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Essays and Commentaries
Pricing Issues in Aviation Insurance and Reinsurance |
April 16, 2003.
By Morton N. Lane, Ph.D.
INTRODUCTION Airlines
are in the business of transporting passengers or freight from origin
to destination as efficiently as possible. They do this with mixed
financial success. However, they do it with remarkable physical
success. The accident rate for airline travel is lower than for any
other mode of transportation, and it continues to decline.
Nevertheless, when accidents do happen they can cause considerable
financial, as well as emotional, distress. Airlines choose to avoid
the financial distress by purchasing insurance against
loss-through-accident. Aviation insurers accommodate the desire of
airlines to get rid of loss-due-to-accident by assuming all such
losses. The remarkable thing is that the insurers have provided this
cover on a ground-up basis for each and every loss, i.e., on an
unlimited basis. The question such large and unlimited cover provokes
is, how should it be priced?
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Alternative Risk Strategies |
Edited by Morton Lane, Risk Books, London 2002.
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Recognizing the Costs of Options and Disguising the Cost of Insurance |
August 2, 2002
By Morton N. Lane, Ph.D.
In
one of those delicious ironies that occur from time to time, the August
1st edition of The Wall Street Journal contained two excellent
articles−one about options, the other about insurance−which when
juxtaposed, show the ever-present nature of contradictions between
finance theory and current corporate practice. The contradictions
exist side by side even in the full glare of the current soul searching
environment.
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An Analyst's View of the Aviation Insurance Industry |
September 1, 2002
By Morton N. Lane, Ph.D. INTRODUCTION The
events of September 11, 2001 generated devastating monetary losses for
the aviation insurance industry. Figure 1 shows the true extent of
that loss. Minor as these monetary losses are com¬pared the personal
trauma suffered by individuals, families and America as a whole, they
have produced their own trauma-induced monetary responses. Future
aviation insurance prices have risen dramatically, easily doubling and
in some cases quintupling. Exclu¬sions have been added to policies and
certain cover¬ages have been specifically withdrawn from the market.
More interestingly, having survived and put in place temporary
solutions to enable the market to move forward, the industry through
this conference and numerous internal reviews has begun to ask itself
how it should charge for its services, whether it has sufficient
capital and if past pricing practices should be perpetuated.
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April 30, 2002,
Excerpt from Alternative Risk Strategies, Morton Lane, ed., Risk Books, 2002
By Morton N. Lane
INTRODUCTION [This
paper is the closing editorial chapter of a book entitled Alternative
Risk Strategies, edited by Morton Lane, published by Risk Books and due
for publication in May 2002. Details of the multi-contributor book can
be found on www.riskbooks.com. The substance of the chapter was also
the subject of Morton Lane’s address to the Bond Market Association’s
Second Annual Meeting at Turnberry Isle in March 2002. While there are
references to particular chapters in the book, this chapter stands as a
separate piece.]
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Premium Increases for the January 1 Renewals |
October 8, 2001,
The Message of the Markets
By Morton N. Lane and Roger G. Beckwith
INTRODUCTION Two
questions have consumed the reinsurance industry now that the sadness
and emotional shock from the awful events of September 11, 2001 have
given way to consideration of future business. The first is the size
of the loss to the industry, said to be between $35billion and
$70billion. The second, obviously dependant on that first answer, is
how much will premiums rise? Anecdotal evidence says increases of 40%
to 100% can be expected in the cat market. (We confine ourselves to
the cat market in this Note.) But how satisfactory is the anecdotal
evidence? Are there other ways to gauge expected increases? We
suggested as much in March this year in our paper “Stirrings in the
Secondary Markets.” Now is the time to test the assertions we made
there. We do this not only to obtain a more precise estimate ourselves
(recognizing that the picture is still unfolding), but also to test
whether our instincts are consistent with “the market.”
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|
Alternative Capital Sources |
December 15, 2002,
Excerpt from Rational Reinsurance Buying, Nick Golden, ed. Risk Books 2002
By Morton N. Lane, Ph.D.
INTRODUCTION The above
definition of “capital” captures two things; first, the essential
meaning of capital as the resource necessary for production of wealth
and, second, the fact that capital can mean many things to many
people. On the other hand, one thing that may be missing is any
reference to the relation between risk and capital. The definition was
written before the modern capital market theories were expounded, yet
it does capture the essentials —present value of income, etc.—before
the significant contributions of Black, Scholes, Merton and other
modern finance theorists formalized the concepts. The theories
contributed by these Nobel Laureates added to our general understanding
of capital markets, and the insights allowed a proliferation of new,
innovative instruments by which capital can be accessed and managed.
Swaps, options, futures, collateralized debt obligations (CDOs),
converts, caps, floors, collars, Remics, collateralized mortgage
obligations (CMOs) and derivatives of all kinds are all aids in the use
of capital to produce wealth.
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|
Stirrings in the Secondary Market |
March 8, 2001.
By Morton N. Lane INTRODUCTION There
is some evidence that the secondary market for insurance-linked
securities (ILS) is beginning to stir. It is faint, but we think it is
important. Viable secondary markets contain important intelligence
about underlying trends. In the ILS market, where underlying
(reinsurance) price trends are hard for outsiders to discern, secondary
market prices could provide valuable investor information. This allows
investors to better evaluate new transactions. It also gives issuers a
better insight into what new issue prices would be acceptable in the
capital market. So far, the still nascent ILS market has provided
little price information outside of new issue prices.
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What the World Bank Should Do About Catastrophic Risk |
What should The World Bank do about it? A Personal View, January 15, 1999. Based on a presentation to The World Bank Disaster
Funding Seminar, "Financial Management of High Severity Risk in
Developing Countries", September 22, 1998, Washington D.C.
By Morton Lane
Today’s
seminar has shown that “insurance risk management is not just your
father’s homeowners policy” (to poorly paraphrase the Oldsmobile slogan
of some years ago). The preceding speakers have expertly demonstrated
that: (a) traditional insurance and reinsurance against catastrophes
has grown dramatically in the developed world; (b) that both
risk-transfer and funded cover mechanisms are available for catastrophe
protection; (c) that there has been a convergence between financial and
insurance markets instruments; (d) that large institutions are
protecting themselves against catastrophes by issuing catastrophe bonds
and derivatives as well as buying traditional reinsurance; and (e)
finally, that these new forms of protection use “index” or “parametric”
measures as well as indemnity losses, thereby expanding their
usefulness to developing areas. All in all, some huge changes are
rippling through the staid world of insurance, and the World Bank is to
be congratulated for organizing so timely a seminar for its
self-education.
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|
December 23, 1998
The
basic idea is very simple: Let the share for which the option (or
under) writer is responsible increase as the penetration of the layer
gets larger.
The purpose of this structure is to reduce the cost
of traditional excess of loss (or pure option) coverage. At the same
time, the structure reduces volatility and provides for fuller coverage
as losses increase.
First proposed in the context of a price
guarantee program, the examples that follow are for Puts (or profit
share) structures, but they work equally well for Calls (or loss-share)
programs.
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