society
Fubon Life pays great attention to social trends and demands, and tailors its services to react to them. Caring for elderly people with dementia is a pressing challenge for both individuals and society. Fubon Life has responded to these social needs with the launch of its Enjoying the Silver Years programme.
The company had partnered with the Federation for the Welfare of the Elderly to provide training to almost 30,000 agents and employees on how to help those suffering from dementia. Fubon Life has also turned its 400-plus spread of sales offices across the nation into service hubs for dementia patients. This not only helps to strengthen the social safety net for an ageing society, but also makes Fubon Life the private enterprise with the largest number of service hubs for dementia patients in Taiwan. This year, Fubon Life has given away 1,000 smart identification bracelets to elderly people with dementia in order to prevent them from getting lost. The company also donated 1,000 ‘love memory’ piggy banks to raise funds for elderly people who live alone. The money raised will be presented to the Federation for the Welfare of the Elderly to fund the Missing Elderly Search Centre and the Make-A-Wish programme for underprivileged elderly people who live alone. The Missing Elderly Search Centre operates 24/7 and has successfully found all missing people who were wearing a smart bracelet.
In 2016, the company focused on promoting the health of elderly people by organising a number of fitness walking events around the nation. The company donated TWD 30 ($1) to each participant to fund the purchase of 10,000 charity lunchboxes for elderly people who live alone. Fubon also hosted its first three-a-side basketball tournament for people aged over 50, as well as the Fubon Life Braves college basketball tournament, a large-scale cross-departmental basketball tournament that enables amateur players to play basketball. With initiatives such as these rising in number and popularity with each passing year, Fubon Life continues in earnest to fulfil its corporate social responsibility aims, something we consider to be at the very core of what we do.
Even when limited to just one country, systems of taxation are complicated and difficult to navigate. When multiple countries and the spread of misinformation are factored in, it can be truly overwhelming. It is hardly surprising, therefore, that businesses and individuals often turn to professional tax advisors to make sense of the complex systems they are faced with.
Given that tax is defined as a compulsory contribution without consideration, it is understandable that taxpayers try to reduce this financial burden
The media’s reaction to the release of the Paradise Papers in November 2017 demonstrated that taxation is clearly an emotive issue, but not one that is always properly understood. There are, for example, various methods of reducing tax bills that are completely legal, whether they concern offshore businesses or not.
Tax optimisation is not something that should be condemned; it is simply one aspect of prudent fiscal management, no different from an individual making the most of their tax-deductible expenses when completing a personal tax return. Unfortunately, some governments appear committed to destroying tax competition, despite the fact that it is not to their advantage. This is a disturbing trend that is becoming particularly apparent in the EU, where the power of member states threatens to undermine our civil liberties.
Of course, staying on the right side of the law is essential, which is why choosing the right tax advisor or legal representative is so important. Afschrift Law Firm has been providing valuable advice to its clients for more than 20 years.
Competitive spirit
EU member states are in constant need of capital and, as a result, they are trying to collect the maximum amount of tax revenue. One of the methods that EU member states are using, under the pressure of more powerful members such as Germany and France, is to limit tax competition. As a consequence, measures are being collectively implemented to restrict tax optimisation.
This said, tax competition will never really disappear, and has even started to develop on regional or federal levels in countries such as Spain or Belgium. Even if governments attempt to prevent tax optimisation, opportunities will always exist. With states continually introducing new tax niches, which can create ways for companies to reduce their tax burden, it could be argued that tax optimisation is even encouraged by the state itself, albeit within a specific context. In any case, the more they are subject to heavy taxation, the more companies and individuals will resort to tax optimisation. The role of lawyers is to help them achieve their optimisation targets within the limits of the law.
Given that tax is defined as a compulsory contribution without consideration, it is understandable that taxpayers try to reduce this financial burden. Government efforts to prevent tax optimisation only result in the creation of new rules and greater complexity. In order to deal with the application of these rules, companies and individuals will be in even greater need of tax lawyers so as to avoid suffering the consequences of the state’s tax policy.
Letter of the law
Directives have been implemented to limit certain types of tax optimisation, such as the deduction of interest or royalties related to intellectual property rights. The implementation of these directives is the result of the joint and concerted action of several large EU members to make it less advantageous for companies to establish themselves in smaller EU countries, many of which use tax incentive policies to attract foreign investment. It is characteristic of the European Commission to use this tactic against its smaller members, including Luxembourg, the Netherlands, Belgium and Ireland.
Because these countries are so small, they need to attract foreign companies by adopting tax-friendly policies; without these advantageous tax policies, large companies would always base their operations in bigger countries. Having said this, it’s important that national tax incentive schemes are carefully chosen so they aren’t classified as selective state aids, which are prohibited in the EU.
Under another directive issued by the EU, tax advisors are obligated to disclose any tax optimisation programmes they set up for their clients. However, these rules are not applicable to lawyers because of attorney-client privilege, which is absolutely essential, especially given the complexity of tax laws. For clients, trusting their tax specialist is hugely important. A client cannot entrust their lawyer with the intricate details of their finances if they aren’t certain these details will remain confidential. This trust is the only way to make sure that clients disclose all information, which is vital if lawyers are to provide their clients with judicious advice and remain respectful of the law. Any measure that would limit attorney-client privilege could result in a violation of the law. The job of the lawyer is never to suggest a violation of the law, but rather to adapt to the law. At all times, the absolute protection of the client-attorney privilege should be upheld.
Optimisation for all
If one wishes to avoid the creation of a virtual cartel of EU states, fiscal competition between states, and even between territorial subdivisions and federal regions, is necessary. Such a cartel will always act against the interests of the taxpayer as its actions will necessarily result in an increase in taxation. While the role of individual states has increased in recent years, unfortunately their efficiency has not increased proportionally. Without fiscal competition, nothing would compel states to reduce tax, nor prevent them from increasing it.
Politicians will always be tempted to increase their power and present their roles as essential. Meanwhile, voters prefer to see personal gain than see taxes reduced for everybody. As a result, it is always more advantageous for politicians to propose plans that benefit their supporters, rather than reduce taxation in a uniform manner. Fiscal competition is therefore necessary in order to restrain the current trend that is seeing our societies become more and more state controlled. By their nature, taxes are set up by those in power. Without competition, this power may become arbitrary. Everybody must have the right to vote with their feet by establishing elsewhere if tax pressure becomes too much.
Nevertheless, fiscal competition does not seem to entirely disappear, even when faced with the pressure from the EU and the Organisation for Economic Cooperation and Development, which generally act in the interests of the most powerful states. Furthermore, even if unification could be achieved, this would not prevent the development of fiscal competition based on tax rates, the harmonisation of which is currently not being discussed.
It’s also worth keeping in mind that tax optimisation is not solely the preserve of large multinational companies: individuals and small companies can stand to benefit as well. First, there are procedures implemented by the tax administration, provided by law or by administrative practice. Moreover, the utilisation of the advance tax ruling procedure, through which a taxpayer may receive prior approval from the tax administration on any given future operation, is not reserved for big companies – smaller companies and individuals may also benefit from this.
Finally, tax optimisation does not always require an individual or organisation to have influence or capital. Lawyers and other advisors are perfectly positioned to recommend tax optimisation methods to smaller companies, specifically developed for them and adapted to their needs, taking into consideration their distinct legal or accounting situation.
On March 19, the Chinese Government announced two high-level appointments that could have a major impact on the country’s economic future. Yi Gang has been confirmed as the new governor of the People’s Bank of China, while Liu He, one of President Xi Jinping’s most trusted economic advisers, has taken a position as one of China’s four vice-premiers.
With the country now heading towards a debt-to-GDP ratio of 300 percent, its loose monetary policy cannot be continued indefinitely
Yi will succeed outgoing bank chief Zhou Xiaochuan, who is retiring after 15 years in the role, and will look to build upon his predecessor’s legacy of economic reform. Under Zhou, China’s central bank pursued a policy of financial liberalisation and managed to weather a global financial crisis. Yi will be expected to continue in much the same vein, while also encouraging greater foreign investment into the country.
“The main task is that we should implement prudent monetary policy, push forward the reform and opening-up of the financial sector, and maintain the stability of the entire financial sector,” Yi explained to reporters following his appointment.
As China’s central bank is not independent of the government, Yi will have to report to new vice-premier Liu He, who is expected to head up the newly created Financial Stability and Development Commission. The man known by some as ‘Uncle He’ has a long history with the Communist Party and is believed to have been friends with President Xi since they were both teenagers. He has held a number of senior roles within the government and is widely believed to be the driving force behind a recent shift in the country’s economic policy.
For decades, China pursued a credit-fuelled economic strategy that saw it become the epicentre of global growth. However, with the country now heading towards a debt-to-GDP ratio of 300 percent, there is a perception that its loose monetary policy cannot be continued indefinitely.
Both Yi and He will be tasked with moving the country towards more sustainable growth, but the latter’s new vice-premiership role means that he will also be expected to improve relations with the US. Given President Trump’s long-standing anti-China rhetoric and his recent import tariffs, that is likely to take up a significant portion of his time.
The past year will be remembered as one of the toughest in recent history for the Peruvian insurance market. Over the course of 2017, the sector was ransacked by regulatory changes and beset by weather-related issues. On the property side of business, the market has been dented by the political turmoil surrounding the Odrebrech corruption scandal and a recent fight between Congress and the Peruvian Government. Meanwhile, Peru remains one of the least insured countries on the continent.
The sector is moving past the setbacks of 2017 and looking at new ways of tapping into the huge potential of the growing middle class in the country
But against this seemingly pessimistic backdrop, a turnaround is fast approaching. The sector is moving past the setbacks of 2017 and looking at new ways of tapping into the huge potential of the country’s growing middle class. Meanwhile, a surge in foreign direct investment is bringing new momentum to the sector, which is on the brink of some serious forward progress, aided by the use of big data and the online market. In order to track the latest developments in the industry, World Finance spoke to Renzo Calda, CEO of Mapfre, a pioneering global insurance company that is present in 19 states across Peru.
How robust is Peru’s insurance market at present?
The last year has been the worst in the last decade and a half. That being said, the industry has been negatively impacted by new regulations relating to the private pension fund. At the same time, El Niño-season floods have presented a stubborn obstacle to success. Thankfully, these issues are now behind us and the sector is beginning to look far healthier thanks to reconstruction, increased foreign investment and a better political climate.
What key factors have contributed to driving growth in the Peruvian insurance industry in recent years?
While the overall growth rate has certainly slowed during last four years, personal lines of insurance – relating to life, personal accidents and vehicles – have been pretty strong. These products have been the main beneficiaries of the growing middle class in Peru. In fact, personal products like life and health insurance have been especially dynamic in recent years. Furthermore, the property business has seen substantial growth, owing to developments in both mining and infrastructure, which have helped sustain the insurance industry during the recent stint of low growth.
At present, what are the key challenges for Mapfre and others in the sector?
Principally, we must focus on the challenge of reaching the growing middle class with an adequate value offering. We have to keep working on communication, distribution and simplicity.
We have to attract the new generations. We used to reach our market through intermediaries, but new generations rely on their phone rather than sales agents. This has been the most dramatic change in our industry. Communicating digitally is not just a technological issue, but involves a whole new language and code of interaction.
Looking ahead, how do you expect the Peruvian insurance sector to change over the next five to 10 years?
It is clear that those who master the online market, digital transformation and big data, are more likely to succeed.
How successful is Mapfre in terms of profits and growth?
In terms of growth, we have been able to double our peer group’s growth ratio, while also increasing our market share from nine percent to 18 percent (excluding pension insurance, which we do not sell). In terms of profits, we have been able to outpace our peers by more than 50 percent throughout the past five years; on average, we have achieved a 24 percent return on equity.
What are the keys to your success at Mapfre?
I would group them in three. First, we have a well-designed market strategy and highly effective channels and products. Notably, we started our online channel seven years ago and focused on products such as homeowners and final expenses before anybody else.
The second key to success is talent: at Mapfre, we have a knowledgeable and passionate team that has stayed with us throughout this whole journey. Third, we provide a high level of support to operations as our strategy is based on solid technology that delivers reliability, efficiency and first-class business intelligence.
Do you believe that Mapfre can continue to achieve profitable growth into the future?
Yes, but what got us here was not a written recipe – instead, we are brave cooks. Profitable growth is intrinsically linked to our values and beliefs. We maintain that success comes from a consistent approach from management, whilst also being willing to take calculated risks and remain open to trying new things. We have all this embedded in our DNA and no matter what new trend appears in the future, I am confident that we will always be prescient enough to benefit from it.
Economist Farida Khambata coined the term ‘frontier market’ in 1992 to describe a market that is more developed than the least developed economies, but not economically advanced enough to be considered an emerging market. These markets elicit fear and enthusiasm from investors in equal measure, as they are generally less accessible than those in the developed world, but they remain attractive to those seeking plentiful long-term rewards. However, the volatility of frontier markets means that more risk-averse investors may be tempted to take their money elsewhere.
The volatility of frontier markets means that more risk-averse investors may be tempted to take their money elsewhere
In the petroleum industry, frontier countries must evaluate how to attract investment from international oil companies, even as low oil prices continue to hamper exploration activities. Frontier countries lacking geological data carry high exploratory risk, making it hard to attract oil companies. Recently, some governments have taken a progressive approach to their production sharing contracts (PSCs) in order to establish a flexible and simple fiscal framework that considers institutional risks. The objective is clear: minimise risks, attract investment and focus on the longer-term gains.
Attracting investment
One of the first frontier countries to take a progressive approach was Uruguay. In December 2008, during the height of the financial crisis and the associated oil price collapse, Uruguay held its first offshore licensing round. Conscious of its frontier status, Uruguay applied a strategy based upon three pillars: establishing a comprehensive legal and regulatory framework; providing data on exploratory potential; and highlighting the country’s positive investment climate. The round was successful in attracting major companies.
During 2016 and 2017, Canales Auty worked with two frontier countries, Belize and the Dominican Republic, which both chose a progressive approach to their PSCs. Belize’s single producing field was in decline and exploration had stalled. The objective was to modernise its legal framework, introduce a new PSC and attract investment. It also wanted to simplify the fiscal regime in order to reduce the administrative burden caused by a plethora of royalties, taxes and exemptions.
The Belize Government also sought to create a stable regime with a universally applicable fiscal system for gas, petroleum, onshore and offshore. Politicians appreciated that only a progressive tax system could meet these objectives and respond to volatile oil prices, exploration and production cost structures, and potential discoveries. The government chose to go back to the roots of the PSC concept and become a project partner, sharing equally in the positives and negatives of each project. To do so, it chose a PSC with only one tax based upon the internal rate of return. Cost control is paramount for such a system to work. For most governments, especially those without an independent regulator, this is a challenge.
The solution was to outsource elements of the development plan to independent experts. Now, an external company must review the development plan prior to its approval, along with any proposed changes and associated costs. The use of independent advice adds third-party and governance risk. The PSC, therefore, sets out clear rules for contracting independent third-party advice, time schedules and contingency plans in the event that these schedules are not met. Reviews of contractor accounts, hydrocarbon sale contracts and transportation agreements all involve similar third-party involvement.
Progressive production
Following the path of some frontier countries in the Caribbean region, the Dominican Republic has also taken the political decision to attract oil companies. Working with Schlumberger, the state analysed its technical data and made it freely available for a licensing round due to commence in 2018. It has chosen a universally applicable PSC based upon a fiscal regime similar to that found in Belize.
The pragmatic stance of both the Ministry of Hydrocarbons and Ministry of Finance is to be commended in both countries. They realised that while front-end taxes, such as bonuses, and royalties provide quick income to the treasury, they also reduce the probability of investment. They also acknowledged any institutional weaknesses, thereby allowing governance processes to be strengthened within the PSC.
Under such a mandate, Canales Auty produced the first model PSC for the Dominican Republic. A new frontier PSC intended to accelerate exploration, mitigate oil price weakness and financing risk, provide fiscal and non-fiscal stability, enhance recovery, and reduce administrative complexity. Importantly, to avoid unnecessary tension once production starts, the PSC provides an adequate balance between investor interest and state control.
The huge discovery of the Liza oil field in Guyana has captured the attention of frontier countries worldwide, pushing them to not only take advantage of available new technologies, but also to move away from traditional and rigid contractual frameworks. As more discoveries are made, the future of frontier PSCs looks optimistic, and traditional oil-producing countries are likely to begin incorporating more progressive features into their PSCs.
We have seen an increase in household deposits, which is very positive considering unemployment is still high and the accompanying tax burden reduces people’s capability to save. Despite this, depositors’ trust is increasing, resulting in a partial return of deposits into the system. This is in part due to banks’ multiple efforts to incentivise household deposits with specific products and services.
