World
Are present market valuations justified by forecasts of growth?

Hopefully the market’s optimism over the Washington negotiations will prove correct and the US economy and global markets will not collapse. But that does not mean that the present valuations are justified by forecasts of growth both for the global economy and corporate earnings

On Thursday, the US markets had one of their best days this year. World markets across the globe followed suit. The reason is that the US has ‘solved’ its debt limit crisis. Of course, the ‘solution’, which has only been proposed, was not really a solution. It was just a proposal to delay the decision for an additional six weeks. It did nothing to get the government working. It provides no fiscal stability to help businesses invest. It simply guaranteed that we will again be entertained with Debt Ceiling II, the sequel. Besides, the proposal was not accepted by anyone and the parties are still deadlocked as of Sunday. But it doesn’t really matter, does it?
 

Despite the shenanigans in Washington, the easy money policies around the world are promoting lasting growth. We can count on easy money from the Federal Reserve. They have concluded, with brilliant circular logic, that any taper causes market conditions that make a taper impossible. So it goes on along with more money from the central banks of Japan, Europe and more loans from China.
 

Markets couldn’t be happier. With about 20 bureaucrats running the world, they are all up. Emerging markets such as India, Indonesia, and Brazil have all recovered from their woes of earlier this year by over 14%. The US markets are near their all time highs and European markets have risen by double digits this year. London and its financial markets have overtaken Germany as the leading market for Ferraris in Europe.
 

This implacable global growth ‘story’ has defeated any attempt at a correction. It goes something like this. Developing countries growth is indeed slowing, but is still quite vibrant. In the meantime, after years of slow growth or even recession, the developing world of the US and the Eurozone are finally beginning to recover. But is this really the case?
 

Apparently the IMF doesn’t think so. Its most recent World Economic Outlook has cut its forecasts for this year from 0.3 percentage points to 2.9%. Next year’s forecast was cut from 0.2 percentage points to 3.6%. This forecast is down from the last one in barely two months ago. But that is not the bad news.
 

The bad news is: this is the sixth consecutive downward revision from the IMF. But it gets worse. In Chapter 1 or the report page 12 chart 1.13, you will find something truly disturbing. The chart shows forecasts made in 2008, 2009, 2010, 2011 and the most recent. There are five charts: one for Japan, Euro area, US, developing Asia and Latin America. With the possible exception of Japan, the most recent forecast is way below all of the others. In light of the new forecast all of the old ones look wildly optimistic.
 

The strains are beginning to show. A measure of 21 key risk indicators for Asia covering everything from investor complacency to bank to bank trust shows systemic risk on the rise. The most disturbing is a spike in borrowing costs and default swaps for some of the region’s largest banks. This is especially troubling because any problems with Asia’s banks will be transmitted globally. Cross border lending to emerging markets surged by $267 billion to an estimated $3.4 trillion in the first quarter of 2013, according to the Bank for International Settlements.
 

This was not supposed to happen. The numbers from early September were relatively good. China’s manufacturing and services indexes showed impressive gains and Europe turned positive. But the trend did not continue. The rate of growth in Chinese manufacturing slowed to a fractional pace. Exports fell 0.3% in September compared with the year-ago period, sharply down from 7.2% growth in August and far below expectations of a 5.5% expansion. This trend does not bode well for the famous restructuring, where China’s growth is supposed to pivot from infrastructure spending and export to consumption. Worse the recent growth was based on the shadow banking system whose share of financing rose from 11% in 2011 to possibly 25% today. According to the World Bank, “China’s credit boom may have run its course”. But not to worry! The Chinese assure us that their economy will beat estimates and grow at more than 7.5%, and they probably know the numbers before they are published or even created.  
 

One of the recent stars in the emerging markets was Mexico. Tied to a slowly growing US economy without the problems of Brazil, it was supposed to do quite well. It hasn’t. Its economy was forecasted to grow at 3.5% last December. The most recent official forecast is less than half that at 1.7%. Private forecasts have been cut to 1.1% partially because US demand for Mexican products has been unchanged for several quarters.
 

Brazil has gone from one of the most promising emerging markets to one of the weakest. Unfortunately it did not use the boom years to reform its economy. So it boasts the world’s most burdensome tax code. Large durable goods like cars and appliances can cost 50% more than in other countries. Consumers pay 21% of their incomes to service their debts. The infrastructure especially the roads, railways and ports are woefully inadequate. In addition, it has a large deficit. A problem it shares with Indonesia, Turkey, South Africa and India.
 

Manufacturing data from companies around the globe last month was very uneven. While data from the US was positive other countries were not as strong. Indonesia had a good month in August, but the September numbers were not encouraging. Imports fell 5.7% and exports fell by 6.3% both missing estimates. Korea had the same problem. Its imports fell by 3.6% and its exports fell by 1.5%. Manufacturing production figures for Europe were just as discouraging. They fell or missed estimates in France, Belgium, Italy and Sweden. The only country that rose was Germany. Manufacturing data for Asia was not much better. It was basically flat for India, China, Singapore and Australia for most of the summer. Whatever the outcome of the US political standoff, the episode is sure to have made a dent in the real economy.
 

In a recent interview with the Financial Times, Nassim Taleb, the author of the famous “Black Swans” was asked if the global financial system was more prone to a ‘black swan’ or improbable tail event than in 2007. His response was that it was more fragile. It was a more vulnerable one because the bureaucrats running the system have no risk exposure.
They won’t lose their jobs or pensions if things go wrong. So they are free to work on programs like Quantitative Easing, which Taleb regards as a ‘scam’. Taleb’s point is very relevant to the present situation. Simply because an event is unlikely, it does not mean that it won’t happen. They do happen. Hopefully, the market’s optimism over the Washington negotiations will prove correct and the US economy and global markets will not collapse. But that does not mean that the present valuations are justified by forecasts of growth both for the global economy and corporate earnings.

 

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

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60% of car insurers make a mockery of IRDA’s rule on third-party insurance

Despite warnings, insurers (mostly private ones) refuse stand-alone third-party insurance for commercial vehicles. And then get away with a mere Rs5 lakh penalty. Another IRDA initiative bites the dust

In December 2011, Insurance Regulatory and Development Authority (IRDA) had prescribed the obligations in terms of minimum premium to be underwritten in respect of stand-alone commercial vehicle motor third party (TP) insurance based on their market share. But, 60% of car insurers have not fulfilled the mandatory obligations for the year 2012-13, and the extent of shortfall is very high (more than 25% of the obligations). Not surprisingly, IRDA order has not stated the number for the “very high shortfall” for the 12 insurance companies who have been penalised for an insignificant Rs5 lakh.
 

The idea with declined risk pool was that insurance companies will have to manage the risk on their own without passing the losses to the pool. If so, why have 60% of the insurers not been able to fulfil the mandatory obligations of TP insurance underwriting? Insurers have the right to refuse or decline TP insurance if it finds it too risky an asset to underwrite, which will be pre-defined with IRDA. Only that risk would be ceded or transferred to the declined pool.
 

Private insurers try to avoid writing such policies because of the high claim ratio in the commercial vehicle space. This leads to the government insurers taking the hit on its books. The four government insurers underwrite nearly 70% of the third-party motor claims in the Indian market. New India Assurance, United India and National Insurance have complied with IRDA requirement. Oriental Insurance Co is the only government insurer present in the list of 12 insurers who have been punished by IRDA.
 

The private insurers with the same offence are as follows: Royal Sundaram, Reliance General, Iffco Tokio, Tata AIG, ICICI Lombard, Cholamandalam MS, HDFC ERGO, Future Generali, Bharti AXA, SBI General and L&T General. Does it mean that private players even with a small market share are eschewing their responsibility and then rewarded with a paltry IRDA penalty which is like a drop in a bucket considering that TP claims can be virtually “unlimited”?
 

What is even more disconcerting is that one year ago at CII (Confederation of Indian Industry) event, the then IRDA Chairman J Hari Narayan had warned car insurers by saying: “Some companies are also declining third-party insurance. They will find it not in their best interest to do so because if companies do not abide by the rules such companies will be visited by very severe penalties which will be more onerous than the business foregone." But, insurers are declining TP insurance requests with impunity. The trivial penalty will only embolden them further.
 

Read - Severe penal action for refusal of 3rd party insurance: IRDA
 

According to one broker, “Private insurers were not interested in underwriting stand-alone TP cover for commercial vehicles earlier due to heavy losses. But, in the last few months we have seen private insurers looking to get less risky commercial vehicle TP cover business and offering commissions. This is due to IRDA mandate of declined risk pool. Trucks with all India permit, dumper trucks are risky business for insurers.”
 

In May 2012, KN Murali, senior vice president & head, motor vertical, Bharti AXA General Insurance, told us:Insurers are given a minimum quota of standalone TP policies that they have to write in their books. If the quota is not met, declined risks pool will allocate business back to insurers to the extent of shortfall. We do not expect insurers to avoid risks; it is also mandated that no insurer can deny standalone TP risk. Customers should not have any issue in getting the cover freely.” But, even Bharti AXA is one of the 12 insurers whose violation has led to penalty.

 

Car insurance: “Higher loss ratio is in diesel car segment”
 

The tariff for TP car insurance is decided by IRDA. The loss ratio for insurers in this category is 180%, which means that for every Rs100 of premium collected, Rs180 of insurance claims were paid. In December 2011 IRDA dismantled the bleeding third-party motor pool and set-up declined risk pool. This is because with third-party motor pool there was no incentive for insurance company to do risk based underwriting or monitoring of claims as the losses were shared as per market share.
 

The TP liability cover, which is mandatory in India, does not provide any benefit to the insured; however, it covers the insured’s legal liability for death/disability of third party loss or damage to third party property. The insurer of the offending vehicle will pay for damages under the section ‘Third Party Property Damages’ up to a maximum limit of Rs7,50,000. For bodily injuries, the cover is “unlimited”. Motor Accident Claims Tribunal (MACT) is a court in which the cases related to road accidents are decided and appropriate compensation is given to the victims or their next of kin.
 

Road Accident: Know your financial rights
 

IRDA has hiked third-party (TP) motor premium by 20%, effective 1 April 2013, but insurers feel that it is less than is what is required to make the TP insurance viable for commercial vehicles. Some estimate need for TP premium to increase by 60%-70% to make it profitable. The transportation lobby in India is strong and they are able to keep the TP premium low.
 

Third-party motor insurance premium hike by 20% is simply arbitrary!

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COMMENTS

Gopalakrishnan T V

3 years ago

The entire insurance business is a big scam and fraud on the people who include even well educated and well placed persons. Even NRIs' are not spared.Most of the private Insurance agencies have well appointed marketing executives having link with private banks and having the information of customers accounts.They try all their marketing gimmicks learned from unprincipled Management Institutions. Ethics and values are seldom appreciated nor taught. Greed has become the core business objectives.These marketing people trap people by offering products which are not understood by themselves nor by their institutions. The objective is to mobilise some funds against issue of some policies the details of which are not intelligible to the best of intellectuals . After paying some installments of premium, if one tries to know the fate of the policy, the real shock comes.The value of invested money is less than the half of the premium paid and the agents who sold the products are either not traceable or not answerable for the loss of value. The institution which has come out with the product will give such an explanation that they have all intentions to protect the investors' interest but the market has behaved otherwise.They will also advise you to invest more to make up for the losses already incurred. Investors silently suffer and about IRDA's role investors are ignorant as It has not established itself as an institution to protect Insurer's interest. Money Life will have a major role to play to set right the Insurance Business and bring in confidence among investors.

REPLY

Param

In Reply to Gopalakrishnan T V 3 years ago

how is this rant related to this article on third party insurance?

Gopalakrishnan T V

In Reply to Param 3 years ago

Entire insurance is a fraud and Auto insurance cannot be an exception. Premiums are hiked every now and then and when the issue of any claim arises,then one will know the true colour of the Insurance Company and how they take the claimants for a nice ride.Less said about the public sector insurance companies the better.

Gopalakrishnan T V

3 years ago

The entire insurance business is a big scam and fraud on the people who include even well educated and well placed persons. Even NRIs' are not spared.Most of the private Insurance agencies have well appointed marketing executives having link with private banks and having the information of customers accounts.They try all their marketing gimmicks learned from unprincipled Management Institutions. Ethics and values are seldom appreciated nor taught. Greed has become the core business objectives.These marketing people trap people by offering products which are not understood by themselves nor by their institutions. The objective is to mobilise some funds against issue of some policies the details of which are not intelligible to the best of intellectuals . After paying some installments of premium, if one tries to know the fate of the policy, the real shock comes.The value of invested money is less than the half of the premium paid and the agents who sold the products are either not traceable or not answerable for the loss of value. The institution which has come out with the product will give such an explanation that they have all intentions to protect the investors' interest but the market has behaved otherwise.They will also advise you to invest more to make up for the losses already incurred. Investors silently suffer and about IRDA's role investors are ignorant as It has not established itself as an institution to protect Insurer's interest. Money Life will have a major role to play to set right the Insurance Business and bring in confidence among investors.

Ashit Rasiklal Shroff

3 years ago

Not only for Commercial Vehicles Insurers are refusing Third Party Insurance but even for Private Cars. Recently a friend of mine wanted a third party only cover since his comprehensive cover was expiring & he was buying a new car , the Insurance Company refused.Even the agents are not interested to take any requests for only TP Cover.

REPLY

Param

In Reply to Ashit Rasiklal Shroff 3 years ago

i can suggest a way out - ask him to have the IDV marked down to a very low number, which will bring down the own damage component to acceptable level.

raj

In Reply to Ashit Rasiklal Shroff 3 years ago

You have good point. Third party insurance rates are under tariff and inexpensive. Insurance companies have huge liability as MACT have no-limit to give compensation for accidents. Comprehensive insurance is where insurers make money and can pad-up for the lower third party insurance premium. TP insurance is tough for insurers and good deal for customers.

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