Moral Hazard,portfolio allocation,and asset returns for thrift institutions

This article examines the earnings performance of nontraditional assets allowed to thrifts since the early 1980s. It uses the statistical cost accounting methodology developed by Hester and Zoellner to estimate average returns on thrift portfolio investments for the years ending June 30, 1987 and June 30, 1988. Results show that average returns on land loans, service corporation investment, real estate investment, and commercial loans were significantly lower than returns on more traditional assets. The results are far more pronounced at capital deficient institutions, lending support to the hypothesis that they used nontraditional investments as a means of exploiting the deposit insurance system. Returns on nontraditional assets are significantly affected by geographic factors, even for well capitalized institutions. The article concludes with an evaluation of the reimposition of portfolio restrictions on thrifts by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.The views expressed in this paper are those of the authors and do not necessarily represent the views or opinions of the Federal Housing Finance Board, the Board of Governors of the Federal Reserve System, or the Federal Deposit Insurance Corporation. George Benston, Tom Fomby, Allen Berger, John Wolken, and anonymous referees made numerous constructive suggestions.     

Long-term forecasting methods: Emphasis and institutions

There are many explanations why the more structured and formalised techniques of forecasting have not yet provided major input to government policy except in specialised areas. This article gives an assessment of the present state of the art in our ability to predict the consequences of current actions in the long-term future. The relevance of this to the ongoing debate about the place of formal methods in policy analysis is considered. In many instances it seems that the methods used run counter to the ideal of scientific liberalism to which the forecasters and officials involved often subscribe. The article indicates where institutional arrangements can be adjusted to ensure that the forecasting ability available is better employed, and points to areas in which forecasting methodologists should increase their attention if forecasting methods are to support more open and more flexible institutional arrangements.     

A Reexamination of the Corporate Demand for Reinsurance

This study examines the effect of the state of the international reinsurance market on the demand for reinsurance by U.S. insurers using data from the years 1993 through 2000. Both the overall demand for reinsurance and the utilization of foreign reinsurance by U.S. insurers are explored. In addition to supporting the findings of prior literature related to the traditional motives for the corporate demand for insurance, evidence indicates that the state of the U.S. reinsurance industry impacts the amount of reinsurance demanded by U.S. insurers. The study also investigates reasons why U.S. insurers utilize a reinsurance program composed of both U.S. and foreign reinsurers. The results indicate that the decision to utilize some percentage of foreign reinsurance is driven primarily by the financial and operational characteristics of the ceding company such as firm size, group affiliation, and organizational form. However, no support is found for the hypothesis that possible differences between the foreign and U.S. reinsurance markets impact the decision to utilize foreign reinsurance.     

Modelling with scenarios: Technology in North-South development

This article outlines work in progress on a study of technological choice in the context of North-South development. Its main purpose is to describe the methodology being developed in the pilot phase of the study. This is of interest because it links together a number of analytic techniques—sociopolitical scenario analysis, macroeconomic modelling, and certain microstudies. The methodological problems are general to much forecasting activity.     

9. An evaluation of the world models

After summarising the findings of chapters 2–8, exercises which demonstrate shortcomings in the general structure of the world models are described. Alterations to the World 3 model, suggested in chapters 3–8, are tested, and comments are made on the results and on world models in general.     

Development,distribution and the future

The distribution of world output between countries, and between social groups within countries, is central to long-term development prospects. Unequal shares mean unequal influence over the future direction of world affairs. The level and structure of demand are conditioned by the distribution of financial resources; while the power to influence the course of development is itself tied to the resources that can be marshalled in support of one's objectives. Two forecasting techniques, scenario construction and global modelling, are used to assess these relationships and explore the consequences of one possible ‘future history’ in which distribution worldwide does eventually begin to improve. Striking limitations to most development strategies are identified; without a wide-ranging set of changes, the prospects for improved distribution—and relief of poverty—are bleak.     

Insurance Derivatives: A New Asset Class for the Capital Markets and a New Hedging Tool for the Insurance Industry

The number and severity of natural catastrophes has increased dramatically over the last decade. As a result, there is now a shortage of capacity in the property catastrophe insurance industry in the U.S. This article discusses how insurance derivatives, particularly the Chicago Board of Trade's catastrophe options contracts, represent a possible solution to this problem. These new financial instruments enable the capital markets to provide the insurance industry with the reinsurance capacity it needs. The capital markets are willing to perform this role because of the new asset class characteristics of securitized insurance risk: positive excess returns and diversification benefits.
The article also demonstrates how insurance companies can use insurance derivatives such as catastrophe options and catastrophe-linked bonds as effective, low-cost risk management tools. In reviewing the performance of the catastrophe contracts to date, the authors report promising signs of growth and liquidity in these markets.