How Insolvent are We?

P. D. Johnson

ASTIN Bulletin, 1977, vol. 9, issue 1-2, 139-154

Abstract: As we grapple with the problems of conducting non-life insurance in a world of high inflation, we should perhaps pause for a moment to look for historical analogies for our present predicament. Let us, then, look back at a distressing period many years ago in the history of the Kingdom of Carmania.Inflation was by no means new to the citizens of Carmania. Year after year, all prices and incomes had been rising at a steady rate of 5% per annum. The economy functioned quite well, albeit in a rather uninteresting way, and the people were accustomed to the idea that the purchasing power of the Carmanian dollar would fall by roughly 5% every year. There were, however, some economists who argued that inflation was both undesirable and unnecessary, and prevailed upon the King to adopt some measures which, they assured him, would quickly reduce the rate of inflation to zero. The measures were adopted, and the following year the rate of inflation rose to 10%.At this point a rival group of economists explained that this unfortunate development was simply what should have been expected, and they set out an alternative policy which would undoubtedly reverse the trend and bring inflation quickly under control. Convinced by the weight of their arguments, the King introduced what became known as Phase 2 of the counter-inflation policy. By the next year, the rate of inflation had risen to 20%.

Date: 1977
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