The Gaussian Copula

An article from Wired about the Gaussian copula. The question is how to model inter-relationships -- correlations. Students may not understand every reference in this article, but it has some good analogies and gets the point across nicely.

- Rick

State Farm Drops Out of the Florida Homeowners Market

According to an artcle in today's Wall Street Journal, State Farm is leaving the Florida Homeowners Insurance Market. It will reduce its policy exposure over the next two years or so.

It's interesting that "the state-created insurer of last resort, Citizens Property Insurance Corp.," is also characterized as having "been trying to shed policies."

- Rick

Putting the "R" in InsuRance (ARRR, ARRR)

Traveling the high seas? You might want to consider pirate insurance.

Per the Chicago Tribune today, Aon is promoting piracy insurance -- specifically, a policy which covers the time delay associated with a pirated shipment.

- Rick

Is Economic Uncertainty Decreasing?

A posting on Vox titled "The Recession Will Be Over Sooner than You Think," by Stanford economists Bloom and Floetotto, suggests that several measures of economic uncertainty have fallen recently. In fact, they say, "economic uncertainty is now dropping so rapidly that we believe growth will resume by mid-2009."

Nice to hear an occasional optimistic voice!

Hmmm...

- Rick

Market Turmoil, Regulation, and Efficiency

Two of the top financial economists in the world, Gene Fama and Ken French, recently started an online forum. They have a Q&A section in which they respond to relevant finance questions, at least a couple of which would probably be of interest to actuarial science students (as well as practitioners):

(1) "Some people have argued that the turmoil was caused by a lack of government regulation. What do you think? Do we need more regulation?"

I think the reference to the possibility of more regulation "stifling financial innovation" is very important. Also interesting is the comment that "regulators are eventually captured by the regulated. As a result, regulation often has results opposite those intended."

(2) "Is the market turmoil a sign that markets are not efficient?"

The Fama-French response identifies two market turmoil factors: expected cashflows (e.g., future dividends and growth rates), and their discount rates. Those of you who have taken my Math 210 course may recall a homework problem I always ask, which is intended to demonstrate potentially how little has to change in order to result in a significant change in the stock market. Using the dividend discount model (P = D / (i - g), where P is the price of the stock or market index, D is the next dividend, g is the growth rate of dividends, and i is the discount rate)), for example, for certain fixed values of D and i, the market consensus regarding the growth rate g need not change much in order to significantly change the price P.

- Rick

The Big Ones

A summary of the most financially significant 2008 property-casualty catastrophes, from insurancenewsnet.com . For P/C insurers, catastrophes are often the risk that causes the most concern.

- Rick

Modeling Risk-Aversion

From The Economist of January 8th, a short article ("The Bonds of Time") summarizing research indicating that "people born at different times make very different financial choices, even in similar economic environments."

Perhaps not surprising -- but think about the implications for the modeling of economic and financial behaviors (which in turn will potentially impact future economic and financial conditions). One more level of complexity to be considered...

- Rick