In March 2008, we submitted the following report to the National Association of Insurance Commissioners.
“A New View of Financial Markets:
Addressing Current Disaster with Future Possibility”
Marketcore is an intellectual property (IP) development company that identifies fundamental problems in the financial services and insurance markets for which it devises solutions.
- Many of the problems in the markets arise from inadequate information, inaccessible information, and no current (real-time) information.
- Regulators are obliged to rely on historical data, available to them only well after the fact, and only to the degree that the regulated entity allows access to information about operations.
- This limited and untimely access to information inhibits the efficacy of regulatory initiatives.
- The inability to accurately determine pricing or transaction terms, contributes to market illiquidity and operating inefficiencies for market makers.
- All market participants are negatively impacted by their inability to access sufficient information to allow accurate pricing.
Marketcore’s solution creates transaction credits which provide immediate economic benefit to the market participant. This is accomplished by linking information to each and every fee charged for a transaction. The credits and the database are displayed electronically. These credits act as a unique, multi-faceted mechanism for accessing all data and activity in the system. The result is increased transparency of the markets.
Use of the credits, which offset the cost of future transaction fees, or the cost of information, encourages more transactions, generates more market data, and demonstrably improves market liquidity, calming markets.
The transaction credits act as an unobtrusive window into market activity for regulators. Market-makers use of the credits effectively promotes additional transactions which pump more money into the system.
Immediate and obvious benefits:
This invention is adaptable to any operating system, drives business volumes and directs market shares.
It lowers operating costs and improves operating controls.
The unique transaction platform and database functions as a central information clearing facility for financial product.
Each transaction is “tagged” with a transaction credit and both the data and the transaction credits are displayed.
- The transaction credit enables the unique, real-time monitoring of market and transaction data, and remains in the system permanently.
All market participants benefit from access to this better and more timely information, resulting in more accurate pricing, as well as improved risk prediction, mitigation and avoidance.
(Marketcore’s IP portfolio contains an issued patent, several pending patent applications (with filing dates back to 1998), trademarks, copyright, registered names, and logo.)
If we were creating banking, insurance and capital markets business models anew, we would not be using models that are conceptually grounded in the 18th to 20th centuries. We would instead focus on 21st century technology and this nation’s proven strengths in market creation. This country has long been esteemed for free markets, resilience, and innovation. The current breakdown in finance provides the opportunity to update structures and practices and to utilize current technology in devising a solution that supports growing dynamic financial and commercial markets.
The current business model for regulation of insurers requires regulators to rely on financial statements made by insurers that provide a snapshot of the insurer’s financial position as of a historical date. If the insurer’s management does not completely understand the risks they have assumed or the value of the assets they have secured, the financial statements they make will be deficient. Regulators can only discover the information was flawed at a later date or during a financial audit. The purpose of this report is to inform you of a better way to gather information about the insurer’s financial position and its market practices deploying a methodology that demonstrably supports the necessary market clarity. In addition, this same technology will benefit policyholders by making key information, available through competitively targeted and appropriate policy terms and conditions that actually do cover the risks that the person wishes to transfer to the insurer, necessary to arrive at a competitive price.
- Knowledge is the essential tool for all regulation. Regulators cannot regulate that which they do not know. Therefore, regulators must have access to as much information as regulators deem necessary to do their job—not access only to that information that the regulated entities choose to make available. Under US accounting standards, different industries use different methods of accounting. It is clear that, no matter the accounting methodology used, it is, and if unchanged will continue to be, insufficient to properly alert regulators about the deterioration in the mortgage market assets—the most advanced of all the loan markets. There is much to be learned from this experience.
One aspect is that our rules require us to reference old information. Old information can only be a lagging indicator, which is useless in volatile markets—because excessive moves in markets drive values way up or down. One of the nation’s leading authorities flagged the results of the current methods in surveys. A Grant Thornton study of controllers and CFOs showed that “less than 15% (14.18%) say they plan on making use of the fair value option.” A similar survey of this same group shows that 62.44% believe it would be possible to “intentionally misstate their financial statement to their auditor”. The reality of these two samplings, combined with the current financial crisis, forces those who think in terms of value, keep the nation’s books, and regulate our financial markets to reconsider the wisdom of using past referenced valuations in the face of rapidly changing current and future values.
Our company’s intellectual property inherently changes this disconnect in value perception by updating all of the definitions of financial products in real time, inherently supporting proper market clarification, transparency, full disclosure of price and terms—with continuous re-pricings.
The job of regulators is becoming more complex and sophisticated as insurance and capital markets converge. Insurers are increasingly involved in investing in, and/or insuring, capital markets products. But here too the market has not successfully cleared the risks. The current crisis can be seen to be rooted in the fact that we have organized the broad financial marketplace into discrete silos that do not properly link transactions and free-flowing information. Each party defines their business circumstance uniquely—and to their own benefit. Separate organizations each fly their own flag and ardently refuse to cooperate in a consistent way, except to add individualized costs to each transaction, each trying to convince the customer of the value of their institution alone. Most every consumer and market participant has had the experience of the exasperating, bewildering search across the financial food chain for an appropriately-priced product and a targeted execution for their unique needs. Everyone is lost. Worse, the meaning of a contract has itself become obscured.
If, as it is often said, fear and greed rule the markets, then surely a time of potential global collapse presents a real opportunity to re-write the rules, using correct and appropriate definitions, and using modern tools and logical incentives to restore calm. This same fear and greed also impedes recovery as there is currently no alternative, unified system that exists for transacting that also gathers and analyses all information in real time.
Marketcore proposes a free market solution for the free markets. This is not about additional legislation or additional regulatory bodies or enlarging the federal government. This is about enabling the existing state regulatory bodies to fulfill their mandates by putting in place appropriate and necessary 21st century tools. Marketcore first contacted the NAIC in October, 2004, when Eliot Spitzer found alleged fraud in the insurance industry and blamed the state regulators for missing it. We first made contact with the Director of Research and explained our notions of transparency. In the intervening period, after our planned presentation at the NAIC Executive Committee meeting was canceled because of Hurricane Katrina, we have met with senior insurance regulators from Alabama, Florida, Kansas, Maine, North Dakota, New York, Oklahoma, Pennsylvania, Wisconsin to name just a few—to confer with them on how our approach advances market clarity, risk analytics, principle-based accounting, and much more. The good news is that we have received expressions of appreciation and support throughout the organization, support that has only grown with the severity of the current financial crisis.
Marketcore’s management has focused solely on creating solutions to the fundamental problems of the insurance and financial services markets for 10 years. We have conceived of, designed, patented and actually licensed (a rare validation for an invention) the methodology for an electronically-presented insurance data exchange that unites buyers, brokers, insurers and re-insurers for the sole purpose of creating data and statistics to clarify policy terms, price, and underwriting standards—and to reduce costs. The model, now being organized, has received the endorsement of both of the major insurance intermediary trade groups, the Council of Insurance Agents and Brokers (CIAB) and The Independent Insurance Agents and Brokers of America.
The answer, a clear and naturally-grown-through-competitive-forces solution, lies in the proposed tracking credit that follows a transaction, carrying an economic benefit and identifying all descriptive aspects of price, terms conditions and final asset performance. Counterparts that elect to be transparent (including all product providers and consumers) can be encouraged with pure economic benefit to provide whatever regulatory details are deemed necessary to comply with both established and evolving rules. The economic incentives occur in the form of clearly lower costs and can be further supported by a broad range of other regulatory incentives.
We believe that all regulators need to see and be able to understand ALL elements of financial product creation and performance in order to begin to determine both investment suitability of the particular financial product for insurers and/or proper risk analysis and pricing for the consumer, as well as proper market conduct.
The NAIC might consider sponsoring a search for ALL appropriate market analytics, as determined by all questions and complaints offered by all parties. The “Infomediary” piece of the Marketcore model focuses on this kind of transparency and, over time, new products and services will grow to support more granular information. At present, the regulators do not understand how the products in which the insurance companies invest are created—or by what standards. Here is an example: rating agencies and regulators alike routinely accept 99.9% or 99.99% product performance assurances offered by product providers, lenders, insurers, investment banks, etc. But, doing the mathematics, one can see this actually means that losses of one in one thousand or one in ten thousand risks are considered acceptable. As the sub prime market debacle shows, massive markets (such as credit derivatives, bonds insurance, securitization, municipals, etc) can be disabled with this sort of seemingly safe risk when it is played out against magnitudes of multi-trillion dollar markets. (There are currently $516 trillion in derivative risk instruments owned world-wide.)
We propose that all market participants open their loan-qualifying and risk transfer underwriting standards, as well as their associated contract prices, terms and conditions, to one another in a system similar to the one presented on our website demo. The demonstrated approach works, as well, for all financial instruments having primary and secondary markets and market intermediation, as well as for related derivative securities. It is intended that such a system be entirely volitional. It will experience a natural growth curve, because trade participants will be clearly advantaged by greater market share and consumer acceptance—as well as access to increasingly important and detailed strategic market data and analytics. Financial market regulators must be able to access and understand both transactional and operational process down to the smallest metrics if they are to safeguard the system. A 23 minute, multimedia online model for mortgages that previews how the system might work for all types market participants (retail, wholesale, investor and regulatory) can be accessed at the bottom of our website, http://www.marketcore.com.
We should (and our model does) reward transacting counterparts who are willing to be transparent with more business at lower prices. We must trust the competitive process to grow volumes, reduce the costs and significantly increase gross profits—but at lower spreads. Ratification that the entire process (from earliest inquiry to final placement with an investor) is in full compliance with current regulation, offering transparent, competitive terms and conditions, can be easily signified, at-low-to-almost-no-cost, to the marketplace. In our case, Marketcore proposes using what we call “The Seal of the Deal™”. This proposed two-part process begins with a “Deal Seal™” that confirms that the product origination process is orderly and conforms with accepted rules of fair practice from earliest inquiry, going forward; while the designation “Deal Sealed™”, the second part, means that all transactions and performance characteristics are being tracked, monitored and fed into a universal database (in a way that complies with the most current regulation). The resulting database improves financial risk prediction, mitigation and avoidance by flagging all discontinuities in market function.
The key feature of these models, disclosed in early summer 2007 by the US Patent and Trademark Office in a published filing, is a credit system that demonstrably reduces costs to all participants, as it improves information (i.e. transparency). It is the engine and the fuel for all these models. Comparable to credit card incentives, this visible electronic real-time display of transaction credits derived from transaction fees is accessible from each transaction platform—each business silo—and is unique to and for each user. March 19, 2008 Copyright 2008 5
The credits “buy” lower fees for the next transaction and/or for access to strategically critical market information. The credits are defined by each recipient of a fee for each transacting client—and these credits can, optionally, “travel” across transaction and product processing platforms, at the sole discretion of each business. The credits have the effect of creating strategic alliance treaties between competing business models, bringing the markets together, and functioning as ubiquitous tracking devices.
This is not so different a process from other linking technologies. Transaction credits work as simply as paper clips or Post-It Notes® and can connect transactions in innumerable ways like some present day financial “Velcro®”. They increase market participation and reward the transparent, active customer most. Importantly, since the credit assignment and their respective term are under the direct control of the management, market shares can actually be directed to underserved sections of a business.
OUR REQUEST OF THE NAIC
Addressing the defacto threat of a dysfunctional financial system provides a historic opportunity for states to provide leadership in the creation of a solution. There is precedence for the states asserting such leadership: our founding documents were indeed inventions. Prior to the adoption of the US Constitution, 12 of the 13 original colonies had already enacted laws in their own right that protected innovation and copyright. We respectfully request that the NAIC publicly support our proposal by committing time, capital, and staff to the development of our proposed exchange for insurance and reinsurance. We are asking for your active support in implementing our solution.
The NAIC should, in our judgment, identify the first steps needed and, through us, request a strategic partnering with Marketcore and an appropriate technology provider, at costs it considers sufficient to its needs, its strategic interest and its historic mandate, as well as that of the public and the industry. We have held numerous detailed conversations with SAP, the global software leader, EDS and Microsoft. Because SAP has a long history of providing enterprise software that integrates all legacy systems, we are inclined in their favor. Then, too, they are re-building their approach in a manner that conforms to our intellectual property: “a transaction platform linked to market information.”
The NAIC can and should announce a mandate for at least relative transparency. Here is how easily this can be implemented: identify a suitable identifier for transparency (we have proposed the copyrighted designation “The Seal of the Deal”) and support its immediate deployment. Then let the financial services industry rush to comply—or risk losing market share. We have the technology relationships so that you can begin now.
The interests of the nation and the financial services industry can be further enabled by beginning to distribute the risk transfer of the $200 trillion market of catastrophic environmental risks with carefully defined and carefully controlled products. We can grow the market out of their present dilemma. The cost of distribution of these instruments (as well as the costs of our past mistakes) can only be borne by truly transparent markets that price risk appropriately. The NAIC is uniquely positioned to do this in a simple clarion call. Importantly, there are lessons to be learned from this crisis that must never be repeated, if the nation – in the form of the integrity of its currency, a country’s most basic measure of value – is to survive.
- Confidence comes with transparency.
- Transparency comes with increasingly defined granular market information.
- Free flowing information alone can restore confidence in, and restore calm to the markets.
Now is the time and the NAIC is the right regulatory body, along with its 56 component state and territorial members, to re-establish the meaning of, and confidence in, contracts of all sorts. To do this, knowledge of the elements of each transaction is required. This will calm the markets.
You can begin immediately with Marketcore’s technology, which adapts easily to all financial business models, simply through executive mandate of a transaction credit usage and electronic display.
We can all determine to re-grow the marketplace using new tools that address old concerns. Creating systems and solutions that support the development of financial products addressing these problems positions both the nation and the world to re-focus priorities and actually grow markets going forward.