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May 19, 2008

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reason

Surely, the problem is not the private costs of developing such a product. The problem is that re-insurance is a very difficult problem because of auto-correlation. Who will reinsure against a depression? All the investments that they will make with their premiums will also go bust at the same time. The solvency of the insurer (or reinsurer) is a major issue with private insurance. You pay but have only a discounted guarantee of having your claims covered.

dearieme

Well said, Reason. I'd like to take out insurance against my occupational pension fund going bust (because of a large fall in equities) but everything I've thought of would carry a large counterparty risk that's also exposed to equities, or would be an investment that would probably fall in a depression, just like equities: e.g. commodities.

kinglear

Chris - I'm sure you've read The Black Swan, which is exactly the contra-big bet situation you mention. But as you say, the minute anyone starts selling somethging, the game's over. The best example was over 30 years ago when the Government started selling index-linked gilts. The rate of inflation has never been as high as it was on the day the issue was announced.....

chris

Reason - your point's a good one. But is it clinching? One asset is safe against deflationary depression - gilts. So holders of these could reinsure. And it should in theory be possible to insure against a local depression by trading with foreigners; Japan's "lost decade" of the 90s was insurable, as the rest of the world thrived.

reason

Chris - and if the gilts all come to market at the same time? And in a normal country, in a depression, shouldn't the currency value rise as domestic demand falls - so that foreign investments are worse less?

reason

oops - ... worth less.

Hari

Well, the food prices problem is getiing difficult to solve day-by-day.

Mark Wadsworth

That's a good list, but you missed off Real Estate Investment Trusts - a super tax structure introduced in January 2007 to enable property professionals to offload their overpriced commerical properties on the unsuspecting small investors, who since then have lost up to half their money. Thanks, Gordon!

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