Discussion by Norma L. Nielson, Ph.D. Chairholder in Insurance & Risk Management

1. Contagion Risk & TCFP by G. Bernier & R. Mahfoudhi Discussion by Norma L. Nielson, Ph.D. Chairholder in Insurance & Risk Management A Better Place to Think About Business

2. Simplifying Assumptions • Surprisingly few: • All bonds in portfolio • Fixed dividend payout rate • While incorporating • A fixed cost element to be in business • Leverage • Taxes (at a fixed rate τ) • Careful interaction of bankruptcy event with possible positive taxes

3. Questions & Suggested Clarifications • Do assessments by PACICC generate tax savings (of λh • τ) under current rules? • How is inflation handled? Mean-reverting processes might use loss ratios (real dollars) while EBIT would imply nominal dollars. Relation to selected discount factor? • You indicate reserves are closely tied to the concept of debt … but reserves attract no explicit interest payment (and the timing of related tax deduction can be ‘creative’). • Multinational/conglomerate parents of many P&C insurers makes the interpretation of dividends results challenging

4. Conclusion • Fabulous first effort to pull together challenging theory with challenging data • With substantial room to grow. Possible extensions include • Recognize a tax credit could replace an existing tax deduction. • After incorporating any offsetting tax reductions available as a deduction, compare to credit mechanism. Does deduction benefit stronger companies more than weaker? Is credit better able to target its benefit to weaker firms that need it most? • Allow the firm to cut dividends before failing. Or at least try to identify how much of the cost of TCFP is going to shareholders vs. consumers