XBRL in Switzerland

Schweizer Treuhänder has published the article about XBRL (German, French summary) which I've co-authored with Martin Welser of Deloitte in its August issue. As this is probably the first time that the term XBRL appears in the pages of this august publication, I am hopeful that it will raise the awareness of the profession in Switzerland.

P.S. After years of silence about XBRL in Schweizer Treuhänder, the current issue actually carries two items which conclude that XBRL plays an important part. The article Five years of IFRS accounts in the EU (German) concludes that XBRL is a key element to increase the comparability of corporate accounts under IFRS.

Seven faces of "The Peril"

What sounds like an Asian action flick is in fact an important research paper (server down, but here's the exec summary) by James Bullard of the St. Louis Fed which has caught the markets' attention last week. The attention is well deserved as the paper demonstrates how current monetary policy concepts and postures might lead the world's largest economy(US) to join its second largest (Japan, for now) in a steady state equilibrium of very low interest rate / inflation. This second intersection point of the Fisher relation with the non-linear Taylor rule is a most undesirable place to be in, of course, because monetary policy is entirely ineffective there, but Mr. Bullard shows convincingly how we might end up there all the same. His proposed way out is quantitative easing (QE II) rather than the current monetary stance.

This leaves the Fed with uncomfortable short term choices: either stick to the current extended period (of very low interest rates) language with its associated Japan scenario, or start Mr. Bernanke's helicopters once more. Neither will be much appreciated.

Save the dates!

I've been invited to moderate the closing panel at this year's Asset Management Forum on To beat or not to beat - The active vs passive investing debate on 1 September in Zürich. It would be great to see you at that event. You can register following the link above.

The next date to save is a little bit further out: 9 March 2011. This is the date of the Swiss Pensions Conference, the preparation of which I am heavily involved with. You can watch the progress of those preparations under that link.

More indices - insurance linked

This copy of Sigma has been sitting around for way too without being mentioned here: The role of indices in transferring insurance risks to the capital markets. It's such a comprehensive overview of insurance linked securities (ILS) that I wanted to do an in-depth review, but never got round to it. Given that this market segment links two very relevant marketplaces (capital markets and reinsurance), its growth from 4% of catastrophe reinsurance capacity 5 years ago to 12% of capacity now is substantive. However, Sigma does not answer the #1 question that concerns me as an investor: how do I know whether the premium I get for taking the risk in question is fair, assuming that the issuer will only approach the ILS market if he thinks that he can get a better deal there than in the conventional reinsurance market? How is the reinsurance market in any specific segment priced? There seems to be a significant amount of information asymmetry there.

Longevity indices

Here's a useful and interesting paper on Longevity Indices and Pension Fund Risk. The abstract sums it up nicely:

Pension fund longevity risk is becoming increasingly important. Longevity indices would allow the creation of liquid derivatives that could be used to hedge this risk. However, there are a number of criteria that such indices would need to fulfil to provide an optimal solution, as well as a number of forms that the derivatives could take. These features are discussed, together with the characteristics of some existing longevity indices.

Longevity indices look like a viable risk management instrument, but given their utility bounded by liquidity and granularity, they are anything but trivial to design. Add to the mix an extremely fragmented market like the Swiss with its many small IORPs and their high volatility risk. Longevity risk also comprises level risk, trend risk and catastrophe risk. Interestingly, catastrophe risk is only seen as a one-off surge in mortality rates: "similar one-off falls in mortality rates do not occur." Black swans, anyone?