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Wednesday, June 12, 2013

Reinsurance as a Shell Game: Another Bailout to Come?

In the stock market, investors can be quite fastidious in demanding a certain quarterly profit or internal rate of return. The increasing activism of institutional investors exacerbates this trend, as they have the wherewithal to investigate the companies in which they hold stock and the incentive given the number of shares they typically hold in a certain company. This pressure can tempt managements to “go outside the box” in developing novel ways to inflate revenue or hid expenses and risk. In theory at least, companies owned by their employees or customers do not have to contend with that sort of pressure, and thus can manage their books with more transparency and honesty. Has managerial capitalism become too reductionistic in relying so much on the corporate form of ownership? Have we as societies been opening ourselves up to too much financial risk as a result? Further, if shifting more regulatory authority from the state to the federal level in the US (and presumably in the EU as well), what would be the cost to the federal system? The answers for the U.S. and E.U. could differ, given where each union is in its development. The insurance industry in New York is a case in point.

The full essay is in Cases of Unethical Business, which is available at Amazon.