Thursday, 29 October 2009

Do Price Comparison Sites Increase Premiums?

Hypothesis: the rising cost of car insurance is actually driven by marketing costs.

Gross premiums have increased 14% in the past year, and the car insurance industry would have us believe this is driven by the 'rising cost of personal injury claims and fraud'. But that would suggest net premiums (the proportion of the gross premium that actually covers the insured event) are being priced wrongly, which I find difficult to believe. Actuaries must be fairly good at predicting accident rates, deaths and injuries and so on by now. And these actually appear to be in decline, according to the Office of National Statistics research published in April 2009:
"The total number of deaths in road accidents fell by 7 per cent to 2,946 in 2007 from 3,172 in 2006. However, the number of fatalities has remained fairly constant over the last ten years...

The total number of road casualties of all severities fell by 4 per cent between 2006 and 2007 to approximately 248,000 in Great Britain. This compares with an annual average of approximately 320,000 for the years 1994-98.

The decline in the casualty rate, which takes into account the volume of traffic on the roads, has been much steeper. In 1967 there were 199 casualties per 100 million vehicle kilometres. By 2007 this had declined to 48 per 100 million vehicle kilometres."
So I wonder if there's a variable cost in there that's proving difficult to control. A chief culprit might be marketing. We're certainly being inundated with TV advertisements for insurance price comparison sites, so I wonder if that is in turn being paid for by higher 'costs per click' associated with advertising on those sites? While some insurers are refusing to list their products on the price comparison sites, they may still face competition for key search terms, for example.

Needless to say, I haven't yet been able to find much public analysis on this, but there is a helpful post on analysing the efficiency of cost per click by The Catalsyst. It's easy to over-spend, and the competition may force you to.

If my hypothesis is right, the case is building for semantic web applications to enable people's computers to find deals simply by interrogating insurers' computers - without all the expensive advertising noise.

Wednesday, 21 October 2009

Extra Data From Us is Key To Financial Health

Just for fun, I've been wading through the FSA's discussion paper on reforming the mortgage market.

The FSA's aims are to ensure the mortgage market is sustainable for all participants, and works better for consumers - and taxpayers.

The credit crunch has shown that consumer lending and related securitisation programmes have become a high risk, low/no data process. That has to change.

So, the immediate challenge to the FSA's approach is the decision (thinly explained on page 67) to focus only on the 'mortgage market', rather than the role of mortgages in the 'credit market' or indeed the overall investment market of which the credit market is an integral part. Of course, the FSA's remit and resources don't even extend to unsecured credit, let alone the entire investment market. This silo mentality renders the investment markets a fool's paradise.

Secondly, lenders and their investors (including the Treasury) will only get better at risk management if all the data systems in the lending/investment process are up to the job of collecting and processing enough credit data. That includes using the data gleaned in the underwriting process to help inform the loan collections/enforcement process, then 'closing the loop' by feeding the lessons learned back into the underwriting and investment processes. It would be interesting to see how much work the FSA has done to understand and encourage the level of investment in systems used for underwriting, collections and investment decisions.

Thirdly, the FSA is right to avoid 'blunt' caps on loan-to-value and debt-to-income ratios. Adding a more detailed calculation of 'free disposable income' is a good way to introduce more data that might help lenders and investors predict the likelihood of default. But that will only work if borrowers are willing to contribute accurate data, rather than try to 'game' the system - which lenders/investors will end up tolerating. So far, the FSA seems to be generating consumer resistance to providing extra information to lenders (making it harder for lenders to ask) by not explaining that extra data is critical to lenders improving their credit risk management systems, which ultimately protects the entire financial system.

The discussion period ends on 30 January 2010.

Friday, 16 October 2009

Will The Eye Tweet?

As the Trafigura saga demonstrated, Private Eye is a good source of news items that resonate with the Twittersphere. I'm an occasional reader of the Eye, but begin to lose the will to live after consuming exposé after exposé of profligacy, greed, corruption, stupidity and otherwise shameful behaviour - albeit leavened by excellent cartoons and some very funny columns.

But if the Eye would only drip-feed choice pieces into Twitter, I fancy it would attract a lot of new online subscribers and achieve plenty of productive change at the same time.

No doubt, I am committing some howling error in the minds of the Eye's intelligentsia, but I don't care. Perhaps the Eye's cynicism prevents it from recognising a real opportunity? It would be interesting to know the rationale for why the Eye won't tweet.

PS: 20 Oct. Private Eye now tweets!

Wednesday, 14 October 2009

Britain: No Pain, No Gain

Here are my takeaways from the Spectator Business breakfast debate, sponsored by DLA Piper in the City this morning. The issue was whether political paralysis is the major obstacle to economic recovery. The speakers were MPs Vince Cable, Frank Field and Philip Hammond, along with Fraser Nelson, editor of the Spectator, and financial columnist Neil Collins. Martin Vander Weyer, editor of Spectator Business, was in the chair.

The politicians concede there is a £90bn structural deficit, that is currently driving unsustainably high public borrowing. They agree a clear mandate is required at the next election if the new government is to be able to administer the 'tough medicine' required to reduce or eliminate that deficit. Technically, they disagree on the detail of how and when to disconnect the economic life support systems currently in place (quantitative easing etc). However, they say little of this is actually 'discretionary stimulus', so their debate doesn't really amount to much. Most of the stimulus is the result of monetary policy that is out of their control and is being well-handled by the experts, even if no one is sure how beneficial it will turn out to have been. However, concern remains that not enough of the stimulus is resulting in finance for solvent borrowers.

Households are in no position to absorb much pain in the short term, due to the £1.4 trillion consumer debt mountain. That would seem to rule out a return to the 'bleak and blunt' Thatcher budgets of the early '80s. So it appears we're in for a long period of monetary and fiscal responsibility. In fact, there will be an 'Office of Fiscal Responsibility', to put an end to the farcical gamesmanship around growth and other fiscal estimates at budget time.

Politically, shrinking the structural deficit will require policies that demonstrate everyone is 'sharing the pain'. Realistically, even the Tories have only found £3bn in potential cuts, so higher taxes are a certainty. The Tories say the 50p top tax rate will be a temporary measure that may not raise enough taxes to make a difference, but will show the 'rich' are sharing the pain - in the same way MPs are being told to repay whatever the Legg inquiry finds they owe, even if they disagree with the reasoning. All agreed that the electorate will not accept much pain while there's a perception that big bonuses are being awarded in the City (or the pubic sector retains generous pension entitlements).

The financial regulatory framework will be restructured, probably to ensure that riskier wholesale banking activities require so much reserve capital as to make them either prohibitive or at least sufficiently low risk for the taxpayer. It's suggested that the protectionist elements of the current EC attempts to regulate hedge funds etc will be successfully resisted by UK MEPs, making it 'irrational', or at least premature, for any funds to leave the UK/EU... good luck with that.

Public sector pensions are going to be cut. Heathrow won't be expanded, and there's a big issue about how the delivery of Britain's energy needs can/will be funded.

While the election provides an opportunity for change, its timing is delaying political focus and agreement on the detail of how to reduce the structural deficit and balance the competing economic and social interests. However, the paralysis goes well beyond the politicians to financial and economic experts and the media.

Against this backdrop, there is concern that confidence in the British economy amongst the investment community may evaporate.

Without real agitation by individual voters, I doubt we will see any real economic detail from the politicians until some time after the general election. Even then, any detail we're given prior to the election will be subject to change after it.

I created the word-cloud of this post at Wordle.

Monday, 12 October 2009

The Human Development Index is Personal

The British media moan that the UK is sliding inexorably down the Human Development Index. It's ranked 21st.

This parochial view of course ignores the plight of nations nowhere near the top 20, whom measures like the HDI are really intended to help. The top 20 are pretty irrelevant, actually, as may be the HDI itself, according to its critics. To them, you could add Hans Rosling, whose TED presentation brilliantly illuminates how misleading and unhelpful it is to refer to the development of 'countries' rather than areas and demographics within them:

This may sound terrifically defensive to those in higher-ranked countries, but ultimately, what is an acceptable standard of living is also highly personal. People's social, political and cultural satisfaction are tough to measure and compare. I regard myself as living in London, rather than the UK, for example. And I reckon it's the right choice for now, even having lived in Sydney and New York City.

Mind you, a huge, lingering structural deficit, higher taxes and the continuing failure to fix a broken parliament might change my view.

Here's that HDI top 20 if you're still interested:

1. Norway

2. Australia

3. Iceland

4. Canada

5. Ireland

6. Netherlands

7. Sweden

8. France

9. Switzerland

10. Japan

11. Luxembourg

12. Finland

13. United States

14. Austria

15. Spain

16. Denmark

17. Belgium

18. Italy

19. Liechtenstein

20. New Zealand

Those Squealing MPs Are Back!

Isn't it reassuring to see the piggies back from yet more holiday, fighting every effort to have their snouts hauled out of the trough?

My personal favourite is the one squealing about 'subjective judgements' in the legal review of her own expense claims, but not the subjective judgements made in how she actually filed them. As a chief architect of the Nanny State she should've known better. Experience how subjectively angry this makes you feel, by staring at the defiant face below for 30 seconds. Then exercise your own subjective judgement at Power 2010.

Friday, 9 October 2009

John Thain's 10 Lessons of the Credit Crunch

I would summarise the recent remarks of former Merrill Lynch CEO, John Thain, at Wharton Business School in the 10 points below (my adds in italics). But two general observations. First, John says he doesn't believe there could be another bubble as damaging as this particular one, whereas we can't possible know that. It seems a lot safer to assume there will be a more damaging bubble, so we can at least consider what it might be and have some chance of acting to minimise or avoid the consequences. And, second, John is pessimistic that we'll heed these lessons of the credit crunch. So, logically, he would have to concede we're in for a repeat.
  1. Loan/mortgage brokers should be incentivised based on loan performance, not just volume;

  2. Loan owners who securitise must retain a significant proportion of the equity;

  3. Government sponsored entities should be not-for-profit (i.e. they can run at a profit, but can't distribute profits, with an exception here in favour of the Treasury, surely);

  4. The issuers of securities need to explain not just the risk in the security, but also what residual risk remains with the issuer and how it plans to cover those risks (this would demonstrate more clearly the inter-relationship between markets for credit and insurance, the use of shadow banks, and related assumptions);

  5. Banks must reserve more capital as a proportion of total assets in a rising market, so they can afford to reserve less in a falling market;

  6. Private equity firms should not be free of leverage controls (which suggests they need to make the same risk explanation in 4 above to their investors as issuers of other securities, regardless of whether those investors are 'sophisticated' or market counterparties);

  7. Financial regulatory structures need to be more logical, less duplicative, less expensive, with no gaps;

  8. Compensation should be variable, reflect how earnings are generated, tied to longer-term performance, aligned with shareholders' interests and ultimate financial results;

  9. Credit risk management needs to be improved - but the crisis has demonstrated that once toxic assets are on the balance sheet it's tough to get rid of them, so there has to be some recognition that a government guarantee is ultimately necessary to remove them;

  10. Financial institutions must pay for their implicit government guarantee, over and above existing FDIC or other financial compensation schemes.

Wednesday, 7 October 2009

Never Retire

The pensions crisis has dragged on for years now. The hole is £200bn deep, and recent stock market rises have not helped to fill it, because bond yields fell at the same time. In fact some households are now missing 5 years worth of living expenses.

Listening to the experts, there is no plan for getting individuals out of this mess. Meanwhile corporations are busy minimising their exposure as best they can, and the UK courts have (grudgingly) upheld the law allowing employers to require us to 'retire' at 65.

Tempted as I am to campaign to raise the 'retirement age', I think we should forget it. It's only there for our employers' benefit, and they may not last long enough for it to matter anyway. For us, there is no retirement, only age. We have no pension 'entitlements'. The welfare state is dead. Investing for the future is like trying to beat the casino.

Like it or not we're in charge of our own welfare, and we need to take control. Some are calling this process "rewirement", which is nice. 'Work' is not a chore that can ever be dispensed with, simple as that. And we can't rely on a single employer. We need multiple revenue streams in case any one of them dries up. We have to remain alert to opportunities, and be flexible enough to take each one. And so on. Until we drop.

Monday, 5 October 2009

Rower's Revenge 2009

Well, that's a wrap for 2009.

An average of 4.84 training sessions a week for the past 50 weeks and a time of 1:39:59 in the Rower's Revenge - 58th overall, 11th in M40-49 group - just pipping Oikonomics, who smoked me on the bike. I was 49th and 9th respectively last year, so I'm going to have to do something radical next season...

In the meantime, I've raised 60% of my target for Prostate UK - you can help beat that by donating at:

Join us next year!

Thanks to for the pic.
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