Transcript Dr. P. Nandagopal

Future Is Gray
Risk is NOT a Black & White Issue
Dr. P. Nandagopal, MD & CEO
IndiaFirst Life Insurance
40th National Convention
of Company Secretaries
Points To Ponder
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What is Risk?
World in Protest- The Biggest Risk?
Mismatch in “What You Can” and “What You Do”
The Risk of Default
The Story is The Same: Country-Corporate-Common Man
Can We Plan For Happy Endings?
What is Risk?
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Risk is when you are not sure about the outcome
And the outcome is not necessarily positive
The actions leading to the outcome are “optional”
Yet we take those actions, because we expect “rewards”
It’s a “bad risk” if actual losses outweigh the expected
profit
 A risk is bad or good, depending on the risk appetite
World in Protest- The Biggest Risk?
World is in Protest- The Biggest Risk
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Popular revolt of Arab Spring
Street fights in Spain and Greece
Mindless shoot out in Norway
Budget deadlock in Washington
Unprecedented arson and violence in London
Anna Hazare - Parliamentary log jam in India
Diesel Prices Hike- FDI in Retail
Different symptoms- same problem:
The risk of the “old” resisting the “new” and vice versa.
Old Vs. Young:
Demographic Ponzi Scheme
 Life expectancy increasing every where
 Fertility is declining as people don’t marry/marry late, have no kids/fewer
kids
 Population Pyramid slowly getting inverted - base narrower, burden
heavier.
 Welfare State politics: Feed the Old through Taxes Paid by the Young
 Old need more money than the Young are willing to pay
This is a generational Ponzi scheme threatening the World
Economic Order
Who Deserves More Privileges? The Young?
Or the Old?
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Dispute in division of political power - Arab Spring & India?
Disappointment in sharing of fiscal benefits - Greece and Spain
More Jobs or More Pensions?
Pensions to the Grandparents impacting jobs to Grand Children?
US Budget battles: Old Age Security Programs constitute almost half of
non-interest government spending ( $1.6 trillion in 2010, of a $3.3 trillion
total. This amount will shoot up as the baby boomers retire.
The Risk of Default
Living Beyond Means: Country and Corporate Risks
 “Costs associated with population ageing are estimated to account for
about half the public-debt run-up of the OECD economies over the past 20
years.” - Nicholas Eberstadt, Political Economist
 “ Old folks may be less willing to repay sovereign debt.” “As the number of
older voters relative to younger ones increases around the globe, the
creditworthiness of borrowing countries could decline.” Ali Alichi,
Economist at the IMF
 Even China, the most brutal apostle of population control, now fears it will
get old before it gets rich. Meanwhile, India, whose fertility was once seen
as its national curse, is touted as a rising investment prospect thanks to its
“demographic dividend”- Chriystia Freeland, Newyork Times
 As countries struggle to meet their fiscal budgets, corporates have similar
problem where the “un-funded liabilities” keep growing threatening
solvency.
What Does Demographic Dividend Mean?
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Having more hands to feed less mouths?
Having more earnings than spends?
Having higher rate of savings when you earn?
Having longer working life and shorter retired life?
The Mismatch in “What You Can”
&
“ What You Do”
Mismatch in “What You Can” and “What You Do”
 If youth and earning capacity is the ASSET
 and old age and income support is the LIABILITY
 There is a serious arithmetical problem in the West: Asset – Liability
Mismatch:
 Result- Possible sovereign default? Economic collapse? Back to the period
of grinding poverty?
 Apply the same logic to Corporate Risks and we know why many go bust?
Story Is The Same: Country-CorporateCommon Man
Common Man
Corporate
Country
Risk is the Same: Country – Corporate- Common Man
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More Natural Resources, Less Human resources
More longevity- less fertility
More pension burden- less savings rate
More fiscal deficit- less job creation
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More estimated profits- less actual cash flow
More operating expenses- less business revenues
Focus on Market share, top line- less emphasis on capital conservation and profitability
Low interest rate induced debt burden- crippling load when economy slows down
High wage costs – low value add of the employees
Dis-functional organization layers – slow decision making
Inability to differentiate between what’s a clear and present danger vs compelling opportunity
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Breakdown of joint family system
Potential breakdown of even micro family system
High disposable incomes in the hands of youth but less locked in savings
Tendency to splurge than save
Short term investments- no long term regular savings
Health consciousness increasing longevity – but ignoring old age financial security
likely to result in population that’s old, sick and poor.
Story Is the Same: Country – Corporate- Common Man
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Kingfisher, Deccan Chronicle, XYZ Companies: Where the story went wrong?
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Relaince ADAG, DLF: Do you see liabilities stretching beyond asset values?
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Dhanalaxmi Bank: Is there a case study for all of us?
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Is “Cash Flow” more important than “ Accounting Profit?”
Can We Plan For Happy Endings?
Can We Plan for Happy Endings?
 We are not Prime Ministers, Kings or Heads of the State
 We may not even be CEOs, CFOs or Directors on the Board
 But We Are Individuals Who Know What Could Go Wrong
 If We Know what’s the Problem- We can seek the Solution
 The Problem is at the Country-Company & Common Man level we have a
serious Asset – Liability Mismatch
 If you can not reduce the Liability (i.e. living longer) then we must improve the
Asset quality (i.e. living better)
Living Better: The Happy Ending
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Accept that “Less is More”
Think Long Term
Don’t leverage beyond means
Protect your core asset quality
Know Yourself: be on your “own”
Bright
Future is IndiaFirst
Future is
Thank You
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