34th Rendez-Vous de Septembre: Insurers May Feel Fallout from Gulf Crisis

At the 34th Rendez-Vous de Septembre in Monaco, brokers and underwriters in various countries announced that their business is suffering as a result of the invasion of Kuwait by Iraq. There has been no new investment in Iraq or Kuwait because of the United Nations (UN) embargo, and investment in other Middle Eastern countries, such as Saudi Arabia, has tailed off because of the threat of war in the region. As a result, few new premiums or brokerage commissions are coming from the area. Further, the Gulf crisis could result in stock market crashes worldwide. Falling stock prices would reduce the net worth of many major world insurers and could lead to an increase in insurance prices occurring more quickly than the predicted time of within 1-3 years. Meanwhile, political risk insurance underwriters are waiting to see how much the crisis will cost them on coverages already issued. Marine and aviation war risk underwriters are benefiting from the crisis because of the additional war risk premiums they are receiving.

Full text: Business Insurance, Sep 24, 1990

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Are Changes in Inflation Expectations Capitalized into Stock Prices? A Micro-Firm Test for the Nominal Contracting Hypothesis

The nominal contracting hypothesis argues that changes in subsequent inflation expectations cause a change in the market value of fixed-rate debt instruments, especially long-term debt, which, in turn, should be capitalized into the market price of equity. Little, if any, supporting evidence has been found for the theoretically anticipated wealth redistribution effects of inflation from bondholders (creditors) to shareholders (debtors). Using micro-firm data for the period 1961-1985, evidence is provided in support of the hypothesis. The data consist of 50 semiannual cross-sectional samples of nonfinancial and nonutility corporations drawn from the COMPUSTAT and CRISP files. Model specification is improved by: 1. recognizing explicitly that a firm's asset and capital structure variables are balance-sheet constrained, and 2. controlling for individual firm risk differences and capital gains taxation.

Full text: The Review of Economics and Statistics, May 1989

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