Since the incidence of maritime piracy off the Horn of Africa is on the rise, will this endanger the economic viability of private companies underwriting war risk insurance contracts?
By: Ringo Bones
Ever since that brazen act of piracy by Somali pirates that allowed them to successfully hijack a full-sized Saudi-owned oil tanker then held her for a “King’s Ransom” became headline news, many of those in the insurance industry have switched into panic mode. After all, the International Community have not even yet reached a consensus whether to classify piracy as an act of war under the Geneva Convention, or just a civil criminal act. Given the current legal debacle of Guantánamo, are war risk insurance contracts still an economically viable part of the insurance industry?
War risk insurance is defined as a type of insurance that covers damages due to acts of war. This usually includes invasion, insurrection, rebellion, and hijacking. Some war risk insurance policies cover damage incurred when weapons of mass destruction – like nuclear devices – were used. This type of insurance is mostly issued in the shipping and the aviation industry.
War risk insurance generally has two parts: War Risk Liability, which covers personnel and items within the craft and is calculated based on the indemnity amount; and War Risk Hull, which covers the craft itself and is calculated based on the value of the craft. War risk insurance premiums are usually based on the expected stability of the countries and territories to which the vessel will travel.
Back in September 11, 2001, policies for private war risk insurance were temporarily canceled but later reinstated with substantially reduced indemnities. In response to this cancellation, the US federal government set up a terror insurance to cover commercial airlines. Because of this, the International Air Transport Association has argued that airline companies operating in the United States which do not provide war risk insurance find themselves at a competitive disadvantage. Because war risk insurance is very dependent on the prevailing geopolitical climate, some insurance companies – like Lloyds for example – have even made adverts highlighting that their companies are very mindful about the prevailing global trends concerning geopolitical security and stability.
For all intents and purposes, and their actions caught on the international news media’s cameras. Somali pirates in most people’s eyes falls under the purview of the Geneva Convention Section I on Belligerents, Article 1. Stating that countries where militia or volunteer corps constitute the army, or form a part of it, they are included under the denomination “army”. So like the al-Qaeda operatives, Somali pirates are by definition enemy combatants waging a war with the Western civilization through piracy.
Given that the maritime industry is the lifeblood of our current global economy, will the threat of piracy make the shipping of goods by sea become prohibitively expensive due to security and insurance mark-ups? Piracy, like the one existing in the Gulf of Aden and the Straits of Malacca only received scant Foreign Policy prosecution by various members of the International Community. With this conundrum, insurance companies and their clients – especially the clients – who are at the sharp end of uncertain losses that’s ever increasing can finally call themselves as the “social group” claiming to be unable to pay for protection. Thus causing widespread social jeopardy to the maritime industry workers and their families, the roots of which can be traced to various governments around the world and their inaction in ending the scourge of piracy.
Saturday, November 29, 2008
Thursday, October 16, 2008
The American Taxpayer: Insurance Underwriters of Last Resort?
The Bush Administration’s 700 billion-dollar bailout package is supposedly for increasing banking liquidity – i.e. make banks more confident in providing credit. But is it wise to use the American taxpayer’s money?
By: Ringo Bones
As a way of mitigating the worst effects of the US Credit Crisis - which has now become global, the Bush Administration gave the green light on the implementation of their 700 billion-dollar bailout plan. An overwhelming majority of American taxpayers now question the wisdom of using public funds to bail out the follies that was caused by Wall Street’s “Quixotic Adventurism” in pursuit of easy money. While many Americans are now beginning to understand that when major financial institutions are allowed to fail – like Lehman Brothers – the negative repercussions will surely be felt around the world. And the question now is the decision to use the American taxpayer’s money a wise choice? Those in the know will inevitably be saying: “But isn’t this tantamount to a nationalization that would inevitably transform the US banking system from a free market economy to a command socialist economy?” After all, this inevitability will surely undermine the ideological underpinnings of Wall Street’s perception of what free market capitalism should be – a paragon of the American Protestant Work Ethic.
Central banks around the world are now coordinating to implement a plan modeled after the Bush Administration’s 700 billion dollar economic bailout scheme – albeit at a more modest scale. This is due to the fact that the International Monetary Fund’s top brass’ praise of the Bush Administration’s economic bail out scheme as “the most sensible so far” in solving our current global economic crisis. Thus the taxpayers disdain of using public funds to bail out the excesses and adventurism of the banking sector is no longer confined to the United States.
If the taxpayers’ money ever becomes the financial too of choice by governments to bail out their ailing economies, then the majority of us taxpayers will inevitably be harboring resentment. Plus that ever increasing consensus that insurance companies make so much because they charge clients / their customers high premiums and then underplay or deny claims altogether. Some have even said that insurance companies are just daring us to fight back. Will incidence of insurers bad faith rear its ugly head on every government around the world attempts’ in alleviating our global financial crisis?
By: Ringo Bones
As a way of mitigating the worst effects of the US Credit Crisis - which has now become global, the Bush Administration gave the green light on the implementation of their 700 billion-dollar bailout plan. An overwhelming majority of American taxpayers now question the wisdom of using public funds to bail out the follies that was caused by Wall Street’s “Quixotic Adventurism” in pursuit of easy money. While many Americans are now beginning to understand that when major financial institutions are allowed to fail – like Lehman Brothers – the negative repercussions will surely be felt around the world. And the question now is the decision to use the American taxpayer’s money a wise choice? Those in the know will inevitably be saying: “But isn’t this tantamount to a nationalization that would inevitably transform the US banking system from a free market economy to a command socialist economy?” After all, this inevitability will surely undermine the ideological underpinnings of Wall Street’s perception of what free market capitalism should be – a paragon of the American Protestant Work Ethic.
Central banks around the world are now coordinating to implement a plan modeled after the Bush Administration’s 700 billion dollar economic bailout scheme – albeit at a more modest scale. This is due to the fact that the International Monetary Fund’s top brass’ praise of the Bush Administration’s economic bail out scheme as “the most sensible so far” in solving our current global economic crisis. Thus the taxpayers disdain of using public funds to bail out the excesses and adventurism of the banking sector is no longer confined to the United States.
If the taxpayers’ money ever becomes the financial too of choice by governments to bail out their ailing economies, then the majority of us taxpayers will inevitably be harboring resentment. Plus that ever increasing consensus that insurance companies make so much because they charge clients / their customers high premiums and then underplay or deny claims altogether. Some have even said that insurance companies are just daring us to fight back. Will incidence of insurers bad faith rear its ugly head on every government around the world attempts’ in alleviating our global financial crisis?
Wednesday, September 10, 2008
Tattoo and Piercing Insurance
Even though this form of insurance has been regularly available across the United States for more than a decade, tattoo and piercing insurance is still an esoteric idea to some bemoaning how tattooing became popular. Is this insurance really useful?
By: Vanessa Uy
Toward the end of the 1980’s, when the rise of the Los Angeles Hair Metal Scene epitomized by bands like Mötley Crüe, Guns N’ Roses, LA Guns, and Poison started to made tattoos – even body piercings - a part of Madison Avenue’s “Fashion Ethic”. Tattoo insurance was virtually nonexistent. A few years later with the rise of the Seattle Grunge scene, the concept of a “Tattoo Insurance” began to take shape.
Many in the tattoo art world credit insurance agents Ray Pearson and Susan Preston for making tattoo insurance an economically viable product. Ray Pearson is the self-proclaimed “short, hairy, fat guy in a suit that you see at the conventions behind the Alliance of Professional Tattooists or APT booth” of O.S. Bruner. While Susan Preston of Professional Program Insurance Brokerage for their hard work during the mid-1990’s to make tattoo insurance a reality. Both Ray and Susan have tattoos themselves, which make them in a privileged position understand their respective clients’ point of view. At the time, Ray Pearson and Susan Preston were very busy in providing tattoo shops with coverage at a minimum cost. The coverage also includes piercing, since this body-modification artform has risen in popularity when the 1990’s began.
Tattoo insurance starts with two basic types of coverage. The first is general liability, which provides coverage similar to that of a standard homeowner’s policy – i.e. coverage against fire, flooding etc. General liability coverage is available to professional tattoo and piercing studios that meet the eligibility requirements.
Next is professional liability, which protects an individual tattooist or piercer much like the malpractice insurance that covers physicians. Professional liability has been proved very important in most cases since judging “artistic merit” is largely a matter of taste. This coverage mainly provides legal defense costs (which can be substantial) especially in cases when a client is not satisfied with his or her tattoo. Professional liability also covers various “mistake” claims, like the perennially publicized “Fighting Irish” debacle.
Insurance companies basically judge professional liability eligibility on the normal, commercial underwriting standards. Like the cleanliness of the shop? The type of neighborhood is the shop in since geographic profiling / gentrification / red lining can be an issue (Have you observed the 2008 US presidential hopeful Barack Obama’s Chicago South Side neighborhood’s “arrested development” via Machiavellian-style political machinations?). Are there any immediate hazardous exposures next door? (Like Monsanto’s undocumented PCB dump sites). Insurance companies also look for legitimate, professional, permanently located tattoo / piercing studios as opposed to an artist working out of his or her own basement.
Some insurance companies require a tattoo shop to routinely register their clients in a log to prove that the specific person were tattooed by them on a specific date. This is distinct from the paperwork of liability waivers most tattooists and piercers require their customers to sign. Courts have been recognizing the validity of these waivers and had been enforcing them for over a decade now. When an adult enters into another contract with another adult, signed with a full understanding and approval, the artist is free of responsibility. The cost to the tattooist is then limited to legal fees, which the insurance company pays for.
As the cornerstone of a good “beauty business” has always been repeat customers and referrals. Tattooists and piercers can be considered an excellent example of a beauty business for reasons previously described, but they also did a good job of policing themselves over the years by consistently and universally operating on a safe and professional level that there haven’t been many claims. This resulted in a business that operates on minimal loss and high profit margins that insurance costs by way of premiums can be considered minimal.
Professional Program Insurance Brokerage offer insurance premiums that start as low as $615 to insure a tattoo shop or individual artist. They usually charge 10% more if a shop does facial or cosmetic tattooing – like permanent eyebrows and lipcolor - which is considered riskier than regular body tattooing.
Some insurance companies offer group policies. O.S. Bruner offers such a policy to eligible Alliance of Professional Tattooists or APT members, which significantly lower the costs of availing one. Ray Pearson says O.S. Bruner’s average shop policy with $30,000 of contents coverage, a $500,000 limit of general liability, and special perils coverage - which is “all risk”, including theft - costs around $1,175, inclusive of taxes and other fees.
Most companies offer tattoo liability limits available from $100,000 to a million dollars. And property coverage can be scaled-up for basically whatever the client needs. Premiums can be paid in a lumped sum – i.e. all at once - or through a more manageable monthly financing. Looks like the tattoo and piercing insurance providers are really looking out for both the shops and their customers, how’s that for corporate social responsibility.
The short but crowded history of tattoo and piercing artform’s assault on the money driven media mainstream – from the late 1980’s Hair Metal scene to the mid 1990’s Riot Grrrl movement epitomized by Theo Kogan and the rest of Lunachicks. With anything that had gone before, between, or after has really popularized both tattoos and body piercings. Some might be jaded, but for better or for worse (I say better) tattooing might outlast anything – the US Navy, Bike Gangs / Enthusiasts, etc - that had helped it become popular in the first place.
By: Vanessa Uy
Toward the end of the 1980’s, when the rise of the Los Angeles Hair Metal Scene epitomized by bands like Mötley Crüe, Guns N’ Roses, LA Guns, and Poison started to made tattoos – even body piercings - a part of Madison Avenue’s “Fashion Ethic”. Tattoo insurance was virtually nonexistent. A few years later with the rise of the Seattle Grunge scene, the concept of a “Tattoo Insurance” began to take shape.
Many in the tattoo art world credit insurance agents Ray Pearson and Susan Preston for making tattoo insurance an economically viable product. Ray Pearson is the self-proclaimed “short, hairy, fat guy in a suit that you see at the conventions behind the Alliance of Professional Tattooists or APT booth” of O.S. Bruner. While Susan Preston of Professional Program Insurance Brokerage for their hard work during the mid-1990’s to make tattoo insurance a reality. Both Ray and Susan have tattoos themselves, which make them in a privileged position understand their respective clients’ point of view. At the time, Ray Pearson and Susan Preston were very busy in providing tattoo shops with coverage at a minimum cost. The coverage also includes piercing, since this body-modification artform has risen in popularity when the 1990’s began.
Tattoo insurance starts with two basic types of coverage. The first is general liability, which provides coverage similar to that of a standard homeowner’s policy – i.e. coverage against fire, flooding etc. General liability coverage is available to professional tattoo and piercing studios that meet the eligibility requirements.
Next is professional liability, which protects an individual tattooist or piercer much like the malpractice insurance that covers physicians. Professional liability has been proved very important in most cases since judging “artistic merit” is largely a matter of taste. This coverage mainly provides legal defense costs (which can be substantial) especially in cases when a client is not satisfied with his or her tattoo. Professional liability also covers various “mistake” claims, like the perennially publicized “Fighting Irish” debacle.
Insurance companies basically judge professional liability eligibility on the normal, commercial underwriting standards. Like the cleanliness of the shop? The type of neighborhood is the shop in since geographic profiling / gentrification / red lining can be an issue (Have you observed the 2008 US presidential hopeful Barack Obama’s Chicago South Side neighborhood’s “arrested development” via Machiavellian-style political machinations?). Are there any immediate hazardous exposures next door? (Like Monsanto’s undocumented PCB dump sites). Insurance companies also look for legitimate, professional, permanently located tattoo / piercing studios as opposed to an artist working out of his or her own basement.
Some insurance companies require a tattoo shop to routinely register their clients in a log to prove that the specific person were tattooed by them on a specific date. This is distinct from the paperwork of liability waivers most tattooists and piercers require their customers to sign. Courts have been recognizing the validity of these waivers and had been enforcing them for over a decade now. When an adult enters into another contract with another adult, signed with a full understanding and approval, the artist is free of responsibility. The cost to the tattooist is then limited to legal fees, which the insurance company pays for.
As the cornerstone of a good “beauty business” has always been repeat customers and referrals. Tattooists and piercers can be considered an excellent example of a beauty business for reasons previously described, but they also did a good job of policing themselves over the years by consistently and universally operating on a safe and professional level that there haven’t been many claims. This resulted in a business that operates on minimal loss and high profit margins that insurance costs by way of premiums can be considered minimal.
Professional Program Insurance Brokerage offer insurance premiums that start as low as $615 to insure a tattoo shop or individual artist. They usually charge 10% more if a shop does facial or cosmetic tattooing – like permanent eyebrows and lipcolor - which is considered riskier than regular body tattooing.
Some insurance companies offer group policies. O.S. Bruner offers such a policy to eligible Alliance of Professional Tattooists or APT members, which significantly lower the costs of availing one. Ray Pearson says O.S. Bruner’s average shop policy with $30,000 of contents coverage, a $500,000 limit of general liability, and special perils coverage - which is “all risk”, including theft - costs around $1,175, inclusive of taxes and other fees.
Most companies offer tattoo liability limits available from $100,000 to a million dollars. And property coverage can be scaled-up for basically whatever the client needs. Premiums can be paid in a lumped sum – i.e. all at once - or through a more manageable monthly financing. Looks like the tattoo and piercing insurance providers are really looking out for both the shops and their customers, how’s that for corporate social responsibility.
The short but crowded history of tattoo and piercing artform’s assault on the money driven media mainstream – from the late 1980’s Hair Metal scene to the mid 1990’s Riot Grrrl movement epitomized by Theo Kogan and the rest of Lunachicks. With anything that had gone before, between, or after has really popularized both tattoos and body piercings. Some might be jaded, but for better or for worse (I say better) tattooing might outlast anything – the US Navy, Bike Gangs / Enthusiasts, etc - that had helped it become popular in the first place.
Friday, August 29, 2008
Collaterized Debt Obligations: Instigating the Global Credit Crunch?
Somewhat unfairly blamed as the instigating agent of the 2007 Global Credit Crunch, are collaterized debt obligations or CDO, really deserving of such infamy?
By: Ringo Bones
After reading the latest book by the billionaire investor guru George Soros titled “The New Paradigm for Financial Markets”, I recently had an epiphany that stability and equilibrium are not our Wall Street controlled global economy’s natural state of being. Instead, the quixotic adventurism in search of quick and easy profits undertaken under unacceptable levels of risk is the rule, rather than the exception. Thus explaining the inevitability of the global credit crunch and the current yo-yoing price of crude oil pegged against the US dollar. Even the rise of asset backed security based on synthetic constructs marketed as investments to anyone who likes to experience first-hand what it's like to be financially devastated by an Enron-type scheme.
Often referred to by everyone’s friendly neighborhood financial advisor as an asset backed security product that works just like a home insurance against losses from fire and theft. Except that it applies to big corporation’s credit insurance which you – a mere civilian – can easily get rich of off. By the start of the 21st Century, CDO s was being sold-off to with alarming frequency to financially ignorant civilians – i.e. people like you and me. Your friendly neighborhood financial advisor might – and it’s very likely – to have made ungodly amounts of money relatively easily. Surprisingly to you – the financially ignorant - through the sheer inherent complexity of structured financial transactions of CDO s that he or she –your financial advisor – might seem like a saint for helping you, the financially ignorant retail chump, to experience your friendly neighborhood financial advisors new found get-rich-quick scheme. Except your financial advisor forgot to mention one tiny but very important detail. You must sell – i.e. pass on / dump them – your CDO s once the financial markets turns into a “Bear”. But most of all, are collaterized debt obligations or CDO deserving of their infamy? But first, let us first explain what is a CDO.
Collaterized Debt Obligations or CDO s are often described by financial academics as a type of asset-backed security and structured credit product. CDO ’s are constructed from a portfolio of fixed-income assets. The assets are divided into different credit rating tranches: senior tranches which are rated AAA or “triple a”, mezzanine tranches which are lower on the credit rating “food chain” are rated AA to BB, and the equity tranches, which are unrated. The first CDO were issued back in 1987 by bankers of the now defunct Drexel Burnham Lambert Inc. for the Imperial Savings Association. A decade later, CDO s became the fastest growing sector of the asset-backed “synthetic” securities market.
A major factor for the further growth of CDO s at the start of the 21st Century was the 2001 introduction of Gaussian Copula Models by David X. Li. Which allowed the rapid pricing of CDO s. Because of this, Collaterized Debt Obligations became a major force in the so-called derivatives market were the value of the derivative is derived from the value of other assets. But unlike some fairly straightforward – i.e. “real” derivatives – such as stock options, calls and even the much-maligned Credit Default Swap, CDO s were nearly impossible for the average person to understand. To me at least, the higher mathematics used in creating synthetic securities constructs like Collaterized Debt Obligations and its related variants like Collaterized Insurance Obligations are better to be used in designing weapons systems that will allow a 250-gram projectile to be thrown at 2,700 feet per second. Most of all if anything goes terribly wrong, asset-backed synthetic securities are really worth less than the paper they are printed on, or the bits – one’s and zeroes – they are encoded on.
The complexity of CDO products – which the investor savvy swears by for making him or her earn easy money – is the reason why CDO s are often blamed by the mainstream news media for the 2007 credit crunch. This inherent complexity is often blamed for the failure of risk and recovery models used by credit rating agencies to value these products. Worst of all, CDO s and their ilk are just mere “financial constructs” – as opposed to concrete assets like gold or land. Complicating matters even more was that there was no market on which to sell the CDO s – i.e. CDO s aren’t traded on exchanges. Causing many CDO customers to be mauled by the impending Bear Market. Which is no Bull by the way.
Given that the math used for credit rating various CDO products is about as complex as the higher mathematics used to quantify the dynamics of certain complex sociological phenomena, its best to be pragmatic. It might lead some to some desperation in embracing Sharia Banking Laws in order to retain a semblance of financial stability in our post global credit crunch environment. Were the sobering fact fiscal austerity are forcing credit and bond insurance underwriters to finally remember what it means to be prudent in doing business.
By: Ringo Bones
After reading the latest book by the billionaire investor guru George Soros titled “The New Paradigm for Financial Markets”, I recently had an epiphany that stability and equilibrium are not our Wall Street controlled global economy’s natural state of being. Instead, the quixotic adventurism in search of quick and easy profits undertaken under unacceptable levels of risk is the rule, rather than the exception. Thus explaining the inevitability of the global credit crunch and the current yo-yoing price of crude oil pegged against the US dollar. Even the rise of asset backed security based on synthetic constructs marketed as investments to anyone who likes to experience first-hand what it's like to be financially devastated by an Enron-type scheme.
Often referred to by everyone’s friendly neighborhood financial advisor as an asset backed security product that works just like a home insurance against losses from fire and theft. Except that it applies to big corporation’s credit insurance which you – a mere civilian – can easily get rich of off. By the start of the 21st Century, CDO s was being sold-off to with alarming frequency to financially ignorant civilians – i.e. people like you and me. Your friendly neighborhood financial advisor might – and it’s very likely – to have made ungodly amounts of money relatively easily. Surprisingly to you – the financially ignorant - through the sheer inherent complexity of structured financial transactions of CDO s that he or she –your financial advisor – might seem like a saint for helping you, the financially ignorant retail chump, to experience your friendly neighborhood financial advisors new found get-rich-quick scheme. Except your financial advisor forgot to mention one tiny but very important detail. You must sell – i.e. pass on / dump them – your CDO s once the financial markets turns into a “Bear”. But most of all, are collaterized debt obligations or CDO deserving of their infamy? But first, let us first explain what is a CDO.
Collaterized Debt Obligations or CDO s are often described by financial academics as a type of asset-backed security and structured credit product. CDO ’s are constructed from a portfolio of fixed-income assets. The assets are divided into different credit rating tranches: senior tranches which are rated AAA or “triple a”, mezzanine tranches which are lower on the credit rating “food chain” are rated AA to BB, and the equity tranches, which are unrated. The first CDO were issued back in 1987 by bankers of the now defunct Drexel Burnham Lambert Inc. for the Imperial Savings Association. A decade later, CDO s became the fastest growing sector of the asset-backed “synthetic” securities market.
A major factor for the further growth of CDO s at the start of the 21st Century was the 2001 introduction of Gaussian Copula Models by David X. Li. Which allowed the rapid pricing of CDO s. Because of this, Collaterized Debt Obligations became a major force in the so-called derivatives market were the value of the derivative is derived from the value of other assets. But unlike some fairly straightforward – i.e. “real” derivatives – such as stock options, calls and even the much-maligned Credit Default Swap, CDO s were nearly impossible for the average person to understand. To me at least, the higher mathematics used in creating synthetic securities constructs like Collaterized Debt Obligations and its related variants like Collaterized Insurance Obligations are better to be used in designing weapons systems that will allow a 250-gram projectile to be thrown at 2,700 feet per second. Most of all if anything goes terribly wrong, asset-backed synthetic securities are really worth less than the paper they are printed on, or the bits – one’s and zeroes – they are encoded on.
The complexity of CDO products – which the investor savvy swears by for making him or her earn easy money – is the reason why CDO s are often blamed by the mainstream news media for the 2007 credit crunch. This inherent complexity is often blamed for the failure of risk and recovery models used by credit rating agencies to value these products. Worst of all, CDO s and their ilk are just mere “financial constructs” – as opposed to concrete assets like gold or land. Complicating matters even more was that there was no market on which to sell the CDO s – i.e. CDO s aren’t traded on exchanges. Causing many CDO customers to be mauled by the impending Bear Market. Which is no Bull by the way.
Given that the math used for credit rating various CDO products is about as complex as the higher mathematics used to quantify the dynamics of certain complex sociological phenomena, its best to be pragmatic. It might lead some to some desperation in embracing Sharia Banking Laws in order to retain a semblance of financial stability in our post global credit crunch environment. Were the sobering fact fiscal austerity are forcing credit and bond insurance underwriters to finally remember what it means to be prudent in doing business.
Thursday, July 31, 2008
Credit Default Swaps: Easy Money through Complexity?
Often referred to as a sophisticated form of credit insurance that’s an easy source of big money for the financially savvy, that is until greedy speculators used them to cash in on the US subprime mortgage crisis. Green backs from Red Tape?
By: Vanessa Uy
Financial regulators now bemoan the existence of Credit Default Swaps or CDS. Some even say that trading in Credit Default Swaps ought to be crime because of the way it siphons the hard-earned money of less investment savvy folks into the coffers of greedy speculators. This almost criminal practice of earning big money easily was recently highlighted by the financially savvy purchasers of homeowners insurance who opted for Credit Default Swaps to hedge their risks, which unfortunately created a “domino-effect” that led into the US credit crunch and the subprime mortgage crisis. Because of this, majority of US banks and other financial institutions no longer trust the credit worthiness of their fellow “financial institutions” due to the effects of the unregulated trade in Credit Default Swaps. But in order for us to form a sound judgment over Credit Default Swaps, let us first define what it is.
A Credit Default Swap or CDS is a credit derivative – i.e. financial instruments of special nature – dealt between two counterparties. One party makes periodic payments – usually in the form of insurance premiums – to the other and receives the promise of a payoff if a third party defaults. The former party receives credit protection via credit insurance and is said to be the “purchaser”. The other party provides credit protection and is said to be the "seller”, while the third party is known as the “reference entity”. For all intents and purposes, Credit Default Swaps are nothing more than privately traded insurance contracts that let people bet on a certain company’s financial health.
When it comes to credit derivative products, Credit Default Swaps are the most widely traded. The usual term of maturity of a CDS contract is five years. But because it is a derivative that’s dealt over-the-counter, Credit Default Swaps of almost any maturity can be traded.
As credit derivatives go, Credit Default Swaps are a relatively recent development. Back in 1995, Blythe Masters of JP Morgan developed the first Credit Default Swap and Collaterized Debt Obligations even though other bond insurance products are already available since the 1970’s. When Blythe Masters was heading the Global Credit Derivatives group of JP Morgan, he introduced Credit Watch in April 2, 2007 as a regulatory measure and also to help evaluate credit swaps among other financial instruments. By the end of 2007, there is an estimated 45 trillion US dollars worth of Credit Default Swap contracts. But if the inherent regulatory measures are well established, then what’s the problem?
The problem with Credit Default Swaps occurs when they hit the market. Everyone knows that banks and insurance companies are regulated, while the credit swaps market is not. Because of this, contracts can be traded – or swapped – from investor to investor without any regulatory body overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends – the insured and the insurer – with nary an oversight. Thus your typical greedy speculator has now been granted “free reign” to prey upon the financially ignorant and those with gullibility for get rich quick schemes. For all intents and purposes, the current market in credit derivatives has now become Mephistopheles’ playground due to lack of regulation and oversight. Thus perpetuating our current financial crisis in which these forms of credit insurance were built to prevent in the first place.
By: Vanessa Uy
Financial regulators now bemoan the existence of Credit Default Swaps or CDS. Some even say that trading in Credit Default Swaps ought to be crime because of the way it siphons the hard-earned money of less investment savvy folks into the coffers of greedy speculators. This almost criminal practice of earning big money easily was recently highlighted by the financially savvy purchasers of homeowners insurance who opted for Credit Default Swaps to hedge their risks, which unfortunately created a “domino-effect” that led into the US credit crunch and the subprime mortgage crisis. Because of this, majority of US banks and other financial institutions no longer trust the credit worthiness of their fellow “financial institutions” due to the effects of the unregulated trade in Credit Default Swaps. But in order for us to form a sound judgment over Credit Default Swaps, let us first define what it is.
A Credit Default Swap or CDS is a credit derivative – i.e. financial instruments of special nature – dealt between two counterparties. One party makes periodic payments – usually in the form of insurance premiums – to the other and receives the promise of a payoff if a third party defaults. The former party receives credit protection via credit insurance and is said to be the “purchaser”. The other party provides credit protection and is said to be the "seller”, while the third party is known as the “reference entity”. For all intents and purposes, Credit Default Swaps are nothing more than privately traded insurance contracts that let people bet on a certain company’s financial health.
When it comes to credit derivative products, Credit Default Swaps are the most widely traded. The usual term of maturity of a CDS contract is five years. But because it is a derivative that’s dealt over-the-counter, Credit Default Swaps of almost any maturity can be traded.
As credit derivatives go, Credit Default Swaps are a relatively recent development. Back in 1995, Blythe Masters of JP Morgan developed the first Credit Default Swap and Collaterized Debt Obligations even though other bond insurance products are already available since the 1970’s. When Blythe Masters was heading the Global Credit Derivatives group of JP Morgan, he introduced Credit Watch in April 2, 2007 as a regulatory measure and also to help evaluate credit swaps among other financial instruments. By the end of 2007, there is an estimated 45 trillion US dollars worth of Credit Default Swap contracts. But if the inherent regulatory measures are well established, then what’s the problem?
The problem with Credit Default Swaps occurs when they hit the market. Everyone knows that banks and insurance companies are regulated, while the credit swaps market is not. Because of this, contracts can be traded – or swapped – from investor to investor without any regulatory body overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends – the insured and the insurer – with nary an oversight. Thus your typical greedy speculator has now been granted “free reign” to prey upon the financially ignorant and those with gullibility for get rich quick schemes. For all intents and purposes, the current market in credit derivatives has now become Mephistopheles’ playground due to lack of regulation and oversight. Thus perpetuating our current financial crisis in which these forms of credit insurance were built to prevent in the first place.
Friday, June 27, 2008
Environmental Coverage: Corporations versus Mother Nature?
Legislated environmental laws not only vary from country to country it is also evolving over time – in favor of the environment. Using this rationale, are existing environmental coverage clauses just a thinly veiled right for companies to pollute?
By: Vanessa Uy
Ever since the term Corporate Social Responsibility became the latest buzzword in the world, corporate leaders keeping their promises to shareholders and the company’s “bottom line” is no longer enough. Corporate leaders must also fulfil their promise to their employees and the community that their business practices are not placing our environment at risk. But when push comes to shove, how many of our so-called corporate leaders choose in favor of the environment instead of just “looking out for number one”? Especially when there are Environmental Coverage already available that not only turn “unforeseen disasters” that they create in the first place out of greed and ignorance – or a bit of both – into manageable situations. If you choose to define manageable situations as “immunity from prosecution” to “profiting from their own apathy”, which explains the popularity of every G8 summit to unruly teenagers.
There are now a number of insurance companies that offer environmental coverage with well-backed claims of underwriting authority for environmental risks. Some of them with reputations solidly backed by Triple-A-rated financial strength, the latest Basel Accord compliance and what have you. The question now is, are products like Cleanup Cost Cap and Pollution Legal Liability Select and their ilk nothing more than a thinly veiled rights for companies to pollute while avoiding the pay out of punitive damages?
The most commonly perceived truth states that this problem is either too complicated to the average layman or can be easily manipulated by the demagoguery of every environmentalist / vote-for-me politician come lately who favors passion over rational thought. Fortunately one can easily “hedge their bets” so to speak by utilizing the aid of one of the latest mathematical tools in assessing whether a corporations “green credentials” are nothing more than misspent PR – namely Quantitative Risk Assessment.
As of late, Quantitative Risk Assessment has been utilized by insurance companies I cited before that offer Cleanup Cost Cap and Pollution Legal Liability Select services as a form of corporate transparency. Stating that their products are not just thinly veiled provisos that allow corporations to pollute and ruin our environment with impunity. Insurance companies that provide environmental coverage always stay abreast with the latest Quantitative Risk Assessment findings especially ones pertaining to the protection of our environment. I just hope when insurance companies custom-tailor an environmental coverage policy to a certain company; it would be equitable to the needs of our environment and to the local economy. The world doesn’t need another corporate injustice like the still unresolved compensation claims of the victims of the 1984 Union Carbide insecticide plant disaster in Bhopal, India.
By: Vanessa Uy
Ever since the term Corporate Social Responsibility became the latest buzzword in the world, corporate leaders keeping their promises to shareholders and the company’s “bottom line” is no longer enough. Corporate leaders must also fulfil their promise to their employees and the community that their business practices are not placing our environment at risk. But when push comes to shove, how many of our so-called corporate leaders choose in favor of the environment instead of just “looking out for number one”? Especially when there are Environmental Coverage already available that not only turn “unforeseen disasters” that they create in the first place out of greed and ignorance – or a bit of both – into manageable situations. If you choose to define manageable situations as “immunity from prosecution” to “profiting from their own apathy”, which explains the popularity of every G8 summit to unruly teenagers.
There are now a number of insurance companies that offer environmental coverage with well-backed claims of underwriting authority for environmental risks. Some of them with reputations solidly backed by Triple-A-rated financial strength, the latest Basel Accord compliance and what have you. The question now is, are products like Cleanup Cost Cap and Pollution Legal Liability Select and their ilk nothing more than a thinly veiled rights for companies to pollute while avoiding the pay out of punitive damages?
The most commonly perceived truth states that this problem is either too complicated to the average layman or can be easily manipulated by the demagoguery of every environmentalist / vote-for-me politician come lately who favors passion over rational thought. Fortunately one can easily “hedge their bets” so to speak by utilizing the aid of one of the latest mathematical tools in assessing whether a corporations “green credentials” are nothing more than misspent PR – namely Quantitative Risk Assessment.
As of late, Quantitative Risk Assessment has been utilized by insurance companies I cited before that offer Cleanup Cost Cap and Pollution Legal Liability Select services as a form of corporate transparency. Stating that their products are not just thinly veiled provisos that allow corporations to pollute and ruin our environment with impunity. Insurance companies that provide environmental coverage always stay abreast with the latest Quantitative Risk Assessment findings especially ones pertaining to the protection of our environment. I just hope when insurance companies custom-tailor an environmental coverage policy to a certain company; it would be equitable to the needs of our environment and to the local economy. The world doesn’t need another corporate injustice like the still unresolved compensation claims of the victims of the 1984 Union Carbide insecticide plant disaster in Bhopal, India.
Monday, May 5, 2008
The Emergency Landing Brace Position: A Lethal Proposition?
Conspiracy theorists reasoned out that the emergency landing brace position is really designed to kill airline passengers in a crash because its cheaper to pay wrongful death suits than medical injury compensation. Is there a truth to this?
By: Vanessa UY
Our technological ability to fly – make that heavier than air technology – is now well over 100 years old, and yet quite a large portion of our populace still harbor this irrational fear of flying even though statistically air travel is the safest way to go. This is probably the reason why unfounded myths and rumors pertaining to the airline industry have become so prevalent lately. But one of these somewhat controversial myth / rumor being spread around by conspiracy theorists is about the one pertaining to the brace position instructed to be performed by airline passengers in case of an emergency landing.
According to the conspiracy buffs, the brace position is intended to kill airline passengers by breaking their necks easily rather than saving their lives. This is so because it’s cheaper for airline companies to pay out to the wrongful death lawsuits than to pay for the surviving passengers’ medical treatment and rehabilitation which could last the survivors entire natural life. In wrongful death pay outs, the airline companies typically pays 3 to 5 million dollars while for survivors medical treatment and lifetime rehabilitation, it could reach 50 million dollars. The risk assessment in dollar terms alone is very scary, reinforcing the typical conspiracy theorists conjecture about insurance and underwriters companies in collusion with the airline industry. By placing profits first before the safety and lives of their passengers, conspiracy theorists never had a better excuse in thinking so. But is there any truth to this?
A very entertaining science program on the Discovery Channel called Mythbusters routinely dispel and test suspected myths like the one previously mentioned by performing visually extravagant but valid scientific experiments that had gained them a cult following – especially to the younger viewers who desperately needed scientific enlightenment. In one episode, they did an experiment to test the validity of the myth that the brace position is designed to kill airline passengers during an emergency landing. Their high tech sensor loaded (actually they used postal / parcel service shock measuring stickers) crash test dummy named “Buster” was used to substitute a human passenger in an emergency landing situation. Sure enough, Buster demonstrated that the brace position actually reduced the shock or G load to a typical passenger by as much as 20 G s. That’s 20 G s less shock compared to a passenger in a normal sitting position. That’s a very significant difference of an outcome between survival and death.
To evaluate the big picture on why this myth ever came about in the first place, let’s examine first the history of manned aviation. When the Wright Brothers first demonstrated their newfound prowess of manned flight, they spawned a host of barnstormers i.e. early aviation enthusiasts. Even though they are very much popular and widespread, most people back then were still deathly scared by flying. Even witnessing a plane flying 30 feet above their heads is enough to terrify them even though there’s also a large majority who are curious to experience themselves the magic of flight. So when business entrepreneurs started the airline business back then, they have to convince the people how safe their planes are – or at least they cared about the safety of their passengers. And since airline companies are still around till this day, then safety concerns did came hand and hand with profits.
Sadly, there’s this other thing that the conspiracy theorists overlook that was always part and parcel of profit generating enterprises – namely corporate social responsibility and ethical business governance. Even though these concepts only became unique selling points of customers quite recently. It’s only common sense that your customers and clients will only do business with you again if you treat them right. Even private security contractors are subscribing to the corporate social responsibility and ethical business governance fad by using the phrase “at least we’re not killing innocent civilians” as their unique selling point. Maybe conspiracy theorists need to study the history of aviation first. If these conspiracy theorists don’t find history or science as a “sexy subject” anymore, then they should blame the Board of Education, not the airline industry.
By: Vanessa UY
Our technological ability to fly – make that heavier than air technology – is now well over 100 years old, and yet quite a large portion of our populace still harbor this irrational fear of flying even though statistically air travel is the safest way to go. This is probably the reason why unfounded myths and rumors pertaining to the airline industry have become so prevalent lately. But one of these somewhat controversial myth / rumor being spread around by conspiracy theorists is about the one pertaining to the brace position instructed to be performed by airline passengers in case of an emergency landing.
According to the conspiracy buffs, the brace position is intended to kill airline passengers by breaking their necks easily rather than saving their lives. This is so because it’s cheaper for airline companies to pay out to the wrongful death lawsuits than to pay for the surviving passengers’ medical treatment and rehabilitation which could last the survivors entire natural life. In wrongful death pay outs, the airline companies typically pays 3 to 5 million dollars while for survivors medical treatment and lifetime rehabilitation, it could reach 50 million dollars. The risk assessment in dollar terms alone is very scary, reinforcing the typical conspiracy theorists conjecture about insurance and underwriters companies in collusion with the airline industry. By placing profits first before the safety and lives of their passengers, conspiracy theorists never had a better excuse in thinking so. But is there any truth to this?
A very entertaining science program on the Discovery Channel called Mythbusters routinely dispel and test suspected myths like the one previously mentioned by performing visually extravagant but valid scientific experiments that had gained them a cult following – especially to the younger viewers who desperately needed scientific enlightenment. In one episode, they did an experiment to test the validity of the myth that the brace position is designed to kill airline passengers during an emergency landing. Their high tech sensor loaded (actually they used postal / parcel service shock measuring stickers) crash test dummy named “Buster” was used to substitute a human passenger in an emergency landing situation. Sure enough, Buster demonstrated that the brace position actually reduced the shock or G load to a typical passenger by as much as 20 G s. That’s 20 G s less shock compared to a passenger in a normal sitting position. That’s a very significant difference of an outcome between survival and death.
To evaluate the big picture on why this myth ever came about in the first place, let’s examine first the history of manned aviation. When the Wright Brothers first demonstrated their newfound prowess of manned flight, they spawned a host of barnstormers i.e. early aviation enthusiasts. Even though they are very much popular and widespread, most people back then were still deathly scared by flying. Even witnessing a plane flying 30 feet above their heads is enough to terrify them even though there’s also a large majority who are curious to experience themselves the magic of flight. So when business entrepreneurs started the airline business back then, they have to convince the people how safe their planes are – or at least they cared about the safety of their passengers. And since airline companies are still around till this day, then safety concerns did came hand and hand with profits.
Sadly, there’s this other thing that the conspiracy theorists overlook that was always part and parcel of profit generating enterprises – namely corporate social responsibility and ethical business governance. Even though these concepts only became unique selling points of customers quite recently. It’s only common sense that your customers and clients will only do business with you again if you treat them right. Even private security contractors are subscribing to the corporate social responsibility and ethical business governance fad by using the phrase “at least we’re not killing innocent civilians” as their unique selling point. Maybe conspiracy theorists need to study the history of aviation first. If these conspiracy theorists don’t find history or science as a “sexy subject” anymore, then they should blame the Board of Education, not the airline industry.
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