NEAM Insights

A Bit of Theory Most commentators previously believed that interest rates were subject to a zero lower bound (ZLB) and thus it was inconceivable that nominal interest rates could be negative. The idea of a negative interest rate, however, is not new. Keynes cited the idea proposed by the German economist Silvio Gesell in the late 19th century to impose a tax on holding money and many economists have written about it since then, from Irving Fisher in the thirties to, more recently Willem Buiter – a former member of the Bank of England’s Monetary Policy Committee. In 2009, Greg Mankiw referred to negative policy rates as a policy option in the New York Times. Read More

The fragility of the European banking sector was exposed during the euro area sovereign crisis of 2010–2012. Policymakers now hope the opposite is true of banks–improved liquidity, capital strength and supervision leading to greater confidence, higher lending volumes and a recovery in euro area economic growth. In this Quick Takes we review how the banking sector has rehabilitated itself and whether policymakers’ hopes are justified. Our conclusion is a qualified “yes.” Read More

Euro Area interest rates have been hitting new historic lows and yields on many bonds have actually turned negative. Claudio Borio, head of the monetary and economic department at the Bank for International Settlements in Basel, (which acts as an advisory body for central bankers) recently wrote that “bond markets show us day after day [that] the boundaries of the unthinkable are exceptionally elastic” and the idea of a bond having a negative yield was certainly unthinkable until quite recently. Read More

Stress testing is a critical component of insurers’ enterprise risk management framework, yet not without its challenges. Our interest in the topic is driven by the clients we serve. As we assist clients in managing their enterprise and investment risk we are motivated to “get it right,” i.e., to assure a better understanding of the inherent risk within their insurance and investment portfolios. Read More

The treatment of securitisations in Europe has gained some publicity recently with updates coming from the EC and EIOPA on Solvency II. In this Quick Takes we review the changes and provide additional comments on our interpretation of the regulatory requirements of holding such assets on the balance sheet of an insurance firm. Read More

The Detroit municipal bankruptcy in 2013 was the largest in U.S. history, by far. Eighteen months and $170 million in legal fees later, the beleaguered city exited bankruptcy. Monetary losses were spread across creditors, including deep cuts for certain classes of bondholders. This landmark case offers a very public and large glimpse into the murky world of municipal bankruptcy. Read More

It is important for insurance companies to have well-grounded expectations for the coming year with respect to fixed income investment returns. In an effort to provide guidance to clients and others, we have used GR–NEAM’s proprietary return projection methodology to establish a realistic target for fixed income returns and a reasonable range of outcomes for fixed income portfolios of the U.S. P&C insurance industry for 2015. Read More

In September, the Federal Housing Finance Agency (FHFA) released a Notice of Proposed Rulemaking (NPR) proposing to revise its regulations governing Federal Home Loan Bank (FHLB) membership requirements while seeking to address what they view as issues related to the FHLBs’ housing finance mission. This Quick Takes outlines a brief history of the FHLB, our understanding of the NPR and how, if passed, the proposed changes may affect insurance companies going forward. Read More

The fall in Euro Area (EA) inflation during the last twelve months has been a surprise to policy makers and market participants alike. In addition to current headline inflation reading of slightly above zero—longer term inflation expectations have also declined. A lackluster growth/deflationary outcome would represent a significant medium term challenge to some EA sovereigns that still require de-leveraging and structural reform. Read More

Change is on the way for UK GAAP reporters with FRS 102 “The Financial Reporting Standard Applicable in the UK and Republic of Ireland” being adopted by the UK Financial Reporting Council (FRC) with effect from 2015. Read More