The Union Budget and the Stock Market reaction

This article was first published by www.yahoo.com on February 23, 2016; Co-author: Anisha Sircar (Student at the Flame University, Pune)

https://in.news.yahoo.com/the-union-budget-and-the-1371194351231030.html

“…The President shall, in respect of every financial year, cause to be laid before both the Houses of Parliament a statement of the estimated receipts and expenditure of the Government of India for that year … referred to as the annual financial statement.”…(Article 112, Indian Constitution)

The Union Budget is the most watched, anticipated, debated and discussed politico-economic event in India. Reviewing what the government achieved in the last fiscal year and what it aims to do in the next fiscal year, the much awaited budget reflects the present economic conditions while forecasting future conditions, and is a key indicator of the financial health of the country. While core fiscal issues (such as taxation, expenditure, and fiscal deficits) are addressed in this session, the budget speech is also used by the Finance Minister to announce new schemes, reforms, policies and plans for the future.

This is why the run-up to the budget is often accompanied by considerable volatility in the stock market. The two are intimately related: how the Finance Minister spends and invests money affects the fiscal deficit, and the extent of this deficit influences the money supply and interest rates of the economy. Simplistically, for example, higher interest rates would mean higher industrial costs of production, lower profits and hence, lower stock prices. Similarly, the budget also deals with fiscal measures taken by the government which affect public expenditure. For example, a direct tax hike would reduce disposable income, which would, in turn, negatively impact consumption. This would affect production levels and cause a decline in economic growth. An indirect tax hike would have a similar effect: indirect taxes may be translated as higher prices onto the consumers, who are often made to bear the ‘incidence’ of the tax, so this would decrease demand for relatively elastic commodities and end up potentially slowing down production and growth.

Susan Thomas and Ajay Shah (Economic and Political Weekly, Vol. 37, No. 5, Money, Banking and Finance (Feb. 2-8, 2002), pp. 455-458) studies 26 Union Budgets to find out the “Stock Market Response to Union Budget” in India. They find that the budget session has on an average resulted in 10 percent higher stock index in the post-budget trading days (about 30 days). According to them, the reaction of a stock market is usually viewed as a measure of the ‘quality’ of a budget.

The announcements in the budget have an impact on the sectors with respect to which the announcement is made. For example, it is often seen that if the market expected a positive announcement regarding say the banking sector, in the pre-budget days, the banking stocks would rally. If the announcements on the budget day are in line with the expectations, there may be very little impact on the day itself. Whereas, if the announcement is better than expected, the banking stocks further rally on the day and may even continue to rally in the next few days. On the contrary, if the announcements are not as expected and are perceived as negative for the industry, the stock prices go down. After the 2005 and 2010 budget sessions, the stock price of almost every company in the banking sector went up. Whereas in 2004, 2007, 2009, 2012 and 2013 most of the banking stocks fell.

On the budget day, one invariably witnesses significant movements in the stock market, which depend on investors’ interpretations of economic activities. However, in an analysis of 31 budgets, done by Livemint (http://www.livemint.com/Opinion/LNs25k8uD6dZsi9Z10gLgK/The-budgets-declining-effect-on-the-stock-market.html) and published on February 17^th 2016, it is seen that the impact of the budget on the stock market is going down. As per the analysis, from average gains in the upwards of 4% on the budget day in the 90s, to a gain of about 2.5% in 2015, the budget is no longer an ‘inflexion point’ for the market.

As expected, the forthcoming Union Budget, which is to be presented by the current Finance Minister Arun Jaitley before the Parliament at 11am on the last day of February, has been a subject of widespread discussion in the recent weeks. Key announcements with respect to the ‘Make in India’, ‘Digital India’, ‘Start up India’ and schemes such as the Pradhan Mantri Krishi Sinchai Yojana, etc. are expected. Goods and Services Tax (GST), Smart cities and Infrastructure reforms may also feature in the budget speech.

The speech will definitely act as a roadmap to the Indian economy in the coming fiscal year. However, with Oil prices, Chinese economy and global uncertainty already playing on the minds of the investors, impact of the forthcoming budget on the stock markets may be just another factor this year!

News: Speed and technology

This article was first published by the Analytics India Magazine on February 15, 2016; Co-author: Sanjay Fuloria (Cognizant Research Centre)

http://analyticsindiamag.com/news-speed-and-technology/

The advent of social media has meant that information travels fast. Everyone participating is judged, liked, trolled, and slammed, every moment. A decade after the advent of Facebook and Twitter, no one can afford to ignore the impact that they have. Businesses, politicians, actors, academicians, writers, have all used social media to advance their cause.

In fact, taking a step forward are companies like Banjo. Banjo released a consumer app in 2011. This was a news app and the sources of information were social media feeds. This might not sound new as there are hundreds of such apps available for download. What’s new is the enterprise software they have developed recently that can detect events. The events are organized by location. The events are shown in great detail using pictures, texts and location. The posts are sourced from the mobile devices closest to the location of the event.

There are implications of such technology for different industries. A tweet posted by an expert about the possible price of a stock could make or break billions of dollars for investors. In the field of finance, especially in high frequency trading, time lag is the key. Research has shown that effective use of Twitter sentiment about a company can result in superior returns.

In another example, if there is a group of people witness to a crime and they are able to post pictures and messages via their mobile devices, the police can be alerted as they would get to know the exact location of the happening. Similarly, in the case of a disaster, the government can be alerted into action to manage the disaster.

Google can predict the onset of epidemics based on individual’s searching for particular medicines. They can even predict hurricanes and storms based on searches for emergency rations, blankets, torches and other items. Now, compare and contrast this to the ways news was gathered and disseminated historically.

A popular method was to appoint messengers to either collect or send news. There were people who were designated as ‘criers’ to shout out the news loud and clear. People were asked to gather at cross roads of their respective localities to spread the news. The great travelers were a good source of information and news from distant lands. They were accorded grand welcome and one of the reasons was their news carrying capability.

Then there are examples of daily handwritten news sheets started by Julius Caesar. The present day marathon can also be traced back to the phenomenon of spreading news through a messenger. Marathon celebrates the courage of Pheidippides who ran 26 miles from Marathon to Athens to carry the good news of Athenian victory over the Persians. He sadly collapsed and died shortly after providing the news due to exhaustion.

As a method of spreading news, pigeons were used by Persians. They trained these pigeons. The Mughals and Romans used pigeons. In fact they were used to aid the military. Surprisingly pigeons were used by financiers before the advent of the telegraph. Just imagine how much time all these modes of communication would have taken and sometimes the message would simply be lost owing to the mortality of pigeons.

From pigeons who would take days to deliver news we are at a stage where we can get the news almost instantly. The use of pigeons to deliver news now seems a very distant past. But the truth is that they were used for transmission of news and information till just about a century ago. With the advent of the telegraph in the late 19th Century, the use of pigeons started to decline.

The world has really evolved. However, there are some privacy issues involved. Not every individual who is privy to an event would like that information to be seen by everyone with an internet connection. The privacy settings in the respective social media sites should do the job. If some individual doesn’t want his/her location information to be shared, they can simply turn that off. There could be some deleterious effects of news spreading fast. During riots, quick news could incite more people pretty fast and soon the mob would become difficult to handle. On the other hand, the law keepers would get the information quickly and they could arrive on the scene pretty quickly before much damage has been done.

There are both positives and negatives like the proverbial two sides of a coin, to this lightning transfer of news. Used judiciously, this technology could redefine the world we live in forever.

A Long View on Liquidity

The interview was first published by the Global Association for Risk Professionals on February 04th 2016

http://www.garp.org/#!/risk-intelligence/detail/a1Z400000031hmbEAA

Concerns about market liquidity and related crises are nothing new, but memories are short, says NYU’s Yakov Amihud

Yakov Amihud, the Ira Leon Rennert Professor of Entrepreneurial Finance at the Stern School of Business, New York University, has been studying liquidity for more than three decades. He is the coauthor of “Market Liquidity: Asset Pricing, Risk and Crises” (Cambridge University Press, 2013). His recent work has been around pricing illiquidity, illiquidity premium and liquidity risk of corporate bonds – at a time when liquidity issues are of growing concern among fixed-income market participants and regulators.

Institutions need “built-in mechanisms and standards to ensure that investments are made in assets that can be liquidated at the lowest possible cost,” says Yakov Amihud of NYU’s Stern School.

“If a bond is liquid, the company can sell it at a quarter point less. That is equivalent to the central bank lowering interest rates by a quarter points,” Amihud says. Although his first paper on the subject, “Liquidity and Stock Returns” (with H. Mendelson), was published in May-June 1986 (Financial Analysts Journal 42, pages 43-48), he believes that liquidity risk naturally captures attention in the aftermath of a crisis – as it did post-2008.

Amihud focuses his research on the effects of stock and bond liquidity on the assets’ returns and values, and on design and evaluation of trading methods in the securities markets. The New York Stock Exchange and Chicago Board Options Exchange are among the markets he has advised.

In this interview with GARP Risk Intelligence contributor Nupur Pavan Bang, the professor discusses liquidity risk, difficulties in assessing it and what the U.S. corporate bond market can learn from the Indian corporate bond market.

Why wasn’t the world of finance paying much attention to liquidity before 2008?

My research shows that the pricing of liquidity becomes more important after crises. As with a natural disaster like a hurricane or earthquake, people buy Insurance after the event. The next year and the following years, if the disaster does not repeat, they may not renew the insurance. Similarly, when a liquidity crisis happens, people say, “Wow, this is important and we should take it into consideration.” But they soon forget about it. And when the crisis hits again, they are not prepared for it.

What previous events may have been forgotten?

There were multiple occasions. During the crash of 1987, the Dow fell by approximately 25% in a single day, and during the crisis of 1998, liquidity was scarce worldwide. There were always more than single reasons for each of these events. However, illiquidity of assets also remains an important reason for the losses.

The collapse of Long Term Capital Management in 1998 is also attributed to illiquidity. LTCM had good positions. It’s just that the market did not have the liquidity to absorb the trades that would result from unwinding LTCM’s positions.

In spite of these historical events, which clearly pointed towards the perils of not taking liquidity risk into account, we have clear evidence of people forgetting. In “The Big Short” by Michael Lewis (2011), pages 216-218, the author recreates a conversation between John Mack, the CEO of Morgan Stanley, and investors on December 19, 2007, explaining the trading loss of $9.2 billion:

“Mack: This was the result of an error in judgment incurred on one desk in our fixed income area, and also a failure to manage that risk appropriately . . .

William Tanona, from Goldman Sachs: “…I am surprised that your trading VaR stayed stable in the quarter given this level of loss, and given that I would suspect that these were trading assets. So can you help me understand why your VaR didn’t increase in the quarter dramatically?”

Mack: Bill, I think VaR is a very good representation of liquid trading risk…”

The risk management tools assumed that the assets can be bought and sold indefinitely without changes in the price. Now that is ignoring liquidity risk completely. So people had really forgotten lessons from the past. I hope people will be more sensitive towards the issue now.

With more commentators and experts talking about it, let’s say people want to tackle liquidity risk. What can actually be done about it?

You and I will not face the problem of liquidity risk, but the institutions which invest large amounts of money will. When billions of dollars are being invested by a single institution, the investment needs to be designed in such a fashion that assets can be liquidated at minimum cost.

Think about it. If the government does not force people to meet certain standards and build an earthquake-proof home, they will not do it. They will look at it as an unnecessary expense. Even in places that are declared to be high-risk zones, people don’t build earthquake-resistant houses. Similarly, an investment may look good on paper and may perform well in good times. It may not do so during periods of crisis. So the Institutions need to have built-in mechanisms and standards to ensure that investments are made in assets that can be liquidated at the lowest possible cost.

What is the problem with corporate bonds in the U.S.?

In the U.S., traditionally the corporate bond market is not very transparent. There is no centralized marketplace where one can see the quotes or post quotes. If you look at the equity markets, NASDAQ or NYSE, it is all electronic and automated trading. Thirty years ago, you would see hundreds of market makers sitting by telephones, providing quotes and taking orders. In the equity markets, they are all gone now. Electronic trading has brought about greater transparency and more liquidity. The cost of capital in the equity markets has gone down.

People say that the U.S. corporate market is not liquid because small investors avoid it. I would say that it is a chicken-and-egg story. Investors avoid it, and it is not liquid, because it is so difficult to trade. In fact the U.S. can learn from India here. India has automated electronic trading platforms for corporate bonds as well.

This is not a question of helping the traders or investors. It must be done for the economy. It must be done to help companies raise capital at a lower cost. Research shows that if a bond is liquid, the company can issue bonds at a lower interest cost. Therefore, the people designing trading systems need to think about this and how to help businesses access the market to raise capital at lower cost. And if the private sector does not do that, the government should help this happen, because greater liquidity generates widespread positive externality in capital markets that the developers of the trading system cannot fully capture.

What kind of impact would the Fed’s recent rate increase have on liquidity?

It is true that when there is a shortage of funds, liquidity problems become serious. But I don’t think the quarter percent increase will have much impact.

In India, the central bank under Raghuram Rajan lowered interest rates one percent in 2015. Will a downward trend in India and an upward trend in the U.S. result in a flight of money to the U.S.?

Not necessarily. If the rate reduction in India brings about greater economic growth and more robust business activity, then the flows from U.S. to India may continue and even grow. Inflation should also be looked at. Investors look at real rates in the end. The strength of the currency must also be assessed. The impact of interest rates must be looked at holistically.

Regarding your work on entrepreneurial finance – in India, many startups have raised money from angel investors or venture capitalists at very large valuations, but they are not making money. What are the prospects for exits or liquidity to enable transactions of any kind?

Amazon wasn’t making money for years and years. The market looks forward. It looks at the potential. If Amazon could get valued at billions of dollars without any profits, so can the startups in India. About liquidity before IPO, in the U.S. there is a platform called Second Market that facilitates private transactions in non-public equity claims. This helps the VCs and other funds and investors to trade in the shares of VC- and private-equity-backed ventures. The greater liquidity in these claims, enabled by this and other, similar trading platforms, makes it more feasible for entrepreneurs to raise capital at lower cost.

There are problems with respect to information asymmetry. But it is something that has been improving over time and continues to improve. Something similar in India will be helpful for both the startups and the investors.

Micro Insurance: Opportunity, Not Charity

This article was first published by the Global Association for Risk Professionals on January 12, 2016

http://www.garp.org/#!/risk_intelligence_detail/a1Z400000031bGL

With India’s under-served population as a case example, there is potential for economies of scale through efficient deployment of technology

In his 2014 book “Capital in the Twenty-First Century,” Thomas Piketty focused on income inequality and called attention to India, where inequality appears very stark despite a lack of data to prove or disprove it. Some of the homes of the ultra rich, in the city of Mumbai, among the most expensive homes in the world, overlook Dharavi, one of the largest slums in the world.

Within the context of access to financial services, insurance is a very critical financial risk management tool. Yet those who may need it the most, such as people vulnerable to natural catastrophes, loss of Income and infectious diseases due to lack of sanitation or access to health care, often have no Insurance.

Twenty-two percent of India’s population is below poverty line (according to estimates published by the Indian government’s Planning Commission in 2013), and a major chunk of the overall population is excluded from the protection of insurance. Life insurance penetration is 2.6%, and the general insurance penetration is merely 0.7%, whereas mobile phone penetration is close to 80%.

Furthermore, the insured in India are covered for just six months of income, and 60% to 70% of health care expenses are borne out of pocket.

Regulatory Push

Micro insurance regulations by the Insurance Regulatory and Development Authority of India (IRDAI) in 2005 were steps in the direction of making Insurance accessible and affordable. The regulations compelled insurers to look at an otherwise neglected market segment. A 2015 regulation, Obligations of Insurers to Rural and Social Sectors, provided further micro insurance impetus, requiring insurers to write fixed percentages of their business to the segments classified as “rural” and “social” each year.

There has thus been a steady increase in number of policies sold to individuals, though the overall premium collected from individuals have declined in the recent years (Exhibit 1). Almost 5 million policies, bought by individuals, are mostly self-funded, which indicates that the targeted segments have a need and are willing to purchase insurance.

Exhibit 1

While the individual micro insurance business is catching up, the group business dominates the sector. There was a significant decline in the premium collected and lives covered in FY2010-11 & 2011-12. There was resurgence in FY2012-13.

Insurance in India is generally a “push-based” business, with face-to-face selling by agents playing an important role. Agents’ importance increases in the micro insurance context, as this segment needs greater convincing and push. Although there has been a steady increase in micro insurance agents, the numbers are not adequate to cater to the vast population (Exhibit 2).

Exhibit 2

In spite of efforts by the regulator to enable the Insurers to remove rigidities in accessing the rural markets and customizing the insurance solutions for the targeted, a large number of the segment remains uninsured.

Factors in Under-Penetration

Temperament and awareness are the most important of the many reasons for under-penetration in the market. Those who are aware about Insurance often have the attitude that they will never need it — that catastrophes or accidents will strike others. Insurance can seem an unnecessary expense when it is a struggle to get two square meals a day. What’s more, a large swath of the population lacks awareness about insurance.

From an insurer’s perspective, this part of the population is mobile (in search of work), does not have a steady stream of income and takes a lot of cajoling to buy a policy. There are challenges in distribution, as not many agents are willing to target those below the poverty line. This segment lacks access to or knowledge of technology to buy online, and reinsurance support is not forthcoming.

There is also the question of whether the products are suitable for very low-income customers who would prefer to insure crops or cattle or loss of income, with premium payment schedules that match the seasonality of their income. Policy document can be complicated, the products too cumbersome to understand.

The Solution

Reaching such a sizable, under-served market entails solutions that are extremely specific to the prospective customers. The approach must be to simplify, customize and create awareness. Use mobile technology, and speedy settlements. And rely on people with local knowledge to convince the customers about the need for protection.

It is important that insurers start looking at micro insurance as a business opportunity, rather than charity. Given the large population, in India as well as globally, who can benefit from micro insurance policies, economies of scale will set in as technology is put to efficient use.

Top 5 Diseases Analysis

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp9-10; Co-Author- Syed Md. Ismail

https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Q2%202015-16.pdf

Many studies have indicated that Indians are now more vulnerable to non-communicable diseases than communicable diseases due to changing lifestyles and income levels. Cardiovascular diseases have displaced communicable diseases as the biggest killer in India and, according to a 2010 University of Toronto study, the leading cause of death in middle aged men is heart disease, even in poorer states such as Uttar Pradesh and Bihar.

A sub-set of the claims data for the Financial Year 2013-14 available with IIB was used. The selected data comprised of claims where the diagnosis code (ICD10) and the pincode of the hospital was provided. The selected claims consisted of both Group as well as Individual policies. The effects of Sum Insured or gender or age are not considered in this analysis. The claims selected amounted to Rs.3,355 crores of claims paid for 11,22,652 claims.

The analysis shows that circulatory diseases have the highest average claims paid among all disease categories, accounting for 13% of claims paid analyzed (Exhibit 1).

According to a report published by the Indian Association of Prevention and Social Medicine, “Decline in morbidity and mortality from communicable diseases have been accompanied by a gradual shift to, and accelerated rise in the prevalence of, chronic non-communicable diseases (NCDs) such as cardiovascular disease (CVD), diabetes, chronic obstructive pulmonary disease (COPD), cancers, mental health disorders and injuries”. The top 5 disease categories (out of 22 broad disease categories as per ICD 10) which account for 51% of claims paid, in the sample under study are, apart from circulatory disease, Injury (10%), Digestive (10%), Urology (9%) and Neoplasm (8.5%) (Exhibit 1).

The same report states that “though there have been substantial achievements in controlling communicable diseases, still they contribute significantly to disease burden of the country”. The amount of claims paid is relatively smaller for Infectious diseases, but they account for largest number of claims as per our analysis (Exhibit 1).

It was also noticed in our analysis that Mumbai accounts for the largest number of health claims, accounting for 27% of the 11,22,652 claims studied, amounting to 30% of the claims paid. The other large cities which account for significant number of claims paid are Delhi (19%), Kolkata (14%), Bengaluru (12%), Chennai (11%) and Hyderabad (10%), with others accounting for the remaining 5% only (Exhibit 2).

Exhibit 1

Exhibit 2

The case for Mental Health Insurance

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp17-18

https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Q2%202015-16.pdf

As per the World Health Organization (WHO), Mental health refers to a broad array of activities directly or indirectly related to the mental well-being components included in the WHO's definition of health: "A state of complete physical, mental and social well-being, and not merely the absence of disease". It is related to the promotion of well-being, the prevention of mental disorders, and the treatment and rehabilitation of people affected by mental disorders.

Common forms of mental illnesses include Depression, Anxiety/ Phobias, Eating Disorder and Stress, among others. Some of the severe forms of Mental Illness are Schizophrenia, Bipolar disorder (Manic depression), Clinical depression, Suicidal tendency, and Personality disorder.

According to National Institute of Mental Health and National Alliance on Mental Illnesses, in the US, 1 in every 4 persons suffers from some form of Mental Illness or the other, while this statistic is 1 in 6 persons in India. The impact is that people with mental illness die 25 years earlier than other Americans and more than 90 percent of suicide cases are found to have one or more mental disorders.

In a study done by BeyondCore, Inc. on people insured between the ages of 18-35, in the USA, it was found that Mental Illness has a compounding effect on claims (cost of treatment). For example, the annual cost for young adults with heart failure was $42,000, for people taking antidepressants was $7,700, but people who had both heart failure and were taking antidepressants had an annual cost of $70,000 (see Figure 1). 

Figure 1: Compounding effect of Mental Illness

To the economy, the loss of earnings due to mental illness amounts to US$193 billion per annum. Globally, depression alone affects 400 million persons and was estimated to cost at least US$800 billion in 2010 in lost economic output, by WHO, a sum expected to more than double by 2030. While such statistics are not available for India, it will be reasonable to assume that the impact would be significant.

In fact, the situation in India may be worse as acknowledging suffering from some form of Mental Illness is culturally a taboo in India. On top of that, the availability of help in terms of psychiatrists, psychiatric beds, clinical psychologists, etc. is much below the required numbers. For example, there are approximately 3000 psychiatrists in India vis-à-vis a requirement of 150000.  

Health Insurance policies also exclude Mental Illness specifically. Extracts from the policy documents of a few health insurance products read as follows:

• “the following fall under permanent exclusions: Any expense incurred on treatment of mental Illness, stress, psychiatric or psychological disorders”
•  “this policy excludes: Psychiatric, mental disorders (including mental health treatments)”

Insurance plays a key role in Healthcare financing. Insurance is based on law of large numbers and there is no denying the large number of people suffering from mental illness. The trouble of course is that Insurance contracts are based on utmost faith and the policyholder must disclose complete known information about his physical and mental health at the time of buying the policy. The fear of inadequate disclosure by the customer may deter the Insurers from offering policies on Mental Health insurance.

Assessing the risks may remain a challenge for the underwriters till adequate data becomes available. Collating the data from various institutions like National Institute of Mental Health and Neurosciences and the Institute of Mental Health and Hospital, Agra may help the Insurance companies design appropriate products.

Use of innovative techniques may come in handy to some extent. For example, social media analytics of an individual may reveal suicidal tendencies or enquiries about specific problems like depression, anxiety, etc. Sentiment analysis can help find people at risk. These can then be verified with the customer and specific undertaking may be taken from the customer if he does not agree with the findings.

Mental illness is also a major cause for the high number of suicides in India. Intervention at the right time, access to healthcare, along with health financing will play a major role in talking the problem of suicides related to mental illness as well as prevention of the illness getting aggravated. It is a serious issue and the Insurers can play a major role to make a difference!

Unconventional Products on the Block

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp4-6

https://iib.gov.in/IIB/Articles/IIB%20Bulletin%20Q2%202015-16.pdf

Mr. Sushant Sarin is the Senior Vice President- Commercial Lines, at Tata AIG General Insurance Co. Ltd. In this capacity, he is responsible for profitably growing the Commercial Lines business of Tata AIG, leading its major and corporate accounts practices and overseeing its broking and commercial agency distribution.

Under Sarin’s stewardship Tata AIG has been the leading Liabilities insurer for India Inc. Sarin helped set up Tata AIG’s operations and as part of the start-up team one of his assignments was to help bring to India Inc. the latest liability insurance products used by industry world over.

A practicing Fellow of the Insurance Institute of India, Sarin has close to 25 years of experience in the General Insurance Industry. Prior to Tata AIG, he worked in various capacities with United India Insurance Co.

Sarin is a graduate in Science from St. John’s College and holds a Post Graduate Diploma in Management & Marketing. His interests include long distance running, reading and dramatics. He is currently reading “Miles to Run Before I Sleep” by Sumedha Mahajan (Rupa Publictions, 2015).

In a conversation with Dr. Nupur Pavan Bang of the Insurance Information Bureau of India, Sarin talks about the Unconventional Insurance products which have gained significance in recent years due to the Social, Regulatory, Technological and Environmental changes taking place globally and in India, the challenges posed to the Insurers while selling such products and while assessing losses.

An ASSOCHAM-Mahindra SSG study earlier this year warned that the number of Cyber crime cases in India could rise to more than 3,00,000 cases in 2015, growing at a compounded annual growth rate (CAGR) of about 107 per cent. In such a scenario, Cyber Liability Insurance must gain importance. Is the growth in volume (in terms of Gross Written Premiums) of Cyber Liability Insurance products for the Insurance Industry, keeping pace with the increased number of crimes?

Cyber Liability Insurance is becoming very important nowadays, especially in the backdrop of rising number of instances of cyber crime and cyber data breaches. Its growth in terms of both premium as well as the number of policies being purchased has been remarkable.

At Tata AIG, we launched this product about two years back and the portfolio has grown to $2 million now. We see that more and more companies are buying Cyber Liability Insurance. Those companies which were the first movers are buying more cover and those who have not bought it yet, will start buying it.

However, when a client is looking to buy a Cyber Liability Insurance, he is buying something quite advanced and sophisticated. Tata AIG has the customers’ confidence in this product and the market share is tilted in its favour.

As you mentioned, Cyber Liability Insurance is quite advanced and sophisticated. How does a customer know what is the amount of Insurance or “Limit of Liability” that they would like to avail of?

Cyber Liability and Cyber Crime are often, though inaccurately, used as synonyms. Cyber crime refers to any crime committed using computers or over computer networks. When we think of cyber crime, we unwittingly limit our thinking to only those crimes committed using computers or over computer networks, that are related to theft and robbery of money or securities. 

However, confidential data or personally sensitive information such as that related to customers’ passwords for financial transactions, bank account numbers, confidential medical records, etc. are also very valuable and theft of such data or information can have dire consequences for a company or an individual.

For example, for a Bank, if someone accesses data of a Bank’s customers in an unauthorized manner, he can get into the account of any bank customer and do whatever he wants to do with the money lying in the account.

So information or data is very valuable. That’s why insurance for financial consequences of data breach, that is, Cyber Liability Insurance, becomes important.

Coming to how do companies know what should be the Limit of Liability for which they should buy insurance, this depends upon factors like the type and volume of data, origin of data, location where the data resides, sensitivity of the data, data security protocols, peer group benchmarking, etc.

So if the data originates from Europe or the US, the data privacy laws are stricter there, so more Insurance will be required. Similarly, if the data is personally sensitive or creates financial vulnerabilities, the amount of Insurance required will be much more.

How does the Insurance Company assess the loss if a data breach does happen? What are the kinds of losses that are covered by such a policy?

When money is stolen, like in the case of a recent event where a Bank discovered a fraud to the tune of a few Crores of Rupees due to fabricated credit cards, the amount of loss suffered is a straight forward calculation and this amount will be paid by an Insurance Company if the Bank has a policy covering such fraud.

However, a data breach is more complex. Cyber crime which results in a data breach may typically get discovered much later than a cyber crime where a specific amount of money is stolen. When it does get discovered, the following issues confront the company and lead to costs, expenses, fines, penalties and liability being incurred by the company:

• How did the data go out? Forensic investigation would need to be done and it is very expensive

• Cost of  notifying the customers, that is, data subjects, about the breach; notification costs form a very large part of the financial costs following a data breach

• Regulatory bodies may impose a fine or penalty; the policy pays for these if these are insurable under law

• Customers or data subjects may sue the company. Courts may awards damages to be paid to each of the affected customers

• Reputation loss- a public relations expert may need to be hired to salvage the reputation of the Company and / or its Data Security Officer

The policy covers these and other financial consequences.  The total of these losses is the amount payable under the policy.

The year 2015 saw bans on popular food products in India. For a company, when operating in a country like India, where the regulations at times may border on being in grey, rather than black or white, Product Liability Insurance becomes important. What are the main features of such a policy?

A lot of awareness has been created in recent times about product safety and quality and of Contaminated Product Insurance as a related risk mitigation measure. Product recall is very generic Insurance Policy. A product can be recalled for any number of reasons. It could be defective or dangerous or any other reason. Contaminated product insurance is a policy specifically created for products which are for consumption by people as consumption by human beings poses a high degree of risk if the product is unsafe or harmful. The policy covers the cost of recall, cost of additional warehousing, extra manpower, disposing of extra packaging and point of sale material, cost of engaging with a Public Relations agency to undo the damage to reputation and brand to re-establish market share, loss of profits because of business interruption following the incidence of contamination, malicious product tampering and product extortion etc.

What if the policyholder (Company) doesn't disclose that a certain product is contaminated? Will the Insurance Company still be liable to pay the claims?

Insurance policies are for fortuitous /accidental events even if caused due to negligence. Intentional or known defects are not covered.

Directors’ and Officers’ (D & O) Liability Insurance is another product which should have picked up in 2015. With cases of harassment in work places on the rise and complaints on high profile executives grabbing the media attention, are more and more companies opting for D & O Liability Insurance?

D & O Liability Insurance is no more an option. Everyone is buying it. No company is secure till they buy a cover protecting management against personal liability for managerial actions.

Is loss of a company’s CEO covered under an insurance policy?

For this, we must consider two different types of insurance products that deal with two very different types of exigencies.

One type of policy which is popular is Key Man Insurance. Such policies are sold by Life Insurance companies and are generally taken by a company on the life of key employees to cover the company from the sudden loss of a ‘Key Man’ that results in financial loss to the company.

As far as a D & O policy goes, it would protect the directors and officers of a Company if the company were to lose a dynamic successful CEO to say, competition. The profitability of the company and hence the share prices could take a beating. The shareholders may sue the Board of the company for not doing enough to retain the CEO and may demand compensation for their losses. D & O Liability Insurance would come into play here.

How does the Insurer price D & O Liability Insurance? What are the factors that are accounted for when underwriting and pricing the product?

It is the collective outcome of many factors like the performance track record of a company, its asset size, whether the company is listed or not, if listed whether the listing is in India or abroad, say US or UK, compliance record, disclosure standards, the nature of business, the nationality and profile of employees, etc.

Insurance is mainly meant to mitigate the losses that a company/individual may face if certain events happen. If we go by this definition of Insurance, then many Multinational companies operating in India may want to buy a cover for Tax related risks. Is there a product in the market which covers Tax risks?

Talking of tax levies in general, tax is levied by law. If tax that is to be levied is not deducted, collected or paid, whenever it is detected, it will have to be paid. There is no fortuitousness about it. However, when there is a transaction like a merger or an acquisition happening, the tax position under law may not be clear. If the law is not clear, for such very limited situations, Tax Indemnity Insurance is available. It is by its nature a customized policy. Very few insurers have the capability to write such policies.

What is the recourse for companies which are faced with retrospective taxes being levied on them? Tax risk is certainly not something that any of these companies would like to carry themselves.

Other than insurance for the limited situations where the tax position in a transaction may not be very clear, there are no blanket or omnibus tax insurance policies. Retrospective changes in laws will not be covered by Insurance.

Ace investor Mr. Rakesh Jhunjhunwala, in an interview to CNBC TV-18, earlier this year, expressed his concerns about the valuation of e-commerce companies in India. In the recent past, there have been more voices expressing concerns about the high valuations of the e-commerce start-ups and it is being likened to the Dot Com Bubble of 2000. If there indeed is a bubble, and it bursts, the Venture Capitalists (VCs) and Angel Investors (AIs) would be the ones to lose maximum money. In such a scenario, do see a need/demand for a product to cover the risks being faced by VCs and AIs?

VCs and the AIs do a lot of due diligence before they invest. Arriving at a reasonable valuation is part of their business and they must take that risk. But if the due diligence is not done appropriately, and limited partners lose money because of the negligence of general partners, professional indemnity insurance coverage under the VC Protector policy will be useful.