Category Archives: Public Policy

How Hurricane Florence Could Move Insurance Markets

Hurricane Florence provides a particularly timely and compelling case study of the economic consequences of natural catastrophes; specifically, the nexus of direct and indirect effects upon property insurance markets, reinsurance markets, alternative risk markets (e.g., catastrophe bonds), and public policy.

Some hurricanes are worse than others — both for people in the way and the insurance industry that tries to understand storms and put a price on their risks.

What Will Trigger the Next Crisis?

Following up on my previous blog posting entitled “The world has not learned the lessons of the financial crisis”, today’s “Heard on the Street” column in the Wall Street Journal entitled “What Will Trigger the Next Crisis?” is required reading! Both articles are motivated by the fact that we are now ten years out from the bankruptcy (on September 15, 2008) of Lehman Brothers. Many commentators mark this day as the seminal event for what is now commonly referred to as the so-called “Global Financial Crisis of 2008” – widely considered to have been the worst financial crisis since the Great Depression of the 1930s.

How government policy exacerbates hurricane-related damage

One year ago this coming Sunday, the article cited below was the cover story for the 9/2/17 issue of The Economist.  The points raised by this article (regarding the “moral hazard” associated with mispriced/subsidized insurance coupled with misguided NFIP claims policies) are (unfortunately) as valid today as they were back then.

Quoting from this article,

“Underpricing (of flood insurance) encourages the building of new houses and discourages existing owners from renovating or moving out. According to the Federal Emergency Management Agency, houses that repeatedly flood account for 1% of NFIP’s properties but 25-30% of its claims. Five states, Texas among them, have more than 10,000 such households and, nationwide, their number has been going up by around 5,000 each year. Insurance is meant to provide a signal about risk; in this case, it stifles it.”

As if global warming were not enough of a threat, poor planning and unwise subsidies make floods worse.

Apple Is a Hedge Fund That Makes Phones

This is a fascinating article in today’s Wall Street Journal about how Apple is, for all intents and purposes, a highly levered hedge fund, thanks to its wholly owned Braeburn Capital subsidiary which accounts for 70% of the book value of Apple’s assets.

Quoting from this article,

“Similar shadow hedge funds abound within S&P 500 industrial companies. Most disclose less information than Apple about their activities… in 2012 these corporations managed a combined portfolio of $1.6 trillion of nonoperating financial assets. Of this amount, almost 40% is held in risky financial assets, such as corporate bonds, mortgage-backed securities, auction-rate securities and equities.”

The (gated) Journal of Finance article upon which this WSJ op-ed is based is available at https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12490.

Big companies need to disclose more about their investments.