If an insurer sets a premium based on the average probability of a loss in an entire population, those at higher-than-average risk for a certain hazard will beneﬁt most from coverage, and hence will be the most likely to purchase insurance for that hazard
In an extreme case, the poor risks will be the only purchasers of coverage, and the insurer can expect to lose money on each policy sold. This situation, referred to as adverse selection, occurs when the insurer cannot distinguish between members of good-...
Insurance is an economic institution that allows the transfer of ﬁnancial risk from an individual to a pooled group of risks by means of a …
Insurance is an economic institution that allows the transfer of ﬁnancial risk from an individual to a pooled group of risks by means of a two-party contract. The insured party obtains a speciﬁed amount of coverage against an uncertain event...
Precautionary principles state that when there are threats to the environment, scientiﬁc uncertainty should not prevent prudent actions to prevent potentially large damage
In order to protect the environment the Precautionary Approach is widely applied: fundamentally, where there are potentially grave or irreversible threats, lack of full scientiﬁc certainty shall not be used as a reason for postponing cost-effective...
Correlated risks from natural disasters
Correlated risk refers to the simultaneous occurrence of many losses from a single event. Natural disasters such as earthquakes, ﬂoods, and hurricanes produce highly correlated losses: many homes in the affected area are damaged and destroyed...
Default risk is the probability of default and helps potential lenders determine whether they should issue loans
The assessment of default risk is also critical in the valuation of corporate bonds and credit derivatives such as basket-default swaps. There is an important distinction between default risk under the actual probability measure and that under the risk-ne...
In ﬁnancial risk management, two types of risk measurements are commonly used
The ﬁrst type measures the sensitivities of portfolio value to some particular market variables. Usually, a portfolio’s risk proﬁle can be described by a large number of those sensitivities. The second type is more comprehensive as it ...
The public is increasingly alarmed over effects stemming from toxicants and industrial waste
Mismanagement of past environmental risk issues, by both scientists and policy makers have left the public distrustful. When risk controversies arise, a struggle may result between competing interests. The typical response from scientists and industry dur...
According to Jorion, banks allocate roughly 60 percent of their regulatory capital to credit risks, 15 percent to market risks, and 25 percent to operational risks
Consider a credit portfolio that consists of default-sensitive instru¬ments such as lines of credit, corporate bonds, and government bonds. The corresponding credit value-at-risk (VaR), is the minimum loss of next year if the worst 0.03 percent event ...
Alternative asset categories have become popular with investors since the 2000–2001 recession
Until the 2008-2009 crash, leading University endowments and other institutional investors have achieved superior returns over the past decade by shifting a sizeable proportion of their capital to private investments. Over this period, numerous pension t...
Without a sound risk allocation system, risk-related decisions are likely to be suboptimal and lead to higher volatility, following unanticipated negative events, and less investment.
The rules for banking supervision at the Bank of International Settlement (BIS) in Basel have changed business in all OECD countries. Basel I was launched in 1988. The justiﬁcation of a framework is based on the interdependence of banks and...
Securitisation is the isolation of a pool of assets and the repackaging of those assets for trading in capital markets. Securitisation began in the 1970s with US banks selling off pools of mortgage-backed loans
Securitisation is the isolation of a pool of assets and the repackaging of those assets for trading in capital markets. Securitisation began in the 1970s with US banks selling off pools of mortgage-backed loans. By 2002, some $450bn of assets had been sec...
Dynamic ﬁnancial analysis (DFA) is an application of mathematical modelling to businesses. DFA models the key elements that impact an organisation’s operations and simulates thousands of potential situations, determining the firm’s ﬁnancial condition for each outcome.
Dynamic ﬁnancial analysis (DFA) is an application of mathematical modelling to businesses. DFA models the key elements that impact an organisation’s operations and simulates thousands of potential situations, determining the firm’s ...
Reliance on models to price, trade, and manage risks carries risk. Models are susceptible to errors
Reliance on models to price, trade, and manage risks carries risk. Models are susceptible to errors. In liquid and more or less efﬁcient securities markets, the market price is, on average, the best indicator of the asset’s value. In the abse...
Enterprise risk management (ERM) is a recent technique, practiced increasingly by large corporations in industries throughout the world.
Enterprise risk management (ERM) is a recent technique, practiced increasingly by large corporations in industries throughout the world. Sensible risk management ﬂows from the recognition that a dollar spent on managing risk is a dollar cost to the...
Each year consumer products are involved in millions of injuries and thousands of fatalities. Responsibility for this rests with the manufacturers
Each year consumer products are involved in millions of injuries and thousands of fatalities. Responsibility for this rests with the manufacturers. Most developed countries have also established government agencies that provide regulatory oversight. In th...
European countries are scrambling to raise every last penny of funds through taxes. But some countries may have gone too far...
Though all business taxes in Belgium can be paid online with little effort and preparation, the rates are still sky-high at 57.7 percent, including a staggering 50.8 percent total rate on profits only in social security contributions.
In Belarus, a company spends up to 338 hours annually preparing for and paying ten different taxes and duties. The total tax rate has incredibly been lowered to 60.7 percent, from 117.5 percent in 2008.
A company in France pays seven different taxes and duties, the sum of which can amount to 65.7 percent of profits; though President François Hollande has announced a wave of business tax rate cuts coming up.
A business in Estonia pays 67.3 percent of profits in tax, 37.2 percent exclusively in social security contributions. The country has gone against the grain in Europe by raising businesses taxes from 48.6 percent in 2008 to the current rates.
While corporate income tax (IRES) in Italy is limited to 38 percent of taxable profit, a company operating in Italy can expect to pay 14 other taxes and duties, including social security contributions, bringing their total payable tax to 68.7 percent of profits, according to the World Bank.
Norway taxes motor fuels twice, with a road use tax and a CO2 emissions tax. Combined with strikes in the energy sector that have curbed output, the price of gas at a local pump has soared to $10.12 per gallon.
Though Turkey sits on the Suez Canal and neighbours many oil rich countries, the price of a gallon of average gas clocks in at $9.41 in Turkish pumps, because of a 60 percent share of taxes.
Like Turkey, Israel is surrounded by oil-rich neighbours, but drills very little itself. Gas prices are controlled by the government, so about half of the $9.28 per gallon goes to taxes.
There are few gas stations in Hong Kong, but the ones available charge up to 76 percent more per gallon than mainland China, where the government caps the cost of fuel. A gallon at the pumps will cost around $8.61 on the island.
Expensive labour costs make the Dutch petrol prices the dearest in Europe, at $8.26 per gallon; though the 57 percent tax add-ons don’t help.
8 February 2007
HSBC warns of subprime mortgage losses
2 April 2007
New Century goes bus
14 September 2007
Wholesale markets have dried up
17 March 2008
Rescue of Bear Stearns
7 September 2008
Rescue of Fannie Mae
15 September 2008
Lehman Brothers file for bankruptcy
3 October 2008
US congress approves $700bn bailout
14 February 2009
$787bn stimulus approved by congress
The effects of the current financial crisis are global and irrefutable. With the collapse of Lehman Brothers, the domino effect of irresponsible public monetary policies, huge levels of unsustainable debt, and a deregulated financial sector, has escalated to the point where no corner of the globe has been left untouched.
Syria and Egypt launch an attack on Israel on Yom Kippur and set off a twenty day war;
US President Carter creates Department of Energy, which develops the US strategic petroleum reserve
The Organisation of Petroleum Exporting Countries (OPEC) used their oil reserves as a weapon with the Arab Oil Embargo against those who supported Israel. By January 1974, world oil prices were four times higher than they were at the start of the crisis, especially in the US, and the shock led to a huge drop in the stock market with NYSE losing $97bn in just six weeks. The embargo lasted five months, and the effects are still seen today.
1923 – 1924
The trouble began when Germany missed a repatriation payment, worth about one third of the German deficit in this period. Inflation was already high but by 1923 it was raging. Prices doubled within hours, and by late 1923, it cost 200bn marks to buy a single loaf of bread. People burned money as it was cheaper than buying firewood. Germany eventually regained control of its economy when it introduced the Rentenmark into circulation in 1923, and then the Reichmark in 1924.
The Great Crash
Recovery and Recession
After the decadence of the Roaring Twenties, the 1930s saw the biggest economic slump of all time. The stock market crashed on 29 October 1929, and optimism and decadent living tumbled along with the figures. The GDP fell from $103.6bn in 1929, to $66bn in 1934 and the subsequent years of recovery were the most dramatic in US history.
Otto Heinze and his brother Augustus Heinze bought shares of United Copper.
The stock market was already cautious over the tight money supply, but the US was thrown into a depression after the stock market fell nearly 50 percent from its peak in 1906. The Heinze brothers thought they could influence market shares but ended up bankrupting lenders that provided the financing to buy the stock. A chain reaction left nine institutions bankrupt. By February 1908, the panic was over and the government created the Federal Reserve system, to prevent banks from exercising too much control over the economy.