Friday, May 29, 2009

(No.30) When is financial regulation like airport screening?

In the wake of the Wall Street financial crisis and scandals  -- blamed quite rightly for the hardship inflicted on US and world economies --  it would seem foolish indeed to warn about the danger of over-regulation of financial services but that depends on the sort of regulation to which one refers. 

It was the absence of effective US regulation or, in the case of credit default swaps in which AIG was such an active player, no regulation at all that made the financial mess not only  possible but (I would argue) inevitable.It was prudential/solvency regulation of financial institutions at which Canada through OSFI and the Bank of Canada has been so effective. 

One is in a different  regulatory arena when what is at issue is what is loosely referred to as market conduct regulation, i.e., what companies and individual sales people do in the market place and the extent to which it is regulated [more about this in my next post to this RickardsRead blog: No.31 "Will 'selling of stuff' be strangled?"]. 

Not all financial regulation is of equal worth. As an example consider Ottawa's regulatory overkill involving detailed and highly prescriptive anti-money laundering regulation of dubious practical value and an expensive burden on financial institutions and their sales people and therefore on consumers who ultimately pay its costs. Privately many in financial companies will agree with what I have just stated but publicly must, like their organizations, bow before this (now) officially designated icon of financial regulation however unlikely it is -- for example -- that the burdening of Canadian life insurance agents with minutiae of anti-money laundering regulation will interfere with international 'terrorists'. 

The US-driven anti-money laundering regime imposed upon Canadian financial institutions and their marketplace activity may complicate the 'business lives' of the Tony Sopranos of the crime world. However the idea that post-9/11 terrorists in order to be a threat to the US or Canada need to be able to 'launder' gobs of money rather than to have what they still possess (i.e., hidden  access to relatively small amounts of needed cash from various sources) is not merely dubious but distinct from reality. 

Ottawa went along with all this terrorist-related stuff to try to please the post-9/11 US government mentality, as we have been forced to do in other areas affecting what the U.S. government believes is American 'security' . They are addicted to the idea that Canada is a weak link as illustrated once again when President Obama's Secretary of Homeland Security actually repeated in a recent interview with the CBC the longstanding American myth that some of the 9/11 hijackers entered the US from Canada.  (She later retracted it).

I think Canadians should be about as reassured on the security front by this sort of new anti-money laundering regulation as by their being forced to take their belts and shoes off as part of airport passenger security screening while unscreened cargo is being loaded into the belly of the aircraft they will shortly board. In a major airport like Toronto's Pearson where, as Senator Colin Kenney's investigations have shown, a significant number of persons with criminal records work and there is unattended access to the airport's supposedly secure areas.

The benefit to Canadians' security of the anti-money laundering regulation (like ostentatious but retiform airport screening) is likely to be arise more in the area of psychological reassurance than in the genuine enhancement of their physical safety.

Alastair Rickard


Sunday, May 24, 2009

(No.29) Lottery tickets from life insurance companies

The purchase of life insurance specifically related to commercial, scheduled airline flights as well as to accidental death (AD) generally reflect the irrational nature of this form of insurance as well as public ignorance and superstition. Each of these insurance products has as much to do with financial planning as does the buying of a lottery ticket -- to which both can be likened. If a life insurance death benefit is needed it is needed if one dies and regardless of how one dies.

For many years I have deprecated both publicly (in speeches and in the Canadian Journal of Life Insurance) as well as within the life insurance companies by which I was employed  the sale of accidental death insurance whether the form of such coverage is individual or group. The sale and ownership of such coverage encourages the illusion among its buyers that genuinely useful death benefit protection has been put in place while appealing to the unfortunate perception among many, perhaps most of its buyers that they have secured comparatively cheap life insurance death benefit protection.

For such reasons as these, combined for many purchasers with the 'lottery ticket' appeal of the coverage [ 'will I die accidentally?'], accidental death coverage has been a partial exception to customary buyer resistance and to the need for agent involvement in the sales process, i.e., to the axiom that 'life insurance is sold not bought'.

Even some life insurance companies have been led to conclude (foolishly in the main) that individual life insurance policies of the more expensive, 'non-lottery' type can be sold extensively and directly and with at least as much ease as the AD coverage with which one of the big Canadian banks graciously informs me annually they have endowed me ['$1000 of free AD -- and wouldn't you like to buy some more of this wonderful accidental death coverage?' Not being in the same risk  group as a 16 year old male driving a sports car, I decline each year's invitation]. 

I have long believed that some deeper psychology is involved in the relatively greater appeal to some buyers of accidental death coverage than of the death benefit protection provided by ordinary individual life insurance policies, something beyond the lottery ticket and cost appeal of AD. The New York Times (May 6, 2008) provided an interesting answer in an article entitled "Appeasing the Gods, With Insurance".

U.S. university research has indicated that "tens of millions of people bought life insurance for scheduled flights in the U.S. [although]  not one of the [previous year's] insured passengers died in a crash. At some level they [apparently] believed that their [flight] insurance helped keep the plane aloft.... We buy insurance not just for peace of mind or to protect ourselves financially but because we share the ancient Greeks' instinct for appeasing the gods... A magical belief in insurance sounds crazy because at a rational level we realize that our decision to forego an insurance policy is not going to affect pilots or mechanics. But ... because calamities are so vivid and easily brought to mind, we tend to overestimate their probability when we intuitively judge what will happen if we tempt fate."

If this sounds far-fetched as buyer motivation, how would you prefer to explain the purchase of (flight) life insurance by rational people, coverage that never or very rarely pays anything to anyone and is of financial benefit almost always only to the life insurance company issuing the coverage?  The fact that there are many members of the public ignorant or misguided enough to waste their money buying flight insurance or accidental death insurance (or, for that matter, government-operated lottery tickets) does not lessen by one jot or tittle my longstanding disagreement with the fact that the life insurance industry not only takes advantage of such ignorance but actively promotes and sells to it. It is a fundamental ethical question for the industry and one that, in the main,  has been avoided.

If life insurance companies are genuinely sincere about meaningful disclosure that is useful to consumers, why not take action -- for example -- to require that every buyer of accidental death insurance must read and sign a form that requires that buyer to indicate that he or she understands that while everyone dies, relatively few of us die accidentally and in terms of the life insurance coverage he or she is about to purchase, a death benefit will be paid ONLY if he or she dies accidentally? And then combine that disclosure with a clear  statement of the actuarial likelihood of accidental death happening to the prospective buyer/life insured based on his or her age and gender?

How about including with this sort of needed consumer disclosure a pithy, attention-grabbing quote to assist the understanding of prospective buyers of accidental death insurance? For example, something like this from Discover  magazine: " if nothing else killed you [excluding old age and disease, then the American adult] would on average live to be 1,743 years old before a fatal accident."

I do not argue that such disclosure would eliminate the purchase of accidental death insurance but it would certainly reduce it -- and that would be a positive change. It would support the proper use of life insurance as part of one's financial planning and, when death benefit protection is needed, its actual purchase instead of a lottery ticket called accidental death insurance.

Alastair Rickard 



Sunday, May 17, 2009

(No.28) The Singing Detective

Suppose at the next dinner party you attend (or indeed any social bunfight) you become involved in a discussion or argument or game of trivia involving this question: what is the best original work in English written for television? Here is a suggestion.

There are are a number of critics  as well as ordinary viewers, of whom I am one, who think the answer is the 6 part BBC program of 1986 The Singing Detective written by Dennis Potter. In the US it was never shown by any network, broadcast or cable, because Potter (who had the control) refused to allow the program to be edited in any way by any broadcaster -- and some of the content was 'advanced' by US standards of acceptability 20+ years ago. 

On an ad hoc basis a few PBS stations in the US did show it and it was shown in Canada by TVO, the Ontario educational network. However it remains largely unseen by North American viewers although it ranks as Potter's masterpiece -- and he was a prolific writer of drama mainly for television although his work was uneven. In the US and Canada his best known work is likely "Pennies From Heaven".

A warning for those who choose to stake out the position I have posited above: do not allow the discussion to be sidetracked by any reference to the insipid 2003 Hollywood movie version of Potter's work also entitled "The Singing Detective" starring Robert Downey Jr and Adrien Brody.  In quality, length and content it cannot stand even in the smallest fragment of the shadow cast by the BBC original.

Potter was a brilliant if eccentric writer born in 1935 in the Forest of Dean in Gloucestershire where both his father and grandfather were miners. He suffered all his life from a serious condition called psoriatic arthropathy, a form of arthritic joint disease associated with chronic skin scaling. Potter died in 1994. The lead character in The Singing Detective, set in mid-1980s England, not only suffers from this medical condition but because of it spends the entire drama in a hospital ward. The condition, or more specifically its symptoms and manifestations, are a key element in the drama.

So why do some people regard this program as a masterpiece? After all it is, to say the very least, multi-layered and the plot is not easy to follow. It is fair to say that on first viewing it is likely to be a couple of hours into the 6 hour series before the first time viewer will get any real sense of how the layers overlap.  

I will attempt a summary but one I admit does little justice to the complexity of Potter's drama: 

Philip Marlow, a minor English novelist of Raymond Chandler-style noir detective stories, suffers from a crippling disease and is back in hospital with another severe attack. He hallucinates and complains while he is treated and eventually recovers to the extent that he is able to leave hospital. He (i.e.,the character Marlow) had written some years before a novel called "The Singing Detective" which he now rewrites in his mind with himself as the lead character, a singing detective -- hence the title. Woven into this surreal experience are his memories from childhood in the Forest of Dean during World War II as well as an overlapping fantasy of spies and criminals ca 1945. Throughout the drama one hears original recordings of popular songs from the era, usually appearing to be sung (in Marlow's fevered brain) by characters in his imagined drama. 

This summary makes The Singing Detective sound bizarre and it is but it works so well it deserves its standing as a 20th century masterwork for television. The cast is superb: Michael Gambon as Marlow and as the 'Singing Detective' in his own novel, Patrick Malahide in 3 roles and Janet Suzman as Marlow's wife Nicola. They are supported by a superb cast of English character actors. 

The program can best be understood and enjoyed over several viewings. Many video rental places will not have it in stock although they likely will have the more recent Hollywood movie version. The BBC has made it available for purchase on DVD and it can be ordered  through DVD sales outlet including Amazon.

The Singing Detective is well worth viewing more than twenty years on and its impact, as too often is the case with a program one enjoys and revisits years later,  does not seem to fade.

Alastair Rickard


Thursday, May 14, 2009

(No.27) Airplane Reading

Since the Scotttish writer Ian Rankin first created the character of the depressed, dyspeptic and rebellious Edinburgh detective inspector John Rebus, the long running series (18 books in all) has set the standard both for this genre and for demonstrating yet again that 'crime' novels can be well written. The Rebus books move chronologically through time and the characters' lives; this DI is one detective who is not fixed in amber like a never aging bee. Rankin's novels have gone from strength to strength.

Now Rankin has written his first novel since he had Rebus retire from the force: Doors Open (Orion). Sans John Rebus I wish I could say this latest novel is of the same quality. It is not. It can best be described as a 'robbery/caper' story involving stolen art and set in Edinburgh. It is a good story but suffers in comparison with Rankin's Rebus novels.

Andrew Vachss is an American crime novelist whose main running character, a tough ex-con named Burke, inhabits a rather dark and gritty world and associates with a strange collection of people in an informal 'family' of criminals and shady fellow travellers. 

Two Trains Running (Vintage) is a novel that, like Rankin's, departs from his series of 20 books mostly with Burke as the lead. Set a in small mid-western American city in 1959 it features a hired killer named Walker Dett retained by a local hillbilly crime boss as part of his effort to fend off incursions into his territory by the Mafia and also by American-Irish elements of the IRA working for the election of John F. Kennedy. Offbeat but interesting.


Quinton Jardine is a journeyman novelist but one who is both prolific and successful. One of his series (he has two) involves the Edinburgh police department and particularly a cop named Bob Skinner who rises over several books to become second in command. The series also features several of his police subordinates and their private lives -- as well as his. 

Death's Door (Headline) is another  interesting instalment in the Bob Skinner series although neither as dark nor as well-written as Rankin's Rebus in the Edinburgh CID. Indeed if it were not for the named setting one might never know it was the same city in terms of its mood and atmosphere or indeed the same police department. 

In this novel the focus is on catching a serial killer and Skinner does not appear until the second half of the book after much back and forth activity by his colleagues (Skinner is on leave). This novel is not the least of the series (this is the 17th) and is good airplane reading.


Lee Child is an Englishman now living and writing in the US who has created a series character named Jack Reacher. Just lately both Child and his character seem to have become fashionable in certain circles. For example I have read just recently highly favourable references to Child and his Reacher novels by Malcolm Gladwell, the Canadian best selling author who lives in New York and comes from Elmira Ontario, and by Adrienne Clarkson, Canada's former Governor-General and a literary lioness of sorts herself.

In the Reacher books, 12 so far, the plots seem to me to have become less realistic recently. Reacher is a former US Army major in the military police who left the army after a dozen years or so and became a wanderer with no agenda or plan and carrying nothing but a toothbrush and -- lately -- his passport and an ATM card. His wanderings take him into circumstances in which his martial skills (and he is a large man anyway) are tested and used to deadly effect. 

Nothing To Lose (Dell) sees Reacher going back and forth between safety and danger represented by 2 small towns 12 miles apart in rural Colorado called Hope and Despair. While the premises of this book seem more contrived than previously, Reacher -- certainly not a conventional hero or even particularly likable -- emerges at the conclusion to continue his wandering. Worth reading.

Alastair Rickard



Saturday, May 9, 2009

(No.26) Sun Life: downplaying Canada

Sun Life Financial's 1st quarter 2009 results both illustrated and reinforced a number of the opinions I expressed in a lengthy post to RickardsRead this past January:"(No.9) Sun Life: shrinking to greatness?".

In summary:
  • a net operating loss of $186 million (Can$) with the losses generated by 2 of the 5 business units: the U.S. $407 m and Corporate (which includes the UK and reinsurance) $45m.
  • of the 3 Sun units on the plus side, Canada accounted for $194 million out of a total of $239 million.
  • while these Sun Q1 results show a net operating loss for Sun for the quarter it is worth emphasizing that this result was still very favourable in comparison with its leading Canadian competitor -- Manulife. In fact it was less than 1/5 of Manulife's 1st qtr 09 loss and its 4th qtr 08 loss (both $1 billion+); in this connection q.v. Manu's unhedged (beginning 2004) equity-related but guaranteed billions of asset product sales: amount guaranteed end of 2007 of $69 billion rising to $103.8 billion at the end of Q1 2009.                                                             
These Sun Life results occurred against a background of a 4% staff cut to begin 2009 in its Canadian operation as well as layoffs elsewhere, the Canadian operation often accounting for half or more of the engine of profit offsetting unimpressive results elsewhere in Sun's worldwide operations. Further budget cuts for 2009 in the Canadian operation continued to undermine the needed level of support for distribution of individual products in Canada.

The competitive backbone  of Sun's individual product distribution in Canada is the career agency system Sun obtained as part of its purchase of demutualized Mutual/Clarica Life. It supplanted most of what was left of Sun's own agency distribution in this country, a system which at the time of the purchase had declining individual life sales and a declining Canadian market share and was, in reality, based on sales of policies of inadequate or non-existent profitability. 

Company support for the Mutual/Clarica/Sun career agency system has been squeezed and increasingly inadequate since the decision by Mutual Life senior management to demutualize. Sun has for years reduced the resources needed to enhance and expand the career system it purchased while it pursued a goal (never larger in Sun eyes than today) of eliminating a supposed "revenue-expense gap", one defined by its finance dept. bean counters and based on dubious numbers and questionable assumptions.

As a former Sun Life executive myself I observe that all of this was (and is) enough to prompt either tears or laughter especially as one considers the refusal of Sun senior management to invest an appropriate amount in supporting and improving its Canadian career agency system, one for which it paid so much and on which its Canadian operation ( Sun's golden goose) depends to such a significant extent for its results.  

Meanwhile Sun's corporate management, not quite yet aping drunken sailors, throw money at its nascent agency distribution in its various Asian operations, agency systems most of which even on a good day bear more resemblance in their quality to, say, the London Life debit system of 1950 than to Sun's own Canadian career agency system today.  For the 1st qtr of 2009 Sun's Asian operations, and they are extensive, generated a supremely unimpressive $17 million of net operating income.

Even more discouraging for those interested in Sun retaining a reasonably healthy career agency distribution system in Canada is knowing what even a small fraction of the hundreds of millions of dollars flushed by Sun in the US in the past 12+ months as the result of poor investment decisions could have accomplished if applied to Sun's agency distribution in Canada.

Based on what I understand about Sun's individual insurance sales in Canada so far this year it will be fortunate to end 2009 having achieved 90% of its plan. One thing is certain: the sales gap will not be closed and real individual insurance sales potential will not be achieved by the diversion of already excessively limited distribution system budget dollars to (as is the case this year in Sun's Canadian operation) the determined but fantasy-driven initiatives of senior executives involving 'direct' sale/distribution of individual life insurance.

The time is long past due for Sun to stop downplaying the importance, indeed the continuing centrality to Sun profitability of its Canadian operation and invest in it accordingly. Nick Clegg, leader of Britain's Liberal Democratic Party, said to beleaguered Prime Minister Gordon Brown in the House of Commons on May 6: "There comes a point when stubbornness is not leadership; it is stupidity."  

As a Sun Life shareholder I hope that this Commons comment will not come to be relevant to a seeming determination by Sun Life's senior corporate management to continue to downplay the importance of the company's Canadian operation while skimping on investment in its operational effectiveness in favour (for example) of excessive focus on the pursuit of financial 'pie in the sky by and by' in Asia.

Alastair Rickard



Sunday, May 3, 2009

(No.25) Expensive Rubbish

Pat and I consider ourselves fortunate to have had many hours of enjoyment in art galleries. The D'Orsay in Paris and the Belvedere in Vienna (from which we just returned) are among our favourites.  One of Vienna's great attractions for us -- it's a city with at least 250 museums and galleries of many types and sizes. 

The fact of the matter is that Pat has an appreciation for a wider range of art than I do. This is especially true of contemporary art. There have been any number of special exhibitions of one sort or another I have viewed in a fraction of the time she spends in them. 

For me the problem isn't that I don't get some enjoyment from certain types or schools of painting that are not among my favourites (I do) but rather that there is too much puerile rubbish presented to the public as worthwhile art by gallery curators and applauded by critics almost as a dare to the public to criticize. The Turner Modern in the old power plant by the Thames in London seems to work particularly hard at finding (and often awarding prizes to) stuff so risible that a long crack created in the floor of the gallery counts as a creative work (I kid you not). 

There is no real mystery why some art critics and gallery curators can become orgasmic about 'paintings' that look like something from a primary school art class: if the great unwashed, unschooled and unsophisticated public ( those referred to once upon a time as the bootless and horseless) are likely to dismiss it out of hand then perforce it must have great intrinsic worth as art. After all, one's avant garde spurs can be earned by embracing it and one's imprimatur secured as an expert and a sophisticate within one's artistic community.

Of course the very worst thing one could do to one's standing as a sophisticated art connoisseur would be, for example, to point out that any one of Rudolf Von Alt's (1812-1905) more than 100 paintings of Stephandom cathedral in Vienna requires more skill and artistry than the slapdash pieces Picasso (who did possess genuine talent, q.v. his early work) churned out like donuts in his later years, pieces which now sell for ridiculously high amounts.

Put another way: the mystery involves how the work of an artist like the Englishman Francis Bacon who died in 1992 can today attract purchasers willing to pay millions for it. How, for example, can a painting by Bacon in Vienna's Albertina Gallery titled "Seated Figure" be distinguished as superior in any meaningful sense to the similar work of the Austrian artist Egon Schiele whose own paint drippings were ended by the Spanish Flu in 1918? 

A possible answer: higher current prices at sale. This occurs not so much because of buyers with far more money than taste but because of the wealthy approaching art as an investment and being advised by promoters in the art world about which art and artist is hot and likely to appreciate in value. Lest one forget, the highly publicized big prices paid for certain paintings at auction at Sotheby's and Christie's are not necessarily a reflection of artistic value (although they may be) but rather of the operation of the art market place. 

Like Wall Street before the meltdown, the art world has too much of the art world's equivalent of credit default swaps and derivatives. 

Alastair Rickard