Year 2008 - Insurance Industry after current finanical tsunami

12 2008 YEARBOOK 二 〇 〇 八 年 年 刊 Insurance professionals and the world economic crisis When the first signs of a credit crisis started to emerge in the US around two years ago, no-one realized that the world was heading for a major economic downturn. The problem basically concerned the American mortgage market, and it did not seem likely to affect the rest of us around the world. Since then, it has turned into a global financial and economic crisis, damaging trade and commerce and affecting millions of people worldwide who have lost jobs or seen the value of their investments fall. It has been compared to the Great Depression of the 1930s orWorldWar II in the scale of its impact. It is certainly more than just a cyclical correction of the sort the world goes through maybe every seven or eight years, nor is it simply a regional problem like the Asian Financial Crisis 11 years ago. Looking back, we can see that there were several factors contributing to this crisis. One of themwas global imbalances in trade and investment flows and patterns of savings, consumption and borrowing. Some countries, notably the US and the UK, borrowed, imported and consumed, while others, like Japan, Germany and China, saved, produced and exported. Trade surpluses were recycled back to the debtor countries, whose financial systems fed them into continued consumption, including of course the property market. These imbalances were not sustainable. At the same time, policymakers – especially in the US – misread inflation rates during much of the 2000s and kept interest rates too low. New technologies like the Internet and emerging manufacturers like China contributed to falling prices in Western markets, and this probably made underlying inflation seem lower than it really was. With monetary policy too loose, bubbles emerged in the US and UK housing markets and later on in markets for commodities, food and transport in 2007 and 2008. These macro-economic factors were outside the control of the ordinary companies and families who are now suffering from severe economic downturn. But some other causes of this crisis lie closer to home, including for those of us in the insurance industry. These are to do with regulation and the management of risk. Looking back, most of us are probably amazed at some of the other causes of this crisis. For example, local lenders in the US pressurized staff to sign customers up for new mortgages, and those staff offered mortgages to people who could not possibly afford them. Further up in the system, someone gave triple-A ratings to mortgage securities that by definition were heavily exposed to a downturn in American property prices.We all know that house prices can go down as well as up. Yet grassroots lenders and borrowers and big international investment houses ignored this simple and obvious fact, and families went bankrupt and some of the most famous names in finance totally or partially collapsed because supposedly safe investments turned out to be extremely risky. Here in Hong Kong, retail investors bought Lehman minibonds on the understanding they were safe, when in fact they were not. Feature