Insolvency and GDP

Global insolvency rises further in 2009 and will stabilize at a high level in 2010.
Those are the main conclusions of the world’s leading credit insurer Euler Hermes.

Euler Hermes is forecasting a 33% rise in corporate insolvencies worldwide in 2009.

In 2008, half the global increase in insolvencies resulted from financial restrictions whereas in 2009 the main factor has been the economic recession. Due to unemployment and weak recovery, business insolvencies will remain at high levels in 2010.

Insolvency growth champions with rocket growth of 75% or more are Spain, Ireland and the Netherlands (as well as the Baltic countries).


Insolvencies have soared by more than 35% in the United States and Northern and Eastern Europe.

Relationship GDP & Insolvency

The relationship between GDP and insolvency is quit interesting.

Corporate insolvency turns out to be different from one country to another.

Although there are differences, the change in insolvencies over time - rather than their absolute numbers - turns out to be strongly related to the change in GDP.




In short one might conclude:

Declining GDP implies inclining insolvencies

Strong local differences
The strong GDP-Insolvency relationship of the Global Insolvency Index (GII) is also - in a slightly different way- visible on zone or country level.


For each of the 33 countries that are analyzed by Euler Hermes, the insolvency index is calculated using a basis of 1997=100.

Next, the GII is calculated as the weighted sum of the national indices.

Each country is weighted according to its share of total aggregate GDP (at current exchange rates).



As actuaries we're all interested in in 'credit spreads'...

Questions:

1. Is there any relationship between 'credit spreads' and 'insolvency rates'?
2. Would insolvency rates influence our business in any way....?

Sources:
- Press release, Euler Hermes Nov. 17, 2009
- Insolvency Outlook Euler, Hermes February 2009

Actuarial Health Care Reform Puzzle

From a European perspective it's hard to understand why the US Health Care Reform creates such a fuzz.

Behind Health Care Reform
At first sight one might think American values were somehow at stake, as UCLA's Dr. Marc Nuwer, a leading expert on national health care reform, stated back in 2008:

• "To heal our ailing health care system, we need to stop thinking like Americans."
  
  
• "Americans prize individual choice and resist limiting care"
  

As one-sixth of Americans are uninsured and especially elderly people are in need of good (insured) health care, one would expect this group to support this new health reform. Think again, the majority of elderly people voted against a guarantee of health insurance for all Americans:


Not a surprise for actuaries of course, because we were already aware of the interesting age-distribution of the uninsured.



Recently, Tyler Cowen, a economics professor at George Mason University additionally stated : Further health care reform doesn’t now seem to promise much to old people, except spending cuts on them. Given their limited time horizons, old people don’t so much value systemwide improvements, which invariably take some while to pay off.

For those of you who are interested in the background and consequences of pay offs regarding limited time horizons, (generation) discount rates and 'Gamma Discounting', the article Caring about the Distant Future: Why It Matters and What It Means from professor Tyler Cowen is a joy to read.

Certainly a 'must read' for actuaries.

Future Health Care Reform

Anyhow, the House of Representatives passed the sweeping health care bill recently.

Puzzle is that this bill has nowhere to go in the Senate, as the stumbling block is that government will have to compete with the private insurers.

The solution to this problem is as simple as can be:

Implement the headlines of the Dutch Health Care Model

Key elements of the new (2006) Dutch Health Insurance Act are:

• All adults are obliged to buy health insurance and can choose any insurer
• Children (under 18 years) are insured for free
• Low income groups receive financial compensation by tax reduction
• All insurers must offer a (governm. def.) policy to anyone who applies
• Basic benefit package is almost comprehensive
• Insurers get compensation for taking on higher risk patients from the risk equalization fund
• Insurers can offer complementary health insurance packages under free market conditions
• Consumers have the right to change insurer at the end of every calendar year if not satisfied or if they change employer
• Insurers have the role of prudent purchasers of health care
  (value for money)
• Providers are encouraged by insurers to deliver high quality care at low costs

In a 2009 Irish (Dublin) Health Actuary Seminar called 'More for less', the Dutch health actuary Enne Osinga explains more of the consequences of this new (2006) Dutch Health Care Model in a presentation called: The Dutch Experience .

I trust the US succeeds in making this important turn around!

Sources:
- Tyler Cowen: Caring about the Distant Future: Why It Matters..
- Economics
- Yahoo
- CNN
- UCLA
- Health Coverage & Uninsured (2009, 2007)
- RIVM Article:Regulated competition behind the dykes?
- Enne Osinga: The Dutch Experience

Invest or laugh

Every crisis generates his own new quotes. Currently, investment quotes are the top.

Perhaps two of the best investment quotes ever are from AIG Vice Chairman Jacob Frenkel:

"The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left. But they are equal to each other. So accounting-wise we are fine."

--------------------------------------------

"Credit markets do not function. Why not, because the word credit comes from credibility"

But there's more... A nice summary of investment ROFL quotes can be find on Ian Thomson's blog Investor Jokes.

As actuaries, let's profit from Ian's latest insights and gain some extra education points by studying the next new investment definitions:

• A long term investment: Short term investment that failed.
• Momentum Investing: The fine art of buying high and selling low.
• Value Investing: The art of buying low and selling lower

Probably investors and actuaries will have a hard time understanding each other, as the difference between them is in the 'tail' .....

Also large-cap fund managers have a hard time these days. No wonder everybody starts looking for a small-cap fund manager....
But how do you find one? Ians' answer is simple: Find a good large-cap fund manager, and wait...

Anyhow, keep up your good mood and laughs, as more investment 'animals' will show up next months.....


Let's conclude this blog with an old actuarial warning:

"Where there's smoke, someone gets fired"

P.S. For some more 'serious' investment quotes take a look at 52 Must Read quotes from the legendary Investor Warren Buffett. I'll quote some of the best here:

• I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
• If past history was all there was to the game, the richest people would be librarians (actuaries?).
• It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
• It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.
• It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
• Price is what you pay. Value is what you get.
• Risk comes from not knowing what you’re doing.
• Risk is a part of God’s game, alike for men and nations.

How can actuaries profit from Buffett's quotes?

Sources:
- Greekshares Jokes
- Ian's Investor Jokes
- Warren Buffett: 52 Must Read quotes