1 / 23

Long-Term Management of Weather and Other Risks

Long-Term Management of Weather and Other Risks. Robert Shiller Arthur M. Okun Professor of Economics, Yale University Chief Economist, MacroMarkets LLC WMRA Conference, Miami, June 3, 2008. Disclaimers. Disclaimer :.

dunne
Download Presentation

Long-Term Management of Weather and Other Risks

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Long-Term Management of Weather and Other Risks Robert Shiller Arthur M. Okun Professor of Economics, Yale University Chief Economist, MacroMarkets LLC WMRA Conference, Miami, June 3, 2008

  2. Disclaimers Disclaimer: The information in this presentation is illustrative, presented only for informational purposes, and is not intended to predict actual results, which may differ substantially from those reflected herein.  Performance analysis is based on certain assumptions with respect to significant factors that may prove not to be as assumed.  You should understand the assumptions and evaluate whether they are appropriate for your purposes.  Performance results are often based on mathematical models that use inputs to calculate results.  As with all models, results may vary significantly depending upon the value of the inputs given.  Models used in any analysis may be proprietary making the results difficult for any third party to reproduce.  These materials contain statements that are not purely historical in nature but are “forward-looking statements.”  These include or may include, among other things, projections, forecasts, estimates of income, yield or return, the value of an index, future performance targets, sample or pro forma portfolio structures or compositions, scenario analysis, specific investment strategies and proposed or pro forma levels of diversification or sector investment.  These forward-looking statements are based upon certain assumptions.  Actual events are difficult to predict, are beyond MacroMarkets control and may differ from those assumed.  All forward-looking statements included herein are based on information available on the date hereof, and MacroMarkets assumes no duty to update any forward-looking statements.  Accordingly, there can be no assurance that estimated returns or projections discussed herein can be realized, that the factual assumptions upon which forward-looking statements are based will materialize or that actual returns or results will not be materially lower than those presented.  This document is transmitted solely for information purposes and is not to be construed as a solicitation of an offer to sell or an offer to buy any security or otherwise to enter into any transaction. All securities transactions by MacroMarkets are conducted through its subsidiary Macro Financial, LLC, member FINRA.

  3. Congratulations • Congratulations on nearly 10 years of WRMA • Next ten years will see a deepening of these successes in risk management

  4. A.C. Pigou Industrial Fluctuations 1929 on Weather Three causes of Industrial Fluctuations: • Real causes: harvest variations, inventions, industrial disputes, changes in fashions, wars • Psychological causes • Autonomous monetary causes Pigou thought that removal of harvest variations would reduce industrial fluctuations by about a quarter, removing either the psychological causes or autonomous monetary causes by about a half. Others of minor importance Is weather more important today? (Compare with William Stanley Jevons, sunspots theory 1882)

  5. Weather Risk as Part of a Long-Term Risk-Management Problem • Most important risks are long term • Diversification has been overstressed by financial theory; hedging is central • The development of weather derivatives is a step in the direction of many further developments in risk management • A New Financial Order

  6. Long-Term Changes in Risks • Jaffee, Kunreuther and Michel-Kerjan, “The Development of Long-Term Insurance” • Uncertainties related to weather are increasing through time • Risk of change in uncertainty needs to be managed

  7. Catastrophe Insured Losses (Wharton, Swiss Re, IFI)

  8. Catastrophe Risk Losses Scaled by IMF World GDP

  9. Regression 1970-2007 of Scaled Losses on Time • R squared = 0.43 • T statistic on slope = 5.2 • P value = 8.7*10-6 • Nobs = 38

  10. Regression 1970-2007 of Log Scaled Losses on Time • R squared = 0.19 • T statistic on slope = 2.91 • P value = 0.006 • Nobs = 38

  11. Ranked Top 20 Hurricane Scenarios (Scaled for Inflation, Population, and Wealth) vs Time 1900-2005 R. Pielke, Natural Hazard Review, Feb 2008

  12. Rank Regressed on Year • R squared = 0.21 • T statistic on slope = 2.2 • P value = 0.04 • Nobs = 20 • Significant, but with the “wrong” sign, indicating that hurricanes are causing less damage

  13. Increased development in hazard-prone areas But, will this continue? Shoreline is already populated Climate change and hurricanes Uncertainty about future is essential to insurance Myanmar Cyclone Reasons for Increase in Losses

  14. Reasons to Suspect Fewer Losses • Technological progress • More apartment dwellers, fewer single-family homes? • Indian Ocean Early Warning System • Filling out of interior of countries • Long-term insurance could cause fewer losses, hence insurance

  15. Regulatory Barriers to LTI • Rates are kept down, apparently no provision for higher rates for longer-term contracts • 50 state insurers. (Paulson “Blueprint” calls for National insurance charter)

  16. Comparison: Mortgage Innovation • Long-term mortgage brought in by HOLC in 1933, FHA 1934 • Ginny Mae futures • Long-term mortgage almost absent outside US, Denmark • Canada, complacency despite problems of early 1980s

  17. Pensions and the Risk of Outliving One’s Wealth • Life annuities are an excellent old idea, rarely embraced by the public • Wishful thinking bias, mental framing • Public pension funds • Private annuities • Problem: annuity providers have to manage aggregate longevity risk

  18. U.S. Life Expectancy, 1900-2001

  19. Problems Inhibiting Longevity Bonds • EIB Bonds were nominal bonds, should be real • UK Issuers of life annuities were not seriously enough interested in this small issue to take fast action • Those who would take other side are not easily found, need to look at prices in an established market

  20. Pigou’s Psychological Causes • Maybe psychological changes are even more important than weather-related changes for whole economy • Irrational Exuberance and today’s crisis • Weather as a factor interacting with the psychological causes: Miami hurricane of 1926

  21. Conclusion • Risk management for weather and other risks has a long-term dimension • Paradox remains: long-term risk is most important, but often overlooked • Stock market is a long term market, but futures markets are not really • Economic development will gradually extend terms of markets, and eventually bring long-term risk management into practice

  22. Forthcoming Book • Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do about It, Princeton, 2008

  23. For Additional Information Prof. Robert J. Shiller Department of Economics Cowles Foundation for Research in Economics Yale University New Haven CT 06520-8281 robert.shiller@yale.edu 203 432-3708

More Related