Microinsurance: Helping the Poor with Risk Management

Recently, Bill Clinton announced the initiation of LeapFrog. It will be the world’s first and microinsurance firm. It will cater to the need of low-income individuals. The firm will invests $100 million over the next 10 years and allow millions of poor people in Africa and Asia to have access to insurance services that they can afford.

Clinton estimates that there are about a billion people that are in need of this type of insurance with about 3% of those having no insurance at all. Dr. Andrew Kuper, the founder and president of LeapFrog, stated that by catering to low-income nations there is a very large opportunity to create a lucrative and sustainable business while helping poor people escape poverty.

This microinsurance will protect the poor by assisting them in managing diverse risks that may be incurred in their lives, homes, property, health, crops, and businesses. Without insurance, they find it difficult to recover from shocks, take business risks to increase their income, build assets and thus escape poverty permanently.

http://www.insurancejournal.com/news/national/2008/09/28/94121.htm

U.S. Treasury to the Rescue….

The U.S. Treasury Department and Congress have come up with a plan to spend as much as $700 billion to bailout banks and financial institutions and keep the financial system afloat. This new plan could bring the government’s bailout bill to nearly $2 Trillion. This link gives detailed information on where the government plans to spend the money:

http://www.insurancejournal.com/news/national/2008/09/21/93887.htm

Is this good or bad?

Perusing the Internet, I found several articles about whether it is a good ideal for the government to bail all of these companies out or not. Many disgruntled taxpayers feel as if these institutions should be allowed to fail and that companies are being rewarded for bad decisions. This is seen by a quote from Paul in Portsmouth, N.H. "It is time for the financial institutions of this country to be called to the mat. We should be expecting and demanding responsible and ethical business practice, not rewarding it at the expense of taxpayers."

On the other hand, others see the move as necessary because the threats of financial system collapse. This sentiment can be seen from Surfta in Brooklyn, N.Y."It's NOT a bailout. The government is not handing out cash, they actually stand to make a great deal of money out of this, which will trickle down to YOU. First priority should be to try to control and fix the problem, then regulate sufficiently to make sure this NEVER happens again."

I especially liked an article by Mike Adams in which he compares the government’s actions to how doctors treat patients with health problems. “Mask the symptoms and ignore the cause.” You can read this at http://www.naturalnews.com/024260.html.

What do you think?

Is this government bailout necessary? Are big financial institutions getting a free ride while taxpayers are footing the bill? Is there another way to solve this massive problem?

Is your money still safe?

With financial giants failing like Lehman Brothers and AIG, investors have been worried about their investments in mutual funds. Mellody Hobson, a financial contributor from “Good Morning America” explained whether investors should be having sleepless nights or if the current economic crisis is just a bump in the road.

Is your mutual fund in trouble?

Below is a synopsis on how Hobson says you can check on your mutual fund:

· Call your fund company's call center and ask if your fund is currently investing in any of the companies that are in the headlines — like Lehman Brothers and AIG.

Also, ask the representative about the fund's quality controls.

· Be weary of money market funds with an expected return of more than 2 percent. The higher the return, the higher the risks.

· Choose money market funds for quality not promises of a higher yield. If a fund is advertising a higher yield it’s best to stay away.

Should I be panicking? Will this happen to other mutual funds?

Hobson says no. She stated that the situations with institutions like Lehman Brothers are atypical in the market and that since the first money market funds were created, there has been only one case where a fund fell below a dollar.

Hobson also stated that her sources say that there is no need to worry about the funds as only a limited amount owned Lehman Brothers and the parent companies are covering the investments.

Finally, she went on to say that money market funds are secure because the industry is one of the most regulated in the country and that the benefits of investing outweigh the risks.

Read this article at: http://abcnews.go.com/GMA/Consumer/story?id=5824937&page=1

WaMu in trouble too

Recently, Washington Mutual’s shares sank to a 17-year low and if the company does not improve its financial situation by finding a buyer or raising enough capital to bounce back from mortgage woes, repercussions could be dire. Analyst attribute the fall in stock price partially to the situation with financial giants such as Lehman Brothers. WaMu has already lost billions of dollars and predicts that losses due to the mortgage crisis could amass to $ 30 billon within the next couple of years. In the last year alone, the company’s shares have fallen 93 percent. Last week Standard & Poor’s lowered WaMu’s credit rating to one level above the junk rating.

What implications does this have for us – the taxpayers?

Bank analysts have speculated that if WaMu doesn’t find a buyer then taxpayers will have to pay a hefty bill of $24 billion to bail the company out. This bill will come from the guarantees of the government for federal mortgage loss to persuade buyers to purchase WAmu. Some potential buyers include Wells Fargo, HSBC and Royal Bank of Canada and the Royal Bank of Scotland.

Where did WaMu fail?

The previous CEO Kerry Killinger accelerated WaMu’s rapid expansion by pursuing the questionable areas of the amortization mortgage business.

Currently the bank’s balance sheet holds the following:
* $52.9 billion in Option ARM mortgages.
* $60.4 billion in HELOC loans.
* $16.1 billion in subprime mortgages.
Analysts think that the company will lose over 30 billion in defaults over the next year.

Washington Mutual lacked enterprise risk management. Just this week, the company announced an agreement with its chief U.S. regulator, the Office of Thrift Supervision (OTS), calling for better risk management and compliance. The company took a reactive approach instead of a proactive one. Instead of combating risks before they occurred, risk management is being used as an afterthought.

Links:
http://news.yahoo.com/s/nm/20080910/bs_nm/washingtonmutual_dc
http://www.nypost.com/seven/09142008/business/wamu__no_wampum_129032.htm

PriceWaterhouseCoopers Survey Raises Questions on Enterprise Risk Management

In a previous class, we discussed the cost of risk and the goal of risk management. We discussed the fact that the goal of risk management is not to minimize risk, but to lower the cost of risk and maximize firm value.

A recent survey from PricewaterhouseCoopers suggests that while the insurance industry has taken significant strides to implement enterprise risk management techniques, the usefulness of these practices is being questioned. PWC’s survey indicates that many insurers are concerned about the effectiveness of ERM and whether or not it can create a return on investment. While the majority of insurers responded indicating that they had implemented ERM programs and that it is a top priority, the survey shows that teams in the workplace do not fully understand ERM and that it is sometimes not relevant in certain situations. Also, ERM is not incorporated when making every day decisions, strategic planning, etc.

Basically, the survey shows that while companies have made substantial progress in establishing ERM programs, ERM has not been fully integrated into regular business practices and unless this is done ERM will not be able to meet the firm’s objectives.

To read more about this, visit the article : http://www.insurancejournal.com/news/international/2008/07/02/91533.htm