Henri Loubergé

Long-term risk management of nuclear waste: a real options approach

In this paper, we investigate the optimal timing for deep geological disposal of nuclear waste. Our model is based on the real options approach to investment under uncertainty. In this context, the problem is similar to the optimal exercise policy for a perpetual American spread option. The potential usefulness of such a model for actual decision-making on a sensitive issue is illustrated by some numerical simulations.

Developments in Risk and Insurance Economics: the Past 25 Years

The chapter reviews the evolution in insurance economics over the past 40 years, by first recalling the situation in 1973, then presenting the developments and new approaches which flourished since then. The chapter argues that these developments were only possible because steady advances were made in the economics of risk and uncertainty and in financial theory. Insurance economics has grown in importance to become a central theme in modern economics, providing not only practical examples to illustrate new theories, but also inspiring new ideas of relevance for the general economy.

Additive and multiplicative risk premiums with multiple sources of risk

Abstract This paper considers the risk premium for one risk when other background risk is present. In a mean-variance setting, we examine the conditions under which the risk premium will be negative. These conditions consider the variance of the considered risk in relation to the covariance of the considered risk with the background risk. We consider the cases of both multiplicative and additive risks. A breakdown of the total risk premium into several components is established by removing each source of risk consecutively. The case of multiplicative risks is shown to be quite different from the additive-risk case in that the individuals total willingness-to-pay for the removal of all risk on a sequential basis does not necessarily equal the willingness-to-pay for removal of all risk simultaneously.

A Portfolio Model of International Reinusrance Operations

In this paper reinsurers are considered as financial intermediaries holding three portfolios: a portfolio of conditional liabilities (the reinsurance treaties) and two portfolios of conditional claims (financial assets and retrocession treaties). For reasons of risk-spreading, reinsurers are mainly active at the international level. They are thus exposed to considerable risks of foreign exchange gains and losses, which cannot be completely offset by traditional procedures of foreign exchange management, due to the stochastic character of technical liabilities and claims. Diversification of foreign exchange exposures may therefore be considered as the appropriate reinsurers response to currency risk. Taking these various elements of the reinsurance business into consideration, the paper presents a portfolio model that permits simultaneous determination of optimal policies for reinsurance acceptances, retrocessions, financial investment, and foreign exchange management.

Export Credit Insurance: Comment

In this comment, some results obtained in a previous article by Funatsu [1] are corrected. His unfamiliar results for the case of non-proportional insurance are due to a misleading definition of the premium schedule.

Reinsurance and Foreign Exchange Risk

This type of concern is felt particularly by reinsurance companies, mainly because they practice geographic dispersal of risks on an international scale, so that they deal in a large number of currencies (generally more than a hundred). Their total net assets expressed in national currency on the basis of assets and liabilities held in various currencies undergo substantial fluctuations owing to foreign exchange rate movements. For reinsurance companies, as for all firms operating at the international level, the foreign exchange problem has become particularly acute since the adoption by major countries of the Western world of the system of floating rates of exchange. This is, first of all, because it is no longer a temporary problem due to the risk of devaluation or revaluation of an isolated currency, but rather a permanent concern. It is also due to the fact that the direction in which foreign currency rates will vary has become more difficult to forecast. The foreign exchange market being an efficient market in the financial sense of the word (see Fama [1970]), foreign exchange rates will at all times reflect the totality of the information available and will fluctuate in a random fashion as a function of the arrival of new information. Although there is always an underlying basic trend in their movements (as reflected by interest rate differentials), the direction of short-term fluctuations is difficult to predict 1 Unlike the conditions prevailing at the time of fixed (and nonetheless adjustable) exchange rates, speculation has become a dangerous game. In all the economic and financial circles concerned, it has given way to a careful management of the foreign exchange risk. Compared with other operators in the international financial market, reinsurers encounter a certain number of specific problems in the management of foreign exchange risk. Essentially, these problems are linked with the random nature of the liabilities

On the Demand for Budget Constrained Insurance

Much of the traditional economic theory of insurance is based on the assumption that the risk against which insurance is to be purchased is entirely exogenous. This is usually modelled by simply allowing the individual to include insurance as a mechanism of covering risk, without any real analysis of how this insurance is paid for. However, in almost all real-life consumer insurance, the size of the risk is itself a choice variable (the type of car to purchase, the type of employment to take, the amount to invest in an insurable asset, etc.), and decisions are made taking budget constraints explicitly into account. While an enormous number of interesting theorems can be derived in the standard model, these results are typically not robust to the extention of making risk an endogenous choice variable and the explicit inclusion of a budget constraint. Here, we use a simple two state model of the demand for insurance in which we explicitly introduce a budget constraint and in which the insurable risk itself is a choice variable. In the model, we find that the standard result of full coverage being demanded if and only if the premium is such that the insurer earns an expected profit of 0 no longer holds as such, and it turns out that in a simple two state setting some of the ambiguity of the standard model’s comparative statics is avoided.

Insurance and Catastrophes: Comment

• At the micro level of the firm, the sudden death of the entrepreneur and the bankruptcy of a major customer are catastrophes; • At the regional level, a flood, an earthquake, an oil spill, and the delocalization of a dominant job supplier represent catastrophes; • At the macro (or national) level, a deep economic slump, a generalized social conflict, an extended period of snowfalls, and a collapse in the price of a major export product are catastrophes; • Finally, at the global level, events like a world war, the breakdown of a major economic power, and a climate change are catastrophic events.