Insurance and gambling have much in common. They both involve uncertainty and money and the rational consumer will, on average, lose money through the interaction. Both business models involve leveraging the tail of probability distributions (one nasty and one nice). The tail of a distribution includes the very bad and very good possible outcomes, that…
CEIOPS issued additional guidance around the standard formula for calculating capital requirements in respect of operational risk late last year. Why was a new OpRisk formula needed? The original formula for OpRisk proposed in QIS4 was widely condemned. Complaints included being too simplistic, being insensitive to risk (and basely primarily on business size) and the…
A friend “volunteered” me to answer an insurance question from Aardvark on allocating economic capital across different insurance products. After writing a short response, I received the frighteningly useful message: “Error”. Having written a brief summary of the different techniques used in this really important area, I thought I should use it as a blog…
The South African Reserve Bank today lowered the REPO rate by a further 50 basis points, down to the level last seen in 2005 and the lowest the REPO and BA Rate have been in nearly 3 decades. Surveys leading up to the announcement and analysis of market interest rates suggests that the expectation was…
In my previous post I discussed some of the risks to various currencies. Now what happens if your local currency is pegged to the US Dollar as it is in Lebanon? Speaking to Lebanese bankers and insurers there seems to be a devout belief that the peg is rock solid. This is surprising given the…
Currencies aren’t what they used to be. The US Dollar can no longer be viewed as a safe bet as Obama and Bernanke spend their way out of a crisis partly fueled by too much spending. Inflation will come, it’s just a matter of time. Warren Buffet thinks so too. The current relative strength of…
The Fed joins Bank of England and Bank of Japan in repurchasing government bonds. photo credit: amber.kennedy This actions (quantitative easing) increases the prices of bonds (more demand, diminishing supply) pushing down long-term yields. Great if you own bonds, not so great if you are an insurer with imperfectly matched long-term liabilities. Given how difficult…
