September 1, 1997

natural disaster at the mall

"Cataclysm" (Summer 1997) by John Campbell presented a balanced picture of issues faced by personal property insurers, but only touched on those facing commercial property insurers. Individual locations of commercial property can exceed $1 billion in insured value, with exposures including both loss of property and potential profits. A loss from one commercial customer can be hundreds of millions of dollars, and equal to a significant share of the insurer's assets.

Commercial natural disaster losses are also more variable than personal property losses. The variance is greater from loss to loss, for a given insurer; it is also greater from insurer to insurer, for a given loss. Thus, commercial insurers tend to see far fewer, but far larger, individual claims. Volatility in the commercial market also makes the presence of a naive competitor (one who underprices in order to gain market share) particularly problematic.

Commercial insurers attempt to manage these risks by avoiding geographic concentration, purchase of reinsurance capacity, and combining with other insurers in program sharing to handle the largest companies. They also place great emphasis on risk assessment and loss control, and rely more heavily on site inspections than on computer modeling. Arkwright sends an engineer to its commercial properties up to several times yearly to evaluate the site and recommend sprinklers, roof tie-downs, and other preventative measures. It is not uncommon to invest tens of thousands of dollars annually in risk assessment and loss prevention engineering for a specific customer.

Peter Kelly

Vice President

Arkwright Mutual Insurance Co.

Waltham, Massachusetts

the not-so-lost art of portfolio lending

Securitization is the wonderchild of the capital markets, and its undeniable benefits to homeowners, investors, and financial institutions are well described in Jane Katz's article "Getting Secure" (Summer 1997). It should be noted, however, that securitization is not the only way for mortgage lenders to "get secure" and stay that way.

Mortgage securitization may be a tool for every lender, but it is certainly not one for every occasion. In quoting William Poorvu, Ms. Katz appropriately alludes to the "cookie-cutter" dynamic of the securitization process. As in the commercial lending that Mr. Poorvu discussed, mortgage lending often requires room for the lender to exercise individual judgment and apply local knowledge. This means portfolio lending.

Portfolio lending supports the extension of credit to a wider spectrum of borrowers. Portfolio lenders have more latitude to target specific market segments, such as the emerging immigrant home ownership market, with innovative products tailored to meet "out-of-the-box" financing needs.

And banks now have many resources for managing the risks posed by portfolio lending, including Federal Home Loan Bank membership. Access to the Home Loan Bank's credit products supplements the ebb and flow of deposit supply, and helps banks manage interest-rate risk with funding specifically structured to support loan portfolios.

Many members of the Home Loan Bank of Boston know that lending outside the conforming loan market is good for business. Even in our high-tech world, the application of local knowledge and sound business judgment will continue to serve the financial marketplace.

M. Susan Elliott

Executive Vice President

Member Services

Federal Home Loan Bank of Boston

another view

I am puzzled by William J. Barber's assertion, in "FDR's Big Government Legacy" (Summer 1997) that "ironically, the Reagan years can be seen as a vindication of Keynesianism (because of) the large tax reductions and defense spending increases, enacted in 1981..."

Well, defense spending increases, sure. But tax reductions? What Reagan got Congress to reduce in 1981 was the individual income tax rates. Did those rate reductions result in Keynesian revenue reductions? Hardly. Individual income tax revenues were $298 billion in 1982, the first year of the three-year 25-percent Reagan rate reductions. In the following recession year, when the rate cuts were only half phased in, those revenues dropped 3 percent, to $289 billion. They have increased every year since, from $298 billion in 1984, to $446 billion in 1989, Reagan's last year in office. That is an average 7-percent annual increase in income tax revenues over the seven-year period.

Keynesianism calls for stimulating enterprise through government deficit spending. There were surely large deficits in those Reagan years, but they were caused by Congress passing spending bills larger than Reagan proposed, and Reagan's unwillingness to veto them. The deficits were clearly not caused by income tax rate cuts, because the rate cuts yielded steadily increasing revenues. Deficit spending may have vindicated Keynesianisn. The increase in revenues from Reagan income tax rate cuts vindicated the supply siders.

John McClaughry, President

Ethan Allen Institute

Concord, Vermont

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