HOW TO LIVE WITHOUT HEALTH INSURANCE

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BUYING TIPS

5 Buying Don'ts

When buying car insurance, it is important not to get overwhelmed. It is necessary to understand the basic concepts that apply to auto insurance before you go out and shop. You should also realize that insurance companies have different price structures that relate to the kinds of people they would prefer to insure. Most insurance companies prefer to insure people that are married, educated, and who have not made a claim, or had any speeding tickets in the last three years. The best rates are given to such individuals. If someone came to me for a quote, and they had a horrible driving record, I would probably insure them, but at an inflated rate. Some companies have their niche in the market of high-risk drivers. They charge higher rates, but will insure anyone; the good, the bad, and the ugly. The following are five things NOT to do when buying auto insurance.

Don’t Purchase the First Quote

Always shop around! It may be unpleasant to give out all of your information over the phone to a variety of people, but as long as you stick with reputable companies, your information should be safe. Also, if you have a clean driving record, and decent credit, you should not have to provide your social security number to get a rate quote. However, if you have bad credit and a sketchy driving record, the rate will be greatly affected.

Don’t Over-Insure Your “Beater”

If you have a car that is old and rusty, and not worth much money , do not carry full coverage insurance. You can go with liability only insurance, which will protect you for bodily injury liability to others. So, if you hit someone, you will still be protected against lawsuits, but you will not have a collision deductible. However, if you drive a newer car, carry a high collision deductible and a lower comprehensive deductible.

Don’t Get Scammed by Your Current Carrier

If you are a loyal customer, and have been with the same company for many years, demand an annual policy review. If you do not know who your current agent is, call your local office and ask to speak to one of the senior representatives. That way they can take ownership of your insurance account, provide you with a free review, and advise you on any discounts that might be available to you now that were not available back when you purchased the plan.

Don’t File Small Claims

If you have a minor accident that does not do too much damage to your vehicle, shop around at some body shops to see what it would cost to repair the damage. If the repair estimate is lower than your current collision deductible, then pay for the damage out of your own pocket and do not file a claim. This way your premiums will not go up, and you will have unaffected rates if you switch carriers.

Don’t Carry Auto Insurance and Home Insurance with Different Companies

Many people do not know this, but many insurance companies offer multiple-line discounts for home and auto insurance. If you have homeowner’s and auto insurance, make sure that they are with the same company and that the multiple-line discount is being applied. Also, when you shop around, make sure you get quotes for auto and home insurance at the same time.

SEVEN SAVVY: Saving Tips

7 Savvy Savings Tips

1. Raise your deductible. Your deductible is the amount you pay when you make a claim before your insurance company pays. The disadvantage of raising your deductible is that when you do make a claim, you’ll pay more. The advantage is that your annual insurance costs go down. You can raise your deductible on the comprehensive and collision sections of your insurance policy.
2. Drop your collision and/or comprehensive insurance on older autos. If your car is not worth much to begin with, then it may not be worth paying for collision and comprehensive insurance. That is because the amount you pay for the deductible plus the amount you pay for the insurance may be more than the value of the car itself. An auto dealer or Kelley Blue Book can help you determine the value of your auto.
3. Buy a "lower profile" vehicle. Part of what determines the cost of insurance is the kind of vehicle you drive. Some models are common targets for auto theft, while some models are just more expensive to repair. Generally these vehicles will cost more to insure. It pays to do your research before you buy.
4. Take full advantage of low mileage or distance discount rating. Some insurance companies give discounts to people who drive less than a pre-determined number of miles each year or drive certain distances to and from their place to work.
5. When you move, consider the cost of insurance. Yes, the cost of insurance varies from place to place. Some areas can be considerably higher. Make sure to keep your insurance broker informed, as this could save you money.
6. Make sure the information about your vehicle is correctly listed on your policy. You would be surprised how many inaccuracies show up on a policy, especially with so many model names sounding very similar. Insurance rates vary depending on model, and you could be paying more for a car you’re not even driving! Other common errors include the wrong mileage and mistaking a four-door vehicle for a two-door (both of which can also affect insurance rates).
7. Research the bevy of discounts available. Insurance companies reward good drivers. Insurance companies also reward people who insure both their homes and cars with them. This is called a multi-policy discount. Other discounts available may (depending on your insurer) include multiple vehicles, anti-theft devices, retirees, driver education, abstainers from alcohol, age, and distance to university/colleges for students.

POLICY USAGE: A Tips

Collecting Your Claim Money

Insurance is different from any other product you are buying. When you buy a car, for example, you get to drive it home. When you buy a house, you live in it. However, when you buy insurance, you only get a piece of paper that symbolizes a promise that your claim will be paid. But, how can you make sure you get paid? Here are some tips to follow.

1. Make sure you know your claim number. Write it down and have it with you. Remembering to do this will enable the adjuster to handle your claim faster. The faster the adjuster can handle the claim, the easier he or she will be to work with.

2. Do not nickel and dime the adjuster. If their offer is close and reasonable, do not push for that last $5. You will never get it out of them and you can make negotiations harder on other aspects of your claim.

3. Do not tell the adjuster that you are going to hire an attorney. They hear that all day, every day. It doesn’t scare them. In fact, it usually just makes them take a hard line with your claim. Unless you have hired an attorney, don’t say it.

4. Treat the adjuster like a real person. Adjusters are people too. And just think, at least they are not debt collectors! An adjuster who is treated respectfully will treat you the same way. This makes the claim process much easier.

5. Provide reasonable documentation. If you claim you had a $500 car seat in your car, you can expect the adjuster to want to see proof of it. While you may not have the original receipt, you should be able to provide some documentation that the car seat costs what you claim. (And yes, I have seen people claim $500 car seats. I have never seen one that costs that much, but people will make a claim for it.)

6. Do not expect the adjuster to be your friend. The adjuster has a job to do: Pay your claim and move on to the next claim. If they save the insurance company money, from their perspective, that is even better. But do not expect them to give you advice, explain things to you, or offer you what your case is worth!

7. Prepare, prepare, prepare. You are not going to sit down and do your taxes without reviewing documents, understanding the process, and spending time learning how to do it. The same goes for your auto insurance claim. For example, if you car is a total loss, learn how your state determines the value. Is it a fair market value state or is it a Blue Book state? Once you know, figure out what you think your car is worth. If you are trying to settle an injury claim, learn what you can get compensation for. Then, prepare that list and figure out for which items you have a claim.

Insurance is unlike anything else. If you want to get fairly compensated for your claim, you must do your homework. This list is not an exhaustive list of what you need to do. But, this gives you some basic tips on how to make sure you get your claim paid fairly and timely.

AUTO SAFETY TIPS

7 Ways to Avoid a Traffic Accident

Over 90 percent of automobile accidents are avoidable. The following are eight such instances where you can completely circumvent collisions with a little common-sense and precaution.

• Intersection Errors. According to the Federal Highway Administration, intersection and intersection-related crashes make up approximately 23 percent of all fatal crashes, and more than half of all fatal and injury crashes occur at intersections. Look around carefully and always proceed with caution into an intersection, even if you have the right of way.
• Inattention. Pay close attention on your own driving, other drivers, pedestrians, and driving conditions.
• Following too Close. Most rear-end accidents are caused by tailgating, according to the California Department of Motor Vehicles. Maintain a 3-second following distance from the car in front of you, except in hazardous weather conditions where you should maintain a 4- or 5-car following distance.
• Vehicle Malfunction. Have regular checkups, particularly of wiper fluid, brakes, and tires, and replace wiper blades whenever they are worn.
• Dangerous Roads. Ice (which tends to develop more frequently on bridges, overpasses, shady spots, and intersections), snow, fog, and rain conditions require slower speeds and much greater caution.
• Unsafe Speeds. According to the National Highway Traffic Safety Administration, “the economic cost of speeding-related crashes is estimated to be $40.4 billion each year.” Excessive speed reduces reaction time and greatly increases impact and injuries.
• Improper Lane Changes. Before you change, check all mirrors, and signal long before you change. Also, watch for the other vehicles.

WHEN THE FINANCIAL CRISIS MEANS FOR YOU AND YOUR MONEYl

It's easy to feel panicked with titans of the financial world like Lehman Brothers, Merrill Lynch and AIG either failing, selling out, or getting taken over by the government this week. The financial world is truly in crisis, but that doesn't necessarily mean your money is now at risk.

Take a deep breath and read on as we take you through 12 personal finance topics and explain what the mayhem on Wall Street means for you:

For your stocks: No doubt about it, the market is going to be swinging wildly for the next few months. Predicting the direction of stocks is all but impossible, but it seems likely the major indexes will be down from here at year-end. That doesn't mean you should sell. But if you will need some of that money in the next year or two, use upswings as an opportunity to gradually exit your riskiest positions.

For your mutual funds: Many mutual funds have been heavily weighted in financials (especially value funds, which buy stocks that seem cheap), so you may be feeling the pain now. But you can bet your fund managers are working feverishly to recover. If you sell now, you miss out on a chance at a rebound. Still, in times like these, index funds prove their mettle. At least you don't have to worry about doing worse than the market.

For your bonds: Treasury bonds are increasing in value as demand for the safest of securities soars. Bond funds are holding up quite well this year. To be sure, some funds that held corporate bonds issued by Lehman Brothers and other failing financial institutions have taken it on the chin. But if you had your savings in government bonds, you should be feeling pretty pleased with yourself about now.

For your home: As long as you can pay your mortgage and don't plan to move in the next two years, you don't have to worry about a thing. The current crisis may mean pricey neighborhoods populated by finance types slip in value. And the weakening economy will keep pressure on housing prices across the country. But rates are falling and that should stabilize housing values.

For your credit cards: For starters, keep in mind that even if your credit card company fails, you still need to pay your bills. Your account would just be moved to another lender. Also note: Banks will be looking to increase profits by issuing more credit to folks with good records, but it won't be cheap and penalties and fees may increase. Be extra careful now NOT to run up costly credit card debt. It may be harder to pay down in a weaker economy.

For your retirement accounts: If you have at least five years until retirement, don't worry about a recent decline in your plan's value. Don't even check the balance if you can help it.k The only caveat to that is if you have company stock in your retirement plan or are not properly diversified (more on finding the right mix of investments). Look at historical returns. Even severe down turns seem insignificant over time as the market historically rises. And plan assets are protected, even if the sponsor fails.

For your savings account: If your savings is in an FDIC-insured bank, up to $100,000 in deposits is protected. Even if the fund that insures those accounts is tapped out , the government would cover your balance. If your cash is in a money market mutual fund, you don't have FDIC protection, and there is a slight chance you could lose a few cents on the dollar and face limits on withdrawals. A bank money market account is an even safer bet.

For your insurance: Since AIG, the worlds' largest insurer is getting bailed out by the government, you don't need to worry too much about your policy for now. In fact, you probably wouldn't have had to worry even if it had failed, since AIG's consumer insurance subsidiary was never in trouble. Plus, in cases where an insurer goes bankrupt, the state regulator takes over and makes sure policies (including annuities) are paid.

For your mortgage: Even if your lender fails, you still need to pay your mortgage. It will likely just be transferred to another institution. And there is some good news here: Mortgage rates are headed lower and banks want to make profitable loans to people with good credit, so you may get an opportunity to refinance at a lower rate soon. Home equity lines of credit are also a good deal now.

For your brokerage account: The government protects brokerage customers from losing assets due to a firm going bankrupt. Even at Lehman, customer accounts seem to be quite safe now. However, it is very difficult to get back money that was badly invested by you or your stock broker. And the stock of companies that declare bankruptcy are usually worthless.

For your ability to borrow money: If you have good credit, you may find it easier to borrow money in the future, due to the current crisis. Interestrates on some kinds of loans are coming down and banks are eager to increase profits by lending. But be careful of taking on too much debt in case the economy worsens and it gets harder to pay it back. If you have weak credit, you may be out of luck.

For the economy: This is probably the biggest worry for the average American. Can the economy keep growing amidst a global credit crisis (and a falling dollar, rising unemployment and inflationary pressures)? Recession is more likely, which means heightened job insecurity. So, start saving. If you can't cover at least three months of expenses should you become ill or lose your job, go on an austerity plan. A cash cushion is the best umbrella in this financial storm.

TIPS ON SELECTING AN INSURANCE COMPANY

When shopping for auto insurance, do a little homework first, shop around, and select your insurer carefully. Your insurer should offer both fair prices and excellent service. These tips will help you find the right insurer for you:

• Know your state's auto insurance requirements:
  

  Most states require you to carry a minimum amount of liability coverage. Many states have "no-fault" auto insurance systems. Coverage for medical costs for you and your passengers is optional in some states. Coverage for damage to your car is optional.

• Write up your personal auto insurance profile:
  

  List pertinent information concerning what type of vehicle you drive, where you drive, who else drives, what your driving record is, where you live, what optional safety features your car has. This profile will make the next step easier.

• Comparison Shop:
  

  Prices for the same coverage can vary by hundreds of dollars, so it pays to shop around. Ask your friends, check the Yellow Pages, and call your state insurance department for guidance. Contact insurance agents or companies for general pricing information. Select a few insurers for personalized quotes.

• Meet with potential insurance agents:
  

  Make a few appointments, bring your personal auto insurance profile with you, and ask questions. You want a fair price AND quality service. Ask about available discounts, higher deductibles, service options and claims procedures after accidents. Take notes.

• Compare Again:
  

  Consider cost, coverage offered, and quality of service available. Select your insurer.

• Read your policy:
  

  Yes, even the fine print! Ask questions. Keep your policy at hand. Call your insurer to keep your policy up-to-date, inform your agent of any changes (new car, new job, new driver, etc.), and ask periodically about any possible discounts. Review your policy yearly with your insurer.

• Keep your insurance information with you:
  

  Many states require drivers to carry a proof-of-insurance card with them when driving. Ask your insurer for a card, and keep it in your wallet or in your car.

HIGH-ASSURANCE DIGITAL ID

The increased pressure of regulatory compliance, combined with globalisation and the distributed nature of business today, has made e-commerce mission-critical for organisations. Building a strong financial supply chain starts with reliability and assurance - particularly when conducting online transactions, which may contain sensitive information and require many levels of authorisation and approval. Banks are uniquely positioned to address these assurance challenges as we help clients mitigate risk as part of our core business. Introducing parties and establishing trust in business-to-business (B2B) transactions is not new - it continues to be a core competency of banks.

High-value Transactions Need High Assurance via Digital Identity

The expansion of e-commerce and the global reach of supply chains have galvanised the need for paperless workflows. However, all information is not created equal. Even granular access control has become critical. Higher-value transactions and sensitive information require better visibility, control and stronger linkages to the authorised employees associated with these transactions - who you are and what you are entitled to do makes a difference in a fully electronic environment.

To meet the demands of the global economy, firms want to leverage paperless workflows to reduce processing time, internal lag-time and the expense of paper communication without compromising visibility and governance. Our clients have made sizable investments in enterprise financial tools which integrate certain functionality, like payment initiation into their systems. Making this functionality work requires common standards, consistent interfaces and integrated multiple sources and process flows. As this evolution continues to accelerate, the use of high-assurance digital identities will enable greater efficiencies as well as profoundly increase visibility, control and security over business processes.

The Four Pillars of High-assurance Digital Identity

Digital identities offer firms a tremendous opportunity to achieve business process improvement, automation and risk management goals. A high-assurance digital identity is a physical representation of your online identity issued on a smart card or USB token. A bank, as a trusted third party, stands behind the vetting and issuance process of the client and, ultimately, the client's authorised employees. With everything that a digital identity can and should provide, identities alone do not address the entire picture - a broader operational framework is required.

The foundation of high assurance is the policies and procedures in place to identify who should be issued the digital identity (whether a corporate or an individual). The first pillar of high-assurance digital identity revolves around the question does the third party stand behind the due diligence process and hold a level of liability for fraudulent use? (Added to this first principle is that the due diligence and the legal framework have to be globally scalable and acceptable.) Clients need to know the rules up front before they do business. Second, how is the identity stored to protect the privacy of the user? Is it difficult to hack, spoof or replicate? Third, are there real-time operations available to validate that the digital identity is still good at the time of a transaction? And fourth, a common liability and dispute resolution model needs to be put in place that provides assurance of accountability and problem resolution.

Why Look to Banks?

Banks are uniquely positioned to address these issues since introducing parties and establishing trust in B2B transactions is a heritage of financial services. Banks have long held a special role in identity certification as regulated institutions, trusted financial intermediaries and administrators of policies like 'know your customer'.

For years, people and organisations have entrusted banks with managing their sensitive information and financial needs. Trusting the identity assurance of a bank's business partners is a natural evolution of this relationship. Identity is having absolute certainty of the individual with whom you are interacting, being able to verify and rely on that identity, and knowing who guarantees the identity. Banks play an important role in this process helping create the 'chain of trust' that is critical in a digital world.

Interoperability Matters for High-assurance Digital Identity

Banks have many corporate clients and these clients have many bank relationships. Both work across diverse geographies and legal jurisdictions. Banks and corporates need to rely on common processes, systems and standards to interact efficiently and productively.

The reality? Today's process is riddled with pain points and complexity - multiple standards, many bilateral agreements, a variety of pipes and proprietary interfaces. All of these inhibit and challenge basic access, processing and integration of information for basic settlement and reconciliation in the procure-to-pay cycle. The downstream effects? Increased operating inefficiencies, compliance risk, labour-intensive investigations, negative impacts of late cash allocations on customer credit lines and thus on revenue realisation. Ultimately, this creates non-productive customer and business partner interactions.

When it comes to digital identity, less is definitely more. Interoperability through well-defined networks, like IdenTrust, eases the interaction of the applications and the players across the corporate and bank communities. IdenTrust provides an operating model of uniform rules, legal and liability framework, and contractual structure required to operate secure and streamlined e-commerce transactions. These identity schemes work similarly to today's credit card model. A bank-issued digital identity allows interoperability with participants - such as other banks - that have agreed to the terms and conditions of the operating model, so they can rely on digital identities used in transactions from other participants.

The benefits of a single identity for corporates are numerous - from interfacing to their various banks and back office systems to eliminating paper to making straight-through processing (STP) achievable. For the banks, beyond streamlining a single identity to be used in interacting with our applications, we can offer improved services based on a common standard.

Reducing Friction in the Financial Supply Chain

We are realising the potential of digital identities to profoundly change many business processes. High-assurance digital identities provide the following core capabilities: authentication, encryption and digital signing. The opportunities for process improvement based on these capabilities are numerous, from better regulatory compliance to improved privacy protection. Where this really gets exciting is the opportunity for STP and enabling processes within the supply chain with non-reputable, binding digital signatures.

If we focus on enabling paper to electronic, what types of applications are we talking about? Basically anything that requires proof of identity and/or entitlement at both the entity and the authorised individual level, involving multiple corporates, banks and legal entities across multiple jurisdictions involving multiple applications.

And, my personal favourite, those 100-year-old, paper-dependent processes that hold up the speed of business today. In financial services, we are reducing paper-intensive processes, such as account opening, and looking at ways to better connect authorised individuals with the transactions that they are initiating on behalf of their organisation, as with Fileact and SWIFT. In other words, using identity as an enabler and 'enrichment' to existing cash management processes for secure, paperless workflows and legally binding processes.

For example, managing a company's authorised signers with the bank can be cumbersome. It is effectively creating a legal contract to change signers with your bank. Each designation requires a paper trail that needs to be repeated at the subsidiary and bank level. This process has not changed in 100 years. The use of high-assurance digital identity can change this process to a global 'find and replace' while putting visibility and control back into the hands of treasury, where it belongs.

The Path Forward

While the usage of digital identities is not at a mature stage, the industry is not far from the inflection point when we are likely to see much broader usage of digital identities to solve real business problems. Digital identity usage today is analogous to that of a credit card with limited merchant acceptance. That being said, there is a lot of good work being done by the banking industry and bodies such as IdenTrust in looking for the right pain points in places like the financial supply chain where digital identities can be a part of the solution.

The financial services industry is moving forward in this space with a focus on connecting the physical to financial supply chain for our clients using digital identity as an enabler. Dialogue, proofs of concept and standards creation are all actively underway among industry participants, at all roles and levels. There are numerous areas that require industry collaboration among the banks, corporate community and interested third parties, including working on these standards and developing the proofs of concept to explore ways to solve these problems for our common clients. The digital identity space should be co-operative, not competitive. Digital identities represent an opportunity to bring value not only to our clients, but to the industry as a whole. By working collectively as an industry, we can begin identifying and addressing the issues and opportunities that exist.

RISK MITIGATION

Mitigating liquidity risks should consist not only of preparing liquidity buffers as a counterbalance, but also requires a fundamental review of risk factors and their alignment with the risk policy of the firm. This is not straightforward as the risk factors a firm is exposed to may not be immediately visible, especially where securitisation and derivatives are involved.

It may be necessary for a firm to map all the assets or risk factors underlying the assets under management to fully understand risk exposure and potential concentrations. An in-depth review of actual risk factors including; links with the firm's main customers, sensitivity and concentrations of key assets to those factors and potential correlations among assets, clients and portfolios are all fundamental to defining the appropriate stress scenarios of each firm.

Each firm must engineer its own individual response and counterbalancing framework in the context of its own exposure, exposure of its clients, and the nature of the business and then align it with the approved risk policy.

The appropriate prevention and management of liquidity problems should involve a tight monitoring of concentrations. Banks are traditionally structured to monitor and hedge concentrations within their lending books, thus focusing on funding risk. Buy-side firms are normally required and equipped to monitor and diversify their concentrations within portfolios, therefore preventing market liquidity risk.

Challenges arise when both the buy- and sell-side need to tackle cross-asset concentrations to similar risks, when the concentrations are hidden by the derivative nature of the instruments, when funding can be disrupted as a result of market movements changing the value of collateral and when all are impacted by their counterparty's failure to properly handle those risks. It would be difficult to predict all business scenarios that can result in disruptions of this sort as they tend to result from unexpected correlation and volatility movements due to unforeseen events. It is possible, however, to tightly monitor exposure concentrations of all kinds - internal and external - as they point out the vulnerabilities of a firm (internal) and even the ones of the entire industry and financial markets (external).

Liquidity (or the lack of) arises from concentrations

Wealth generating markets such as stock exchanges or real estate aggregate liquidity based on the perceived value of the assets traded. Zero-sum game markets, such as futures and options, match customers so that one trader's gain is the loss of another. One macroeconomic role of the former is to absorb or regurgitate liquidity; the latter is a hedging tool for operators with matching exposures to risk factors such as fluctuations of commodity or currency prices, for example.

A key element to maintaining wealth-generating markets in balance is the different timeframes to which investors operate. What one perceives as a short-term opportunity to sell an asset is seen as a long-term investment by others. The exposure derived from the various investments leads to hedging with zero-sum game markets such as futures and options. Hedges are always arranged for the short term, or rolling from tenant to tenant, due to the risk profiles and settlements they require. Zero-sum markets do not drive trends but can dramatically amplify the short-term price fluctuations of the underlying investments they are derived from.

Speculative bubbles tend to inflate when a large majority of investors trade in a single direction regardless of a timeframe. Risk concentrations form at that point and are particularly likely to trigger liquidity problems as everyone becomes a short-term trader and may exit in panic when the bubble bursts. In fact, a definition of a stock market crash is "the day everyone becomes a short term trader."

While it would not be possible to predict where and when the next bubble will be created, there are tools to help monitor the build-up of risk concentrations and the associated liquidity risks.

Monitoring concentrations as they build-up

The key to understanding a firm's vulnerabilities is to uncover the actual risk factors to which it is exposed. For instance, a firm holding a portfolio of securities exposed (directly or indirectly) to commodity prices would have only a partial view of its risk exposure by solely running simulations on equity prices. The potential impact of the underlying commodities on the equities also has an effect. Simulating prices of the underlying equities is fraught with difficulties as it relies on many assumptions, such as the covariance of the equity versus underlying price returns, the impact on the market volatility and liquidity of extreme market movements, correlations within the industry and so on.

In other words, considering the impact of liquidity risks requires the monitoring of risk exposures at their roots, as much as possible. Each firm should, therefore, embark on identifying all root-risk factors, monitor the concentrations they build-up and add radical correlation changes in their scenarios.

Price movement and volumes traded give precious indications of potential concentration build-ups as they point out the degree of emotion in which securities or financial instrument are traded. A well-balanced market where buyers meet sellers in steady volume tend to return normally distributed prices and profit and loss (P&L) changes, on both short- and medium-term. Before a market loses its balances and experiences a massive drawdown, some typical distortions are often noticeable, such as directional volumes imbalance, unexpected changes in correlations, unusual standard deviations, among others. Simultaneously, news releases related to such a market tend to accelerate, new sources of information appear, and the market sentiment tends to point to a single direction. The market liquidity may actually be at its highest at such point, but the market gets vulnerable.

The answer is in transparency: from open model, open data and open analytics

The impact of volatility and correlations on market liquidity is massive and complex. The unpredictable nature of correlations under stressed conditions makes models less reliable. The interaction of volatility, liquidity and correlation is three-dimensional and non-linear. Simulations based on history can be misleading too, since financial markets typically suffer from remedies or structures derived from a previous crisis to the effect that the next crisis will be different from previous ones.

It is possible, however, for analysts to keep tracking the effects liquidity (expressed in market depth); volatility (implied) and correlation have on each other and relate those observations to news as it breaks on a real-time basis. For example, one can define several categories of news related to oil prices and set up systems for machine-readable news to automatically trigger records of price changes, volatility, impact on correlations, on credit, credit correlation and so on. It sets the base for an exploratory forward-looking approach that can supplement a quantitative statistic-based analysis

As the sound management of such sensitivities and the capacity of the risk managers to pre-empt on those risks will be eventually rewarded or punished with liquidity implications, we can conclude that the most important aspect of the new risk management is transparency. Not only the transparency of pricing models, but also the clarity of processes, counterparty relationships, connectivity and IT setup, regulatory compliance and the adequacy of the overall framework with the shareholders' appetites for risk.

THE ULTIMATE OPERATIONAL RISK: LIQUIDITY

As stated above, the management of all risks and adequacy of the perceived risk appetite of the firm, which was sanctioned when there was an abundance of business and liquidity, does not necessarily take into account that failure has an immediate impact that can lead to bankruptcy. For example, the exposure to counterparty risk was traditionally measured as the outstanding amount plus or minus a profit or loss. Settlement risk was a replacement cost plus a profit/loss. But the credit crunch and ensuing confidence crisis raise the stakes dramatically. Today's analysts may interpret a bank's customer failure as a sign that the bank is overexposed to illiquid or risky sectors, or as the bank's failure to properly value collateral, call margins and manage risks. The bank's credit spread goes up immediately, which has a direct impact on equity value and funding costs. Similarly, a settlement failure may hurt much more than the replacement cost if it is perceived as the inability of a bank to settle OTC deals in adverse market conditions, opacity in back office processes, inefficiency of credit controls.

Liquidity issues seem to derive from the mishandling of risks related to the financial and technical aspects of the trading and banking business, such as funding, portfolio and collateral management, counterparty management, failed settlements and other operational issues. Therefore liquidity risk should be considered the ultimate operational risk rather than a stand-alone risk.

Sources of liquidity risks

There are three main causes of liquidity risk:

1. Market liquidity risk - the risks that assets held in portfolio or pledged as collateral may be mispriced or simply impossible to sell due to adverse market conditions. This is made worse in the world of structured finance with the lack of transparency of the underlying assets; money managers have stopped investing in these assets thereby drying up liquidity.
2. Funding liquidity risk - the funding and funding costs associated with the lending books. Reflecting the lack of transparency in the industry banks have limited lending lines in the interbank market leading to a drying up of funds affecting most credit markets.
3. Counterparty driven liquidity risk - the liquidity risks related to a counterparty's unfulfilled obligations, missed or overdue settlements. Causes can stem from either financial problems with the counterparty, connectivity failures and especially from data mismanagement. The latter occurs across straight-through processing (STP) systems linking risk takers with their execution venues, brokers, custodians and administrators. These systems require complex and frequent database alignment. Failure to process transactions in a timely manner may result in payment failures which, in times of extreme market conditions, can disrupt the firm's liquidity management.

THE FIVE CHANGING FACES OF RISK

As the liquidity crisis of the last year shakes the very foundations of the financial industry, most agree that managing risk is part of the problem and key to a solution. Significant changes are expected, but little is known about what they could actually consist of.

Thomson Reuters has identified five key areas of changes that are naturally derived from the ongoing analysis of the crisis and of its roots. Risks, such as market or credit risk, do not change in nature but evolve with the instruments and the purposes that they are used for. The way we manage these risks, however, will be entirely different in the future. Risks are interrelated to one another. In most cases, it is the value of the firm - through the validation of its balance sheet - which is at stake. Liquidity is the ultimate reward or punishment for the sound management of the other risks combined. Therefore, liquidity risk emerges as the ultimate operational risk across departments, firms, sectors and even across borders by the regulators themselves.

These five changing faces will elevate risk policies to strategic priority, executed as a corporate culture hinging on risk management techniques dynamically implemented throughout the enterprise. For clarity, we define the key areas of risk as follows:

1. Valuation risk stands for managing market and credit risk as a whole after it appears a firm's credit exposure depends on the assessment and transparency of the market risks carried by its counterparties and, reciprocally, that cross-asset strategies have turned credit risk exposure into direct market risk for others. Whether it is about measuring collateral value, reporting portfolios' net asset value (NAV), assessing counterparty exposure or allocating capital, the risks related to data management, models and valuation processes are the true drivers of both market and credit risk exposures.
2. Liquidity risks have become a key factor of concern. Volatility, liquidity and correlations define the backdrop for valuations, sensitivity and tail risks. It's comparable to trying to experiment a chemical reaction in an unstable environment. The three can no longer be seen as standalone sensitivities to be managed: volatility, liquidity and correlations impact each other in a three-dimensional fashion, with highly non-linear and rather unpredictable interdependencies.
3. Settlement risks are being revisited after the crisis highlighted that risks can no longer be seen or managed in isolation at any link of the financial system chain. Failures or even delays in settlement or payments are credit events and have direct implications on credit spread, ratings, valuations, reputation and shareholder value. With 50% of trades going over-the-counter (OTC) combined with the multiplication of cross-asset, absolute return and arbitrage strategies, it has become essential that brokers, prime brokers, custodians, market-makers and administrators share the same definitions of instruments, events, data, protocols and remain able to settle trades independently of the legal frameworks they originate from.
4. Regulatory risks have been pointed out as some systemic risks have arisen from leading entire industrial sectors towards a narrow choice of models and uniform hedging tactics.
5. Risk policies will now be defined and implemented by all firms as part of their business strategy. To be sustainable and truly protect shareholder value, these strategies need to be aligned with each firm's culture, capabilities and true appetite for risks. Firms may choose to expose themselves to risks they cannot really manage or embark on inappropriate hedging strategies or risk diversification they cannot fully control.

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