Risk Management And (The Illusion Of) Insurance
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The expansionist post war era has been characterized by the development of the FIRE economy (finance, insurance and real estate), with a greater and g
[See the full post at: Risk Management And (The Illusion Of) Insurance]I’ve been trying to convince my dear old mother to cancel her perpetual travel insurance for lack of utility. It only costs €30 annually, but she doesn’t travel as much as she used to.
I estimate about 1 in 20 probability of her actually traveling once in any given year by now, compounded by a 1 in 20 prob of anything going wrong and needing claiming during said travel, an unrealistically high estimate, but at best leaving only 1 in 400 chance per year of said insurance having utility, so she’d end up needing it once on average after 400 years, having paid a total amount of €12000 in insurance premium, and then the insurance would only cover a few hundred euros of damages in rare cases. Its a simplified calculation to illustrate the expected utility.
I’ve come to understand that in her case, merely having travel insurance promotes a cognitive bias making her believe the odds of actually travelling in any given year become greater, which provides some comfort to her, since she much enjoyed travelling in her younger years.
I expect that for the TEPCO people, being able to insure for meltdown damages promoted a cognitive bias making them grossly underestimate the actual probability of catastrophe.
Insurance has gone the way of all good useful products, into the hands of the banksters and their hired gun lawyers that have destroyed all things financial with their corruption and skullduggery.
FDIC insurance on the trillions of dollars in the US banking system will be the end of the great insurance scam when and if the big crack arrives. I can here them now, “Get in line”, “You will get your money but it will take some time.” “You must present a notorized document as proof of your deposit to receive your first annual payment of 5 % of the total.” “No claims whatsoever will be paid to heirs of the deceased.” “You must take 80 % of your payment in a government issued note that is not redeemable until seven years after issue date.” Politicians and Police, because of the good deeds they perform and necessity to us in the financial emergency, as well as banksters and the bank employees will all be allowed full access to their funds so they may perform the task of paying everyone’s claims in an orderly fashion.”
I am having a problem figuring where the lawyers will stand in the mayhem, any suggestions?
23 years ago, just before the birth of my first child, I took out a life insurance policy with Norwich Union. I had a background in statistics and maths and, should I have wished to become an actuary, would have been exempt from the first part of the exams to join their Institute. It seemed to me a ridiculously good deal – too good to be true in retrospect. Furthermore, the company was a mutual – owned by policy holders – so I thought that they are unlikely to be too mercenary. They assured me that I would be able to renew this policy after 10 years – after making an “inflation” adjustment. In the event of my death, a big lump would end up with my hypothetical kids and trust was formed for it and so on. In sum, I thought I had worked out all the nooks and crannies of the deal.
After 7 years, Norwich Union ceased being a mutual and since I did not own the “right” sort of policy, I did not get free shares in it or anything of the sort. The company it merged with was CGU – which was in turn a merger of General Accident plus a few others. I had a long-standing feud with General Accident as I had once been hit – I was on a motorbike – by a van driven by one of their policy holders and they had threatened to take me to court for “compensation.” Obviously, I was not very happy with that, but I could do nothing about it.
After 10 years, they offered to renew my policy after increasing the premiums to 5 times their former level – official inflation was way below that figure – while not changing the payout. The people I had been dealing with had been replaced by a new set – in the UK, not Scotland. Of course, I did not renew the policy – having sunk £20,000 into the first 10 years.
The – expensive – lessons I learnt from this experience were never to buy a policy that runs for longer than 12 months, and that if something is too good to be true then it is too good to be true.
” @Golden Oxen,I am having a problem figuring where the lawyers will stand in the mayhem, any suggestions? “
Bill Shakespeare had a great suggestion on what to do with them. Besides, what would be left for them to plunder?
I hear you loud and clear Professor, old Billy was one smart gent wasn’t he? Had a great sense for priorities, “The First Thing We Do”….
Insurance as a business?
Ah, insurance. It’s a racket. Maybe why Al Capone ran with it. Numbers is numbers, whether Keno or insurance. I figured it would become a powerful lobby when it was made mandatory auto drivers obtain it, one state at a time, until it became universal. (.Gov protection?)
Then mortgage insurance, flood insurance and now mandatory health insurance. By now the Insurance Industry has accumulated a house full of it’s own politicians, “insuring” it’s own perpetuity.
To mention TEPCO? Well, the nuclear power industry is back end loaded. The closer to decommission a nuke plant gets, the more susceptible to catastrophic loss it becomes. In the end of life of one of these things, all the back loaded risks and expenses come due. Even in absence of a meltdown, the byproducts that are the volatile substances that power them must be transported, processed, insured and maintained for decades.
As many as are now approaching this timed danger zone, who/what is going to cover their “pre-existing” conditions?
In addition, upon failure of these political campaign financing insurance racketeers, how long will the ultimate “re-insurers,” the taxpayers of the world, be willing to bail them out?
Won’t the fixed income trailer park inhabitant in Oregon question why he must pony up to rescue owners of million dollar beach houses in NY? Or might the resident of St. Paul MN be reluctant to bail out folks who built on an earthquake fault in California? A desert dweller in Elko NV finding himself obligated to save a below sea level flooded neighborhood in Louisiana?
I’ll add this little anecdotal ditty. I am reminded of the unfortunate Snow Bird Canadian lady sitting on a bench, in tears, at an Arizona airport last December, in excruciating pain, even through the heavy morphine dose. Seems she slipped and fell and had broken her collar bone.
She had gone to an emergency room and discovered her homeland “insurance” wouldn’t cover surgery in the US. Instead, her “insurers” booked a series of flights for her, promising she would be back in Canada in a day or two, and everything would be just fine.
OK, fine it is I guess, if the injury and drugs didn’t do her in, and the pain didn’t permanently traumatize her. But alas, seems the insurance premiums/taxes keep us so broke we can’t save enough to pay directly should an emergency crop up. Humm? Is there a fat middle man in here somewhere? One who knows what’s better for us than we?
Pavlov’s dogs, possibly? Like those little third stop lights on cars we become so used to that, upon becoming common, rear end collisions make a comeback? The illusion there is no need to self insure? Dunno.
And to think my mother in-law’s cattle rancher father traded a calf to the Doc in exchange for delivering her back in the early 1900’s. Things must have been awful before the invention of F.I.R.E. 😉
What we see happen with insurance is the exact same as what happens to pensions. Both are exposed as mere Ponzi schemes. Which work fine for a while, until there are no longer enough new buyers. An added factor in the case of pensions and insurance (and certainly for swaps and other derivatives) is the declining economy.
Looking forward, will wills and trusts be necessary? Everyone is told to have a will to designate one’s stuff. But as the economy worsens, there may not be anything to leave one’s heirs and special friends.
I had also heard that a trust hides one’s stuff from probate court. But why setup a trust if there might not be anything to probate?
I actually work for a major property-casualty (personal auto and home) insurance company so I think I can add some color here.
In “normal” times, .i.e. up until 2008, insurance companies basically just needed enough premium coming in to cover claims and expenses. Since there is a time period between when premium comes in and claims are paid, they could invest that money and make a decent profit, even if they weren’t making or even losing money on the actual insurance part of the operation.
In the last few years, things have changed quite a bit. First off, all the severe weather is causing a lot more claim severity, hitting carriers hard. On top of that, with all the QE the FED is doing, interest rates are so low that carriers are challenged to make any money on the investment side. In most insurance sectors, carriers are required by regulation and prudence to invest mainly in short term relatively risk free bonds, and these are yielding almost nothing.
Bottom line, no matter where you are, at least in the U.S., you’ve probably noticed your auto and homeowners premiums going up. Expect this to continue.
In ‘Escape from Camp 14’ about North Korea, there is a reference to the inability of NK to get reinsurance policies from Western insurance giants due to their history of staged accidents. (Apparently, this is how the Kims financed their nuclear program and mansions).
I guess if you can’t trust a country/fiefdom, what chance do individuals have? :whistle:While the insurance industry is probably as much of a house of cards as the banking & investment sectors are, I’d like to point out that not every unpaid claim is the fault of the insurer or some macro global trend.
Having worked in the Canadian health insurance industry for 12+ years, I can tell you that with insurance (just like every other good/service) there is a spectrum of quality. Some policies are a waste of time, money and paper and only serve to give people a false sense of security. Others are exceptionally good and are highly likely to deliver when/if there is a claim.
People love to hate insurers because it makes for a good “heartless corporate villain versus poor, innocent customer” story. But in reality many customers choose to buy the least expense coverage and wind up getting what they paid for.
Insurance is a contract and many customers don’t make any effort to research what their obligations and responsibilities are within that contract.
Having gotten that off my chest, I’d like to agree with what DancesWithStaplers has to say. This low interest rate environment is really squeezing the industry players. They trying to adjust by revamping their products and restricting their obligations. But in the end if the funds aren’t there to pay claims (and still make a profit), I would expect them to get a lot less friendly about paying out claims with grey areas.
Barak, agreed. We shouldn’t paint a broad brush against all insurance companies/products because of some of these horror stories. My company is actually policy-holder owned, and as a former claims adjuster I can say our culture was to find coverage for the insured, rather than find ways to deny it. Now, at a publicly-traded company, it might be a much different environment where you are pressured to over-promise at the point of sale and under-deliver at the time of the claim in order to meet the quarterly goals for stockholders.
Also, while you want to meet the promised obligations to the policy-holder, you don’t want to over-cover (called “leakage”). The rates charged are developed based on the policy sold, and if you get in the habit of covering things that the policy was not intended to cover, you will eventually have to raise rates on everyone.
Hi Folks,
Insurers may deny, or seek to reduce, a claim if they can place some, or all, of the responsibility for an accident on to the victim
Unless you’re a wealthy celebrity!
Atkinson, worth a reported £71 million, hit a slippery patch of road near Peterborough in August 2011, he lost control of the F1 and hit a tree – leaving the car’s 6.1-litre engine 20-yards away from the rest of the vehicle. It was the second time Atkinson had crashed his F1, with the actor front-ending it into a Rover Metro in 1999.
Maybe his insurers will sue the tree! I’d love to see his ‘revised’ premium…
Meanwhile the UK gov’t tries to persuade insurers to continue insuring flood prone properties:
Floods Insurance Payouts Top £1bn For 2012.
Nick Starling, ABI’s Director of General Insurance, said: “2012 may have been a record-breaking wet one, but it was business as usual for insurers, who helped thousands of customers recover from the trauma of flooding.
“Flooding is the greatest natural threat facing the UK and the risk is rising so political consensus and commitment on investment in flood defences, sensible planning decisions and working with the insurance industry is essential.”
The figures comes as an agreement between the Government and insurers to ensure cover for high-risk homes is due to expire at the end of June.
The ABI said talks with the Government are ongoing about how affordable premiums in high-risk areas can continue.
But the insurers are set to claw back all those payouts in the form of big premium hikes:
Mohammad Khan, a partner at PricewaterhouseCoopers (PwC), said: “The weather events of 2012 have dented insurers’ profits and will probably lead to renewal premiums rising by up to 5% for those unaffected by the floods and by up to 50% for those flooded.
“The UK floods therefore, have also brought into sharp focus the current standoff between the insurance industry and the Government on the renewal of the Flood Principles – agreement needs to be reached in 2013.”
More like no insurance for those flooded and 50% or more premium hikes on everyone else…
L,
Sid.Can anyone tell me what the fed is doing..I googled it and I got an article from bloomberg that they are spending 85 billion a month buying bonds…I thought they were buying mortgage backed securities? And when they say the FED is going to unwind its actions….does that mean stop buying these or bring the money back? I am an independent electrician and am wondering if this storm I am seeing is real… and should I take a tax job….want to be able to take care of my kids.
Ted,
It’s 45B per month of Treasuries AND 40B of mortgage backed securities. Everyone (if you’re a big bank) is a winner!
Ted,
As to what the FED will do…I guess they’ll slow the buying but have no idea on they’ll unwind. When the targeted federal funds rate went to virtually 0% in December 2008, the cognoscenti weren’t thinking it would still be around 4+ years later. Electrician is a good skill, though. May I be your apprentice?This is a really timely and useful messsage. Here are the signs of the times in my world. First, neighbours had a relative help with re-roofing. The relative fell off the roof (fortunately survived but multiple bones broken in wrist and several vertebrae cracked). The insurance company is dragging its feet — started by repeatedly cancelling apointments event to come for the initial assessment. Second, we recently had a robbery in our town involving 4 people waving down a car and trying to rob occupants. They say that banks have such good security setups (quality surveillance images) that now robbers have moved to street crime. Third, in my circle of friends, many of their kids just can’t get anything other than Mcjobs and that isn’t even guaranteed.
Hello Nicole,
this question is OT, but would you agree with Louis de Sousa and his recent piece on TOD on solar power?
“The actions recently taken in Europe against solar power are not a sign of failure but rather a consequence of the highly successful progress of PV technologies.” — he claims that declining subsidies are largely thanks to decline in solar power…
https://www.theoildrum.com/node/9841
Cheers,
Alexander
(!) Check out Tom Fyler@2h08min in the following video – about the financial elite and the CDS bomb:
I checked out Lindsey Williams on the Wikipedia. It would seem that his profile has been thoroughly ruined. I wonder why? 🙂
Same goes for Dr Judy Wood:
https://en.wikipedia.org/w/index.php?search=judy+wood&title=Special%3ASearch
Check her out@:
Real Men Don’t Work – Giving Up On The Labor Farce https://chartistfriendfrompittsburgh.blogspot.com/2013/02/real-men-dont-work-giving-up-on-labor.html
Why has Lindsey Williams’s profile been ruined on Wikipedia? Who knows?
Alex,
Would you agree with Louis de Sousa and his recent piece on TOD on solar power?
No. I think he may misunderstand how power systems work and what is required to control them. Also, bubble dynamics is missing from the picture he paints. Prices are low on a temporary glut. This sets up a supply collapse in the longer term, just as we are in the process of seeing in natural gas in North America, and what I am expecting to happen to oil as well.
auto-Daniel,
The dude is a pastor. I guess for me that seriously undermines his credibility in terms of any insight as to who is really being controlled by whom (given his religion’s shocking history of collusion, conspiracy and exploitation). He cites senior Exxon executives…and then doesn’t name them. One single solitary on-the-record name would help his case. Instead it’s all these shadowy cloak-and-dagger figures that border on the supernatural, especially in their powers to divine and control a future. A future which physics describes as infinitely variable and chaotic. But then as a pastor, he would have certain leanings to believing in the supernatural, and some individuals having magic powers beyond the rest of us.
I simply don’t see the point of these diatribes. If the powers are so magical, what are you going to do about them. Without any concrete evidence, what difference does it make. Your world is fucked either way (whether it is being controlled by wizards or simply following a very inevitable cycle of exploitative expansion and greed, ending in the equally inevitable cycle of contraction and fear). The more powerful will always seek to expand their power. And the weak will always succumb to greater or lesser degrees…until the tipping point, and the castle falls.
There is so much for us to do. Seeking out supernatural phantoms, beyond our reach whether they exist or not, doesn’t change our immediate circumstances. We have very real, concrete, tangible preparations to make. We should be educating ourselves about the dynamics of market cycles, and cutting through the obfuscation presented by very real mainstream media, which does have very ordinary, though grandly diabolical, intentions to pull the wool over our eyes.
I advocate truth-seeking where it leads us to answers that can change our lives and our chances for survival in an inevitably difficult future. I reject wasting time looking for scapegoats, demons, ghosts, witches, phantoms, illuminati, magic bankers and all other imaginary gremlins. The system is sick. We have to start by making our immediate communities healthier, and our families more resilient. Resisting and revolution on the larger scale will also follow naturally, but only if we’re alive long enough to be part of that movement.
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