Insurance workshop.

• Position: Program and Working Group Meetings

The NBER's Working Group on Insurance, directed by Kenneth A. Froot of the Harvard Business School and Howard C. Kunreuther of the Wharton School, University of Pennsylvania, met in Cambridge on May 8. These topics were discussed:

John Major, Guy Carpenter & Company, Inc., "On a Connection between Froot-Stein and the de Finetti Optimal Dividends Models"

Discussant: Kenneth A. Froot

Thomas Davidoff, University of California, Berkeley, "Illiquid Housing as Self-Insurance: the Case of Long Term Care"

Discussant: David Moss, Harvard University

Dwight Jaffe, University of California, Berkeley; Howard Kunreuther; and Erwann Michel Kerjan, University of Pennsylvania, "The Development of Long Term Insurance (LTI) To Address Catastrophe Insurance Market Failure"

Discussant: Robert J. Shiller, Yale University and NBER

Neil A. Doherty and Anastasia Kartasheva, University of Pennsylvania, and Richard D. Phillips, Georgia State University, "Competition among Rating Agencies and Information Disclosure"

Discussant: Christopher Lewis, The Hartford Financial Services Group

Martin F. Grace and Robert W. Klein, Georgia State University, "The Perfect Storm: Hurricanes, Insurance and Regulation"

Discussant: Richard Thomas, American International Group

Paul A. Raschky, University of Innsbruck, "Natural Hazards, Growth, and Risk Transfer: An Empirical Comparison between Risk-Transfer Mechanisms in Europe and USA"

Discussant: Jeffrey R. Brown, University of Illinois at Urbana-Champaign and NBER

Christian Laux, Goethe University Frankfurt, and Alex Muermann, Vienna University of Economics and Business Administration, "Financing Risk Transfer under Governance Problems: Mutual versus Stock Insurers"

Discussant: Keith Crocker, Pennsylvania State University

Costly external capital is one of the frictions that violates the premises of the Modigliani and Miller irrelevance theorems. Froot et. al. developed a three-stage model to explain how costly external capital, along with other frictions, provides an opportunity for risk management to create value. Major extends their model to analyze risk management (in particular, reinsurance) in the context of a going concern. He relates the extended Froot model to a 50-year-old stochastic dividend optimization problem, introduced by Bruno de Finetti, which has received growing interest in the recent decade.

Long-term care is one of the few observable triggers for home sale among the elderly, Davidoff notes. Combined with a thin...