Q&A: US debt crisis

The battle between the White House and Congress continues over how to raise the US debt ceiling. If the 2 August deadline is missed, the government could quickly run out of money.

Why is the debt ceiling so important?

The US government has a legal limit on how much debt it can run up – $14.3tn at present. It reached the cap in May, which means it cannot borrow any more money.

So how has America been keeping afloat since then?

Treasury secretary Tim Geithner managed to stave off default by suspending payments into two federal pension funds, pledging to repay the money once Congress has approved a higher debt ceiling.

Why can't Barack Obama just raise the debt limit?

Under the US constitution, all government borrowing has to be approved by Congress, and this has led to a protracted stalemate between Republicans and Democrats. The borrowing limit was introduced in 1917 to make it easier for the government to fund its efforts in the first world war. Since then the ceiling has been lifted numerous times – usually it is just a formality. It can also go the other way. During the 1950s economic boom, Congress voted to lower the limit twice.

So what's different this time? Why can't the two sides agree?

Since the financial crisis and recession government spending has soared while tax revenues have suffered, driving up the government's deficit. The Republicans, who control the House of Representatives, insist that the government must cut the deficit first before any agreement on raising the debt limit can be reached.

Has there been any progress in the debt talks?

Both sides accept that the deficit needs to be brought under control, but have different ideas about how to go about it. The main sticking points have been the Republicans' resistance to tax rises and calls for bigger spending cuts than have been backed by the Democrats. The Democrats also want to shield healthcare programmes for the elderly and poor from the cuts. After chaotic scenes in the House on Thursday night, Republicans called an emergency meeting for Friday morning to try to get their plan through the House.

What happens if a deal can't be agreed by Tuesday?

The US treasury estimates that funds will dry up by then, which would leave the government unable to pay its bills – such as social security payments, Medicare, military salaries and debt interest payments. The Republicans claim that the government would get by for a few more days after 2 August, but there is no doubt that the two sides need to agree a deal soon.

How have financial markets reacted?

Investors have become more nervous, and the dollar was under pressure on Friday. Moody's has put America's credit rating on negative watch.

What impact would a default have?

US treasury secretary Timothy Geithner has said a US default would have 'catastrophic' results.

 It would trigger a major global panic. Standard & Poor's has said it would slash the US credit rating from AAA (the top) to D (the bottom). That means banks would technically be barred from using US debt as collateral with central banks, although these rules could be changed.

Soon, your visit to doctor too could be covered by insurance

A government health insurance scheme providing hospital cover to over 23 million poor households will also pay for visits to the doctor and medication if pilot projects currently underway prove feasible. The labour ministry, in collaboration with the International Labour Organisation (ILO) and ICICI Foundation , has launched the first Rashtriya Swasthya Bima Yojana (RSBY) pilot project in Puri, Orissa, this month, covering both outpatient and inpatient care for the beneficiaries of the flagship scheme, which has been extended beyond BPL families to unorganised sectors such as construction workers, beedi makers, domestic workers and street vendors. 

Under the the proposal, RSBY beneficiaries can make 10 free visits a year to empanelled hospitals and doctors and get free medicines. The pilot scheme entitles empanelled doctors and hospitals in Puri to insurance claim of Rs 50 for every visit by RSBY beneficiaries. It covers medicine costs too, though up to a limit that would be prescribed later depending on bids put in by insurance companies. To ensure that medicine costs do not push up the insurance cover, the labour ministry is working with the National Rural Health Mission on a list of cheap generic medicines that the doctors will have to provide.The extension of the scheme is feasible as the government would have to give only about Rs 200 more annually for each beneficiary family, Swarup said. This would be over and above the premium charged currently by insurance companies for the RSBY scheme. It varies in each state, averaging around Rs 500 per family. What needs to be tested, however, is the practicality of implementing the scheme because it would be more difficult to monitor than the hospitalisation scheme as here patients would walk away after being treated. When a patient comes for consultation, his card is swept in the scanner and his ailment, diagnosis and medication fed into the reader. This data is then transmitted to the central server and monitored by insurance companies and the government. The patient is given a printout of the details of visit and treatment. The RSBY covers a family of five for a token registration fee of Rs 30 and provides annual hospitalisation cover of Rs 30,000.


http://economictimes.indiatimes.com/personal-finance/insurance/insurance-news/health-insurance-cover-should-be-increased-in-india-ficci/articleshow/9256799.cms

New Swiss Re sigma study “World insurance in 2010” reveals growth in global premium volume and capital

• Global premium volume rose solidly in 2010, driven by economic growth, rebound in capital and solvency
• Emerging countries continued to gain in importance - China became the 6^th largest insurance market
• Investment income suffered from low interest rates

According to Swiss Re’s latest “World insurance in 2010” sigma study, world insurance premium volume increased 2.7% on an inflation-adjusted basis. Life premiums rose by 3.2%, non-life by 2.1%. Premium growth in emerging markets accelerated. The industry’s capital and solvency improved, while low interest rates weighed on investment income.

The insurance industry is back to growth, as shown by Swiss Re's annual assessment of global insurance markets for 2010. Premium volume grew in three quarters of the 78 markets covered in the publication. Growth was particularly strong in emerging markets. At the same time capital and solvency in the insurance industry improved robustly but low interest rates still had a negative impact on profitability.

Global life premiums rose by 3.2%

Life insurance premiums globally grew 3.2% to USD 2 520 billion in 2010. Growth was especially strong in Asian emerging markets and robust in some large European markets. In the US and the UK, premiums declined, though at a more modest pace than 2009. While low interest rates negatively impacted life insurers’ profitability, they contributed to a strong improvement in the life industry’s accounting capital position by increasing the value of life insurers' bond portfolios.

Daniel Staib, one of the authors of the new sigma study, says: “The dominating picture is that the industry is on the way back to the long-term growth trend. In fact, in some continental European countries, growth in the past year could be said to be very strong because sales of single premium products with comparatively attractive guarantees increased strongly."

In emerging markets, life premiums rose by 13%. South & East Asia was the region that had the strongest growth, at 18%, led by China, with strong demand for both traditional and investment-linked products. Latin America and the Caribbean were not far behind, at 12%, led by Brazil.

Non-life premium increased by 2.1% in 2010

Global non-life insurance premiums rose by 2.1% in 2010. In emerging and newly industrialised Asian countries, the strong economic rebound increased demand for insurance cover. Premium volume rose in Europe and the US as well. Industry capital continued its positive development and rose to a record high in 2010.

Underwriting results deteriorated by most in the US and turned negative in large European markets, in the latter case due to dismal motor results. In the eight largest markets, premium income did not fully cover claims payments and other costs for the second year in a row. “The average combined ratio of these leading markets worsened to 103%, compared to 101% in 2009. Given recent catastrophe loss events, it is clear that global underwriting results will deteriorate further in 2011. This indicates that prices are inadequate. In some markets, such as Italy and the UK, rates began to mount, most notably in the personal motor business, signaling that the underwriting cycle is at long last beginning to turn,” says Staib.

Outlook: Strong focus on growth in 2011

Despite lingering uncertainty, the economic recovery should continue and bolster premium growth in the life and non-life sectors globally in 2011. However, investment income in both life and non-life sectors will remain low given that interest rates will only rise slowly, at best.

"In terms of the mature markets, growth in life insurance is expected to turn positive in the US, while in Western Europe, premium growth could slow down slightly, as rising interest rates will make life policies with interest rate guarantees less attractive,” says Staib. Over the longer term, the fact that our ageing societies increasingly need provisions for old age continues to be positive for life insurers. In non-life, the trend is towards higher premium growth in 2011. This trend will strengthen as premium rates begin to get adjusted upwards.

The global market share of emerging countries is expected to continue to increase strongly from today’s 14% over the next ten years. China is likely to become the second largest insurance market within a decade (in 2010 it is the sixth largest).

The main risks to the outlook are an escalation of the euro sovereign debt crisis or a major oil shortage caused by turmoil in major oil producing countries.

The study is the first public assessment of the performance of global insurance markets in 2010. The 78 markets, where data or estimates for 2010 are available, account for 98% of global premium volume. Overall, the report is based on 147 insurance markets.

source-swiss-re website.

India's biggest farm equipment maker Mahindra & Mahindra plans to venture into general insurance business

MUMBAI: Mahindra & Mahindra Group , the biggest farm equipment makers in the country, is planning to tie-up with an experienced company to venture into the Rs. 40,000-crore general insurance business, which is growing at around 20% a year. 

The group, which has a lending business in Mahindra & Mahindra Financial Services Ltd , has mandated consultants KPMG to find a partner who would have technical experience in running a general insurance business, including writing covers for industrial accidents and automobiles. 

The group is present in the insurance broking business through Mahindra Insurance Brokers . Magma is the last NBFC to enter into non-life space by manufacturing insurance products. 

Magma Fincorp and its associate company, Celica Developers , have formed a joint venture with German insurer, HDI-Gerling to foray into insurance. Another conglomerate L&T has started an insurance subsidiary last year. The general insurance arm of the company is a 100% owned subsidiary of L&T without a foreign partner. 

Mahindra will be the 24th non-life insurer in the industry. There are 23 non-life insurance companies, of which four are public sector insurers. The entry of new players could put pressure on premium rates. 

HDFC plans IPO for insurance business in two years

Housing Development Finance Corporation(HDFC) on Friday said that it may come out with an initial public offering (IPO) for its insurance business in about two years. 

"We are planning to come up with an IPO for insurance in two years," HDFC Chairman Deepak Parekh said at the annual general meeting ( AGM )) of the company. 

Parekh said the new Insurance Regulatory and Development Authority (IRDA) guidelines that allow life insurers to float an IPO without three year profitability clause would help but said the firm would need to discuss about it with its partner Standard Life. 

He said Standard Life would have to increase its stake to 49 per cent from the current 26 per cent, so that part of its shares (the increased stake) can be offered to the investors. 


Source- Economic times

IRDA scraps profit rule for life insurance IPOs

The insurance regulator has scrapped the minimum three year profitability clause for life insurers to float initial public offerings, throwing a lifeline for many companies that would have struggled for capital. The Insurance Regulatory and Development Authority , or Irda, took the decision in a recent board meeting, two people familiar with the matter said. 

The decision to do away with the requirement, which was part of the draft guidelines for IPOs, follows lobbying by insurance firms that the absence of higher foreign investment and access to public funds could cripple their businesses. Valuing insurance companies in India may become tricky with some arguing they are at a growth stage and the market has huge potential. While insurers may look for high valuations due to market potential, their losses could be talked down as it happened in the case of dotcom companies. The insurance regulator had prescribed a minimum embedded value for which the insurers objected to and sought flexibility. 


SOURCE-http://economictimes.indiatimes.com/personal-finance/insurance/insurance-news/irda-scraps-profit-rule-for-life-insurance-ipos/articleshow/9131020.cms

Industry welcomes draft Bill on microfinance

The government on Wednesday released the draft of a new Bill to govern microfinance institutions (MFIs) that will, if approved in its entirety, take them outside the purview of state-level legislation, including the Andhra Pradesh law that has thrown the industry into crisis.

The Microfinance Institutions (Development and Regulation) Bill gives more powers to the Reserve Bank of India (RBI) to regulate microlenders. It will cover all MFIs, including the smaller ones. MFIs give tiny loans to poor borrowers at around 24% interest. The Bill has to be approved by the cabinet and Parliament before it becomes law.

More than a quarter of the industry is concentrated in Andhra Pradesh, which promulgated a law in October restricting operations of microlenders. This led to a drastic rise in bad loans as borrowers stopped repaying debt. Banks in turn stopped lending to MFIs. The state law, which had been preceded by an ordinance, followed reports of coercion in recovering loans that allegedly led to suicides.

Early this year, RBI issued regulations to govern MFIs operating as non-banking financial companies, based on the recommendations of an expert committee headed by noted chartered accountant Y.H. Malegam. The new rules capped the interest rate MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above `15,000.

While the panel looked into operational issues, the new Bill provides an overarching framework, signalling the government’s stand on the importance of the industry, said Mathew Titus, executive director of Sa-Dhan, an association of MFIs.

In what could affect the larger institutions, the Bill says that any MFI that becomes systemically important will have to register itself under the Companies Act.

The draft Bill also proposes the setting up of a Microfinance Development Council, which will advise the government on policies and programmes required for the development of the sector.

The members of the council will represent the industry, the government, RBI, the National Housing Bank, the National Bank for Agriculture and Rural Development (Nabard) and the Small Industries Development Bank of India. The council will also look into establishing credit information bureaus for the creation of a database of clients who avail of microfinance services from various agencies.

The draft legislation proposes to establish state advisory councils for close coordination between the states and the Centre with regard to the working of the industry.

The Bill also envisages a Microfinance Development Fund to be constituted by RBI to provide loans, refinance, grants, seed capital or any other financial assistance to any MFI and to which all government grants received and fees payable for this sector will go. The Bill will also empower RBI to ask MFIs to cease their activities if warranted upon inspection of the accounts. It will also be able to cancel registration granted to the MFI.

It also gives RBI the option of delegating its powers to Nabard in respect of any MFI or class of MFI. The earlier draft of the Bill had envisaged Nabard as the regulator for smaller MFIs, a move that was opposed by RBI.

Courtesy-http://www.livemint.com/2011/07/06224522/Industry-welcomes-draft-Bill-o.html?atype=tp

Japan earthquake and nuclear catastrophe leaves a Rs 400 crore hole in GIC books

The General Insurance Corporation of India (GIC), the designated national reinsurer, has seen a claim of Rs 400 crore from the catastrophe in Japan. Japan was hit by an earthquake on March 11 this year. This was followed by tsunami and fire outbreak that lasted for close to a week. The entire catastrophe has taken the total economic loss to the extent of $409 billion. "We have seen a loss to the extent of Rs 400 crore from the crisis in Japan," said GIC chairman and managing director Yogesh Lohiya. He said the total economic loss was estimated at around $409 billion.

The insured loss, however, is estimated to be around $40 billion, he added. GIC had mainly reinsured the property risks for catastrophic events. Mr Lohiya said that the entire loss to commercial properties is borne by insurance companies against 80% of the damage to the residential properties absorbed by the government in Japan, while the remaining 20% is with insurance companies. The recent catastrophic events such as floods in Australia, quakes in New Zealand and tsunami in Japan had led to reinsurers to raise rates.

India's RSBY scheme evokes keen interest overseas

Countries like Nigeria,Ghana,Maldives and Bangladesh had evinced keen interest in India's social security schemes,especially Rashtriya Swasthya Bima Yojana and on implementing similar ones back home, Minister for Labour and Employment Mallikarujuna Kharge said here today.

Addressing a state-level workshop on RSBY here,he said RSBY had been appreciated on global platforms like ILO and G-20 Labour Ministers Conference in Washington."Some countries were keen on learning about the scheme and implementing a similar one in their respective countries," he said.

He claimed that RSBY has been rated as one of the top 18 schemes by an international body.

Anil Swarup, Director General, Labour Welfare, Delhi, said a Bangaldesh delegation had twice met Indian officials while similar interactions had taken place with those from Maldives and Nigeria. They had sought guidance on tehnical matters, issue of smart cards and implementation of the scheme,he said.

-http://articles.economictimes.indiatimes.com/2011-07-01/news/29726254_1_rashtriya-swasthya-bima-yojana-health-insurance-bpl-workers

Proposed new insurance norms may adversely impact mergers

India's insurance regulator may be attempting to override legal provisions while also seeking to prevent promoters from exiting ventures within 10 years of starting operations, experts feel. 

Their cause of concern is the recent draft guidelines issued by the Insurance Regulatory and Development Authority -- formally titled the IRDA (Issues of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011. The proposed regulations are to govern the initial public offering by life insurers or for dilution of stake by the promoters. The insurance regulator has called for comments and views on the draft regulations before finalising the same. "According to its apparent tenor, the proposed regulations would prevent promoters from exiting their venture or roping in new partners within 10 years of operations," said D. Varadarajan, a Supreme Court lawyer specialising in company and insurance laws. As per the draft regulations, promoters of life insurance companies can dilute or divest their holdings after 10 years of operations by: 
- issuing capital under the inter-corporate deposit regulations; 
- divesting equity through inter-corporate deposit regulations; and 

- issuing capital or divesting through other means.

The catch lies in the fact that under the proposed norms, the 10-year operations clause may become mandatory for insurance companies proposing to raise capital through a public issue under inter-corporate deposit norms, or if a promoter intends to reduce stake. Experts maintain while the Insurance Act does not bar insurers from going public within 10 years of operations, the regulator may interpret the new norms as though the 10-year operations clause is mandatory, which could hit their future plans to raise money. The Insurance Act has two sections on transfer of shares. Section 6A requires prior nod for transfer of stakes above five percent and Section 6AA deals with public issue or divestment by promoters after 10 years to bring down their holding to 26 percent. "Section 6A of the act expressly provides for transfer of shares when the shareholding is below five percent, without the permission of the regulator. Any transfer in excess of five percent requires the regulator's permission," an insurance expert said. But the draft regulations, if they come into force, may restrict any stake transfer during the first 10 years of operations. "The ambit of Section 6A is entirely different. For all purposes, a lock-in period of 10 years as proposed by the insurance regulator as per norms can't be stipulated here," Varadarajan told IANS. He further said Section 6AA comes into play only when insurance companies go for public issues or when promoters have to dilute their holdings after 10 years of operations. Industry officials conceded as prudent the licensing regulation that bans promoters from transferring or diluting their stakes during first five years of operations to ensure that only serious players enter the business.