The Effective Duration and Convexity of Liabilities for Property-Liability Insurers Under Stochastic Interest Rates

Managing interest rate risk for property-liability insurers requires appropriate measurement of the sensitivity of liabilities to movements in interest rates. Most prior studies have assumed that interest rates shift in a parallel fashion and that the cash flows from liabilities are unaffected by interest rate changes. This article recognizes that unpaid property-liability (P-L) insurance losses are inflation-sensitive, that movements in interest rates will affect future claim payouts due to the correlation between interest rates and inflation and that interest rates are stochastic. The effective duration and convexity of P-L insurance liabilities calculated based on this approach are substantially lower than those measured using traditional approaches, which has important implications for asset-liability management by P-L insurers.     

Ownership structure and the pricing of discretionary accruals in Japan

This paper examines the valuation effect of discretionary accruals for Japanese firms, taking into account the book value of equity. Consistent with US evidence, the Japanese market prices discretionary accruals, indicating that discretionary accruals enhance the value relevance of reported earnings. This value relevance is lower for cross-held firms, consistent with the view that cross-business shareholding aggravates tunneling or managerial opportunism through discretionary accounting choices. On the other hand, foreign shareholding and bond financing provide effective monitoring on managerial discretion of profit firms to enhance the valuation of discretionary accruals.     

Conversion of mortality ratios to a numerical rating classification for life insurance underwriting-revisited

This is a commentary requested by the J Insur Med Editor to accompany a reprinting in this 2004 issue of my 1988 article on "Conversion of Mortality Ratios to a Numerical Rating Classification for Life Underwriting" (J Insur Med 1988;20:54-61). Topics discussed in this commentary include the distinction between short-term and long-term mortality follow-up in certain conditions, the format and the introductory text of the US Decennial Life Tables, the distinction between mortality rate and mortality probability, averaging mortality rates over a period of years, and the great value of the exemplary follow-up study used in the 1988 article.     

Private Pension Arrangements and Retirement in Britain*

This paper looks at the policy debate surrounding private pensions and retirement patterns in the UK. Recent increases in longevity have led not only to increased pressures in public pensions but also to corresponding increases in the importance of private pensions in the UK and changes in the way in which they are structured. We consider the economic implications of these changes, and in particular the increased importance of defined contribution plans. In addition, we discuss the prospects for future trends in retirement ages.     

Estimating the Cost of Equity Capital for Property-Liability Insurers

This article presents new evidence on the cost of equity capital by line of insurance for the property‐liability insurance industry. To do so we obtain firm beta estimates and then use the full‐information industry beta (FIB) methodology to decompose the cost of capital by line. We obtain full‐information beta estimates using the standard one‐factor capital asset pricing model and extend the FIB methodology to incorporate the Fama–French three‐factor cost of capital model. The analysis suggests the cost of capital for insurers using the Fama–French model is significantly higher than the estimates based upon the CAPM. In addition, we find evidence of significant differences in the cost of equity capital across lines.     

Your company's secret change agents

Organizational change has traditionally come about through top-down initiatives such as hiring experts or importing best-of-breed practices. Such methods usually result in companywide rollouts of templates mandated from on high. These do little to get people excited. But within every organization, there are a few individuals who find unique ways to look at problems that seem impossible to solve. Although these change agents start out with the same tools and access to resources as their peers, they are able to see solutions where others do not. They find a way to bridge the divide between what is happening and what is possible. These positive deviants are the key, the authors believe, to a better way of creating organizational change. Your company can make the most of their methods by following six steps. In Step 1, Make the group the guru, the members of the community are engaged in the process of their own evolution. Step 2, Reframe through facts, entails restating the problem in a way that opens minds to new possibilities. Step 3, Make it safe to learn, involves creating an environment that supports innovative ideas. In Step 4, Make the problem concrete, the community combats abstraction by stating uncomfortable truths. In Step 5, Leverage social proof, the community looks to the larger society for examples of solutions that have worked in parallel situations. In Step 6, Confound the immune defense response, solutions are introduced organically from within the group in a way that promotes acceptance. Throughout the steps, the leader must suspend his or her traditional role in favor of more facilitatory practices. The positive-deviance approach has unearthed solutions to such complicated and diverse problems as malnutrition in Mali and human trafficking in East Java. This methodology can help solve even the most extreme dilemmas.