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Protecting the Belt & Road

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Protecting the Belt & Road

“We acknowledge that that this article first appeared on Bermuda:RE+ILS.”

 China’s Belt and Road Initiative, the economic project which aims to recreate the ancient Silk Road that linked Europe to Asia, needs protecting. ILS could provide the perfect solution, as Kirill K. Savrassov, chief executive of Phoenix CRetro Reinsurance Company, tells Bermuda:Re+ILS.

In September a 5.8 magnitude earthquake shook Istanbul, triggering the evacuation of schools and public buildings and damaging buildings. The same week, a 5.8 magnitude event killed 38 people and caused massive damage to infrastructure and roads in north-eastern Pakistan.

Kirill Savrassov

Kirill Savrassov

For Turkey it represented a stark reminder of how bad these events can be. In 1999, a 7.4 magnitude earthquake in the western part of the country killed more than 17,000 people.

For Kirill Savrassov, chief executive of Bermuda-based Phoenix CRetro, such events serve as a reminder of the potentially important role that insurance-linked securities (ILS) based on parametric triggers could play in the region to help cover some of the growing risks in Eastern Europe and Western areas of Asia.

Savrassov stresses that for a range of historic reasons insurance penetration remains very low in the various countries of the former Soviet Union, in Turkey and in parts of former Yugoslavia. Those areas are also very vulnerable to earthquakes, such as the ones that have devastated Armenia and Tashkent in the past 50 years.

Protecting the Silk Road

Savrassov says the Turkey earthquake illustrates Turkey’s strategic importance as part of Eurasia, an area with a long history of various natural disasters, although earthquakes have probably been the most significant.

Devastating events in the region include Almaty (1911), Ashgabat (1948), Tashkent (1966), Spitak (1988)—all earthquakes that almost totally ruined the respective cities. On top of these, severe flooding in the Balkans in 2014 and 2016 caused tremendous damage and disruption to several of the region’s economies.

“Turkey was always positioned as the ‘bridge’ between Europe and Asia; now, with the Belt and Road Initiative (BRI), this concept can go further to the entire region between mainland China and the EU,” Savrassov says.

“With the BRI and key transport corridors passing through countries of the Commonwealth of Independent States and the Western Balkans the threat of devastating natural disasters and earthquake in particular takes on new dimensions.

“This is especially true if investment is made in infrastructure to further open up key transport corridors, but these are located in some of the most earthquake-exposed territories of Eurasia—if not the world.”

The investment being poured into the region by the Chinese government via the BRI is designed to expand its economic footprint and to recreate the ancient Silk Road that linked Europe to Asia.

This requires the creation of infrastructure such as roads, railways, bridges and warehouses, as well as the living quarters for local workers. All of this would be very vulnerable to a major earthquake, not to mention the losses that could be caused by business interruption costs.

“Private markets have the solution to this in the form of parametric cat bonds,” says Savrassov.

“This is a classic win-win partnership and it’s very much the future of the development of the ILS class. It’s in the interest not just of investors or ILS fund managers, but in the interest of international agencies and financial institutions such as the UN Development Programme and the Asian Development Bank, as well as the
general area.

“To give an example of the scale of the vulnerability, the BRI has not yet been completed but 10,000-plus trains a year already pass through railways from China to Europe.

“The amount of disruption from an earthquake in Kazakhstan or Uzbekistan could be economically catastrophic,” he says.

Underdeveloped markets

Savrassov iterates that with investments of billions of dollars being poured into critical infrastructure, the BRI is seen by transit countries as an important opportunity to expand their international trade and gain a boost to their economies.

“However, the issue of protection in case of a large disaster remains open and burdened by some regional specifics. In underdeveloped markets where penetration is less than 2 percent and there is state ownership of—and responsibility for—critical infrastructure, insurance does not play any meaningful role in case of a really devastating event.

“This raises a question about post-disaster finance arrangements,” he says. “It relates to potential contingent business interruption losses, whereby an earthquake in Kazakhstan or Uzbekistan may stop the whole corridor operating for a significant amount of time, with consequences to the whole BRI project.

“If there is to be a solution that benefits everyone, it is likely that it will have to be organised by the governments, whether on a sovereign or sub-sovereign level in the form of disaster risk transfer. Ideally it will combine all the best practices developed in other parts of the world.”

Savrassov says that over the last two decades, financial markets, governments, and the development community have introduced important innovations in disaster risk finance, giving rise to a collection of funding sources after disasters such as national or regional pooling schemes, contingent credit lines, parametric disaster risk insurance, catastrophe bonds and other ILS techniques.

With the fragmentation of countries and geographies based on their strategic foreign policy making the creation of regional schemes such as the Caribbean Catastrophe Risk Insurance Facility or the African Risk Capacity risk pools difficult, and low sovereign credit ratings making it tough to raise funds, the transfer of peak risks to capital markets in the form of parametric sovereign catastrophe bonds seems to be the most viable option in the region.

Savrassov explains that this is especially true following successful examples in Latin America, Caribbean states and Africa where such bonds appeared to prove the concept. Using simple, transparent and well-defined trigger mechanisms, investors have become comfortable and there have been several payouts in recent years.

“A government considering such type of disaster risk transfer will obtain certainty around budgetary planning and fast capital deployment after the event if it is triggered by pre-defined parameters,” he says.

Stable protection

Savrassov adds that if the Chinese were to invest in such bonds, this would ensure a stable form of protection from a country with a vested interest in protecting the region—avoiding complicated and not always available insurance solutions.

“One important message to deliver is that issuance of sovereign cat bonds is not rocket science,” he says.

“Any country that has ever issued, say, Eurobonds could quickly get to the same point with catastrophe bonds in terms of legal preparedness.”

Two other important factors that could aid the emergence of the first sovereign cat bonds are the diversification ILS bonds offer investors and Singapore’s recent endeavours in ILS whereby it is offering issuers incentives in the form of a grant scheme to use it as a domicile for ILS deals.

ILS investors see the asset class as uncorrelated from their other investments, but they are increasingly over-concentrated towards North American exposures.

“There is no doubt that diversification into a new territory, especially one yet unexplored, would attract a big interest,” Savrassov says.

“This is obviously subject to transparent and compliant structuring, based on the lessons learned in other parts of the world over the last decade.”

Singapore is moving towards becoming the ILS centre in Asia. It has already completed issuances for IAG, Security First and Safepoint and Savrassov notes that some of those bonds cover perils outside Asia.

Cat bonds can be a good instrument for development banks in their wish to support developing countries and the increase of disaster resilience in the region, he notes.

“In addition, the use of cat bonds for disaster risk transfer solves a fundamental problem of addressing the protection gap.

“Based on the aforesaid let us assume that the combination of various factors together with the question of general macroeconomic stability of the entire BRI brings a unique opportunity for the introduction of a sovereign or sub-sovereign parametric catastrophe bonds solutions for the whole region between Europe and China,” he concludes.

Phoenix CRetro, Insurance-linked securities, ILS, Kirill Savrassov, Europe, Asia,

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Seven lessons from 2020

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Seven lessons from 2020 1

Rebeca Ehrnrooth, Equilibrium Capital and CEMS Alumni Association President

 

Attending a New Year’s luncheon on 31 December 2019, we played a game that involved predicting the world in 2020. Some of the questions included: would Uber become profitable? Would the three-decade bond rally finally come to an end? Would the US hit a recession?

Unlike any of our predictions based on a traditional approach to business and predicting, we now know that 2020 became the year where business, professional and personal plans were turned upside down, reshaped and put-on hold. The proverbial black swan had arrived.

As revealed in a new CEMS Guide to Leadership in a Post-COVID-19 World, to which I contributed, the COVID-19 pandemic has exposed deficiencies in the 20th Century vision of leadership, giving a rare opportunity to question the status quo.

So, what are the main lessons from 2020?

  1. Humans are enormously adaptive.  This is not an extinction scenario. The world is getting used to dealing with global human disaster which may become a recurring event. Life continues guided by new parameters.

  1. No sector or country is immune to rapid change. Just as the leveraged finance and equity markets ground to a halt during the Global Financial Crisis, we have seen a disruption in the financial markets (including M&A) in 2020, including a significant redistribution of wealth between sectors; think tech vs airlines and the hospitality industry. When a market is disrupted it has secondary and tertiary effects such as less work for accountants, lawyers, financiers etc.

 

  1. Location is not as important anymore. The belief that finance staff need to be based in one of the financial capitals to be effective has been forever altered. Pursuing a career in finance from anywhere is becoming possible. However, it’s likely that over time, financial controls and human interaction will move the work model back towards the traditional office approach, as work is a critical sanctuary for people. While working from home may allow more time for family, chores and sports, it is mainly effective for people who already have their internal and external networks. For junior employees it presents a notable challenge as they may be forced to spend their formative years without a chance to really build their networks.

 

  1. Change is likely to be lasting. The opportunity for alternative finance and tech focused providers is enormous and 2020 will accelerate this shift. For example, many retail banks are providing rather poor customer service, blaming the pandemic. Even the most loyal customers will be heading elsewhere. For recent graduates and current students this is a major shift; future winners and key employers may not be names we are used to seeing in the headlines.

 

  1. There will be a spotlight on leaders with visionary strategy and understanding of the operations. 2020 showed many politicians and business leaders behaving like they were playing a game of snakes and ladders, rather than executing a thought-out strategy. The next wave of thoughtful leadership is urgently required.

 

  1. Collaboration leads to success. The definition of a pandemic is an infectious disease prevalent worldwide. A global problem requires a collaborative solution rather than each country and industry on their own. Quoting Steven Riley, professor of infectious disease dynamics at Imperial College London: “Once you have the knowledge and you share the knowledge, then you are able to take measures to push transmission much lower”. This principle is transferable to management education. In a world more complex than ever, investing in a degree is hard currency. Combined with the full global alumni network, corporate partners and schools, CEMS is capital that doesn’t depreciate.

  1. Resilience has become a watch word. Saint-Exupéry’s quote resonates with me: “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” We are in a new paradigm – so prepare for the next change. For COVID-19, while we hope that the vaccine will soon upon us, the broader long-term positive challenge remains.
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Data after Brexit: How does the end of the transition affect GDPR?

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UK's Post Brexit productivity puzzle

By John Flynn, Principal Security Consultant at Conosco

The UK has officially left the European Union now that the transition period has ended on January 1st 2021. But this could raise issues with one of the biggest bugbears for many companies – the international transfer of personal data.

Businesses can relax, somewhat – GDPR, which took businesses months to get their heads around, is not being replaced. It will continue as the UK GDPR 2018, and will still be based on the criteria of the Data Protection Act of 2018. However, the UK will retain the right to change the UK GDPR as it sees fit in the future.

The main changes apply to those who receive data coming into the UK from Europe. Transfers from the UK to other countries can continue under existing arrangements.

We know it can be difficult to cut through the legal jargon, so we have simplified what you need to know to protect yourself and your data:

1 – Update your privacy notice

Most businesses do not have the correct clauses in place ahead of January 1st, potentially exposing their liability, should something happen to their data. All company privacy notices online will need to be updated to specifically state ‘UK GDPR’, as opposed to ‘EU GDPR’. You will also need standard contractual clauses in place, which cover both parties – those transferring and those receiving the data.

 The Information Commissioner’s Office (ICO) has a list of what needs to be included in the standard contractual clause here. The ICO will remain the UK regulator for data protection, regularly liaising with each EU member state.

This also applies to Multi Corporate Groups who operate in multiple countries, who need to update their documentation and privacy notice to expressly cover the data transfers.  The UK has applied for an adequacy assessment, which would negate the need for contractual clauses, however this has not yet been approved by the EU.

2 – Data privacy assessments

Any company which runs applications and software should always perform a Data Privacy Impact Assessment. This was also in the guidelines before, but these assessments are now more important for those who outsource their IT operations internationally.

For example, when using a service such as a cloud-based system, the company must be sure that its service provider adheres to UK GDPR and stores the data within the European Economic Area (EEA), or has a binding corporate agreement with the company, where data is stored outside of the EEA. You should also, as mentioned above, make sure that a contractual clause is in place.

3 – Review local legislation

Contracts should now have contractual clauses that specify the responsibilities of the data controller and the data processor. If you are receiving personal data from a country territory or sector covered by a European Commission adequacy decision, the sender of the data will need to consider how to comply with its local laws on international transfers. You should check local legislation and guidance in this case.

4 – Cyber Security health check

The ICO is increasing its capacity and efforts to crack down on data breaches, post-Brexit. Now is a great time for all companies to have a health check to understand their Information Security posture and GDPR compliance. Nobody wants to be caught handling data improperly and fined when it could have been prevented with education and training.

A gap analysis performed by an expert is money well-spent. It’s also a fact that companies that have cybersecurity and Information Security controls are not only able to better defend against attacks but are also far better placed to recover from an attack.

Looking forward

It’s important that all businesses – large and small – are properly preparing their data storage and transferring for the 1st January. ICO has been busy setting examples by fining large, high-profile companies for failing to keep millions of customers’ personal data safe.

It will continue to come down hard on the data breaches of personal identifiable information and special categories of data. The saying ‘prevention is better than a cure’ rings truer than ever this year, and you will thank yourself if you make the efforts to properly store your data now, and not when it’s too late.

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2020 reflections and 2021 outlook

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2020 reflections and 2021 outlook 2

By John Hunter, Head of Banking and Fiduciaries, Finance Isle of Man

Reflections on the most surreal year

The Covid-19 pandemic has completely changed the world as we knew it, resulting in catastrophic loss of life and fears of a downturn hang over global economies like a sword of Damocles. In the UK, the new strain has further exacerbated the situation. As I am sure many have already said we are living in what could be called the most surreal times. People have been trying to cope with this “new normal”, by changing their lifestyles and evolving behaviours.

The Isle of Man responded swiftly to the pandemic by closing its borders and enforcing social restrictions which everyone respected and adhered to. Socially and culturally the Island demonstrated all the good things that come from living on a relatively small Island where community still means so much.

The Isle of Man’s financial services sector adapted quickly, seamlessly transitioning to working from home. The banks too adopted flexible remote working practices and continued to support clients around the world helping them navigate the challenging situation and making the most of any opportunities that arose.

Although there is no substitute for face-to-face interactions, we all embraced web-conferencing platforms like Microsoft Teams and Zoom to stay connected with contacts around the world and build and nurture business relationships, whether it was with financial services firms or high net worth individuals looking to relocate to the Island.

Furthermore, a priority for the Isle of Man has been to reinvigorate the business and cultural ties with South Africa. In a normal world, we would have travelled to the country, held in-person meetings with businesses and industry representatives and talked about building on our wonderful historic ties. However, because of the scale and breadth of disruption we had to change all our plans! We hosted a virtual roadshow which comprised a series of webinars exploring why it has never been more important for South African businesses and individuals to choose the right jurisdiction for long term financial planning.

Looking ahead to the future

We are all hoping that the global rollout of vaccines will provide the pathway to some form of return to normality and all the things people are missing will be back. Like amidst all periods of immense turmoil, interesting, new possibilities have emerged such as the revolution in work culture and a renewed importance of being close to nature and green spaces is. And these possibilities can help reshape society for the better.

The global economic recovery and rebuild might seem further away in the current environment especially amidst the new lockdowns. But we are confident in the resilience of economies and are hopeful that different industrial sectors and governments working together would result in green shoots.

The financial services industry has an important role to play in getting the world economy back on its feet. It is a core component of the solution to continue facilitating the financing of corporates, as well as to develop sustainable finance and nurture digital technologies which have proven to be vital during the pandemic. The sector should continue its cooperation and collaboration with governments and regulators to ensure efficient capital flows and financial stability for businesses and individuals.

Banks too have a crucial role to play as they are instrumental to the effective transmission of monetary policies and stimulus packages. As mentioned in a report by EY: “Financial insecurity in the wake of COVID-19 will require banks to boost consumer confidence and help build a more resilient working world.”

We expect the Isle of Man’s financial services sector and banks to continue navigating the situation with resilience as they have been doing thus far and contributing to the global recovery process. Also, we truly hope this will be our busiest year ever (subject to our ability to travel), with an extensive global schedule of planned activity to promote the Island as an international financial centre of excellence and innovation. Personally, I had planned to be in South Africa for the British & Irish Lions tour, but regrettably, it might not take place and as such we will look forward to catching up with friends there as and when we can.

Conclusion

No doubt, there are significant challenges for the world ahead but as Albert Einstein said: “in the midst of every crisis lies great opportunity”. And it is this opportunity that we all need to work together to identify and make the most of. We are confident that in 2021 the Isle of Man will continue to support financial services businesses help their clients, employees, and the wider society through these surreal times. We are all in this together.

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