insurance


I had a life insurance salesman visit me yesterday selling life insurance. He made his case with the purpose of life insurance, viz. the risk of my dying and the missus left penniless. Fine, no problem, I appreciate the management of risk far more than possibly your average chap in the street.

When he asked “do you have any questions”? is when things turned a bit curly. The question that I put to him was this: how do I know that if my missus lodges a claim that she will be paid out? Normal question, one that any reasonable potential customer would ask.

The answer that came back was pretty much what I expected. If you are dead, you are dead, and apparently after 10 months this includes suicide. Talk about a non-insurable risk. Anyhow, I let him finish before rephrasing my question.

I am not referring to “exclusions”, rather, to the ability of the insurance company to actually “pay-out” on any claim lodged. The Christchurch earthquakes bankrupted a huge number of NZ based insurance companies, they had mis-priced the risk of a tail-risk. So the answer I was looking for related to this.

After looking a little confused, and requiring some further prompting, I elicited that this particular insurance company, apparently it is now NZ law, had laid off risk via re-insurance. I mentioned Lloyds of London and asbestos – never heard of it. Ok, no problem, what is the name of the re-insurance company?

The answer came back, “SCOR”. Excellent, what is their capitalization and financial position like? The answer, “excellent” some ratings agency just raised them from B- to AA. Well hell son, that is some jump…WTF did they do to deserve that upgrade? Who was the ratings agency, I was thinking “Best” as they specialise in the insurance space.

Anyway, I said that I would look at SCOR and if I liked them, I would top-up my life insurance. Give me a few days to do some research and I’ll come back to you.

Well indeed I did have a quick look. I haven’t run the numbers yet, but once I have, I’ll post them up. Essentially however, superficially, the numbers look fucking atrocious. This obviously does not bode well for a long term investment which is essentially what a life insurance policy is for my missus. So once I have the numbers crunched, we’ll take a closer look.

I am not on my own computer here, so this post will lack any images.

The object, or end, of Obama’s healthcare Bill was to provide universal healthcare. Morally, this is an admirable end to aim for. Unfortunately, he has approached it in the manner of legislating the desired end, which, economic reality being what it is, cannot but fail.

There is already universal access to goods and services supplied, and it is called exchange. The exchange mechanism operates now through indirect exchange, via money. Thus should any individual demand healthcare, they can receive it through the exchange of money.

Health insurance came about as a method by which the risk of possibly permanent, or long term illness/disability to a wage-earner, could be offset`; a premium would be paid for a lump-sum, or stream of payments to offset both the capital outlay and the loss of ability to earn.

The real issue then is not about “availability” it is about “affordability.” Affordability is an entirely different argument entirely. Here we return to my earlier post in regards to the restriction, via government granted monopoly status to the allopathic medical model, in raising the cost of healthcare. If you limit [artificially] supply, the price must rise in the face of a growing demand.

Some will raise the issue of medication and the high costs associated with drug therapy. Once again however, the government has granted a monopoly restricting the supply, through the patent system, and preventing generic drug manufacture lowering the costs. Also prevented are phytotherapies, homeopathic remedies, etc. The result: higher costs. Of course you could look closely at the major pharmaceutical companies and their budgets allocated to lobbying Congress.

Providing universal access, to goods and services, to those who cannot afford to pay, due to earnings that are below the required levels, requires a subsidy. Where does that subsidy come from? Clearly from those that can afford it. There are two choices here [i] philanthropy or [ii] coercion. If it is coercive, then government impels contribution to provide for the subsidy. This is called a “Tax.” Indeed the SCOTUS decision labelled it as exactly that, a tax.

This, unfortunately, is where the issue goes beyond the normal government error of adding taxes. This tax falls on the very socioeconomic class that cannot afford a tax. They cannot afford the healthcare, but neither can they afford the tax that will be levied should they choose not to purchase the subsidised insurance, which they can’t afford either.

What is required, is not a gun-to-the-head tax, but a lowering of the costs of healthcare: this can only be accomplished via a removal of the allopathic monopoly, and an opening of the market to increased competition from healthcare providers.

What could possibly cause this? The answer is that American football is in very, very serious trouble.

2,450 players have now filed 89 concussion related law suits against the NFL and Riddle Athletics (helmet manufacturer) . All of the State cases are being referred to Federal Court.

I’m no expert on this topic. I follow (among others) ESPN and NFL Concussion Litigation. I have recently talked with four attorneys (none directly involved – all sue for a living). The cut to the chase question for the lawyers was:
“Will there be financial awards?”

Four out of four were quick to answer:
“Yes.”

This will make for an interesting legal case.

I suppose the starting point would be a contract [certainly at the Pro level, & probably at the College level too] The contract would obviously have to address the physicality of the sport and the potential for serious injuries/death from participation.

Without a doubt, the protective clothing/padding, contributes to the speed/strength of collisions/tackles. In rugby, where there is minimal/none of protective padding, the collisions are at lower speeds and impact power. There are still injuries/concussions, but they are I would guess less common frequent. That must therefore open another door as to prescribed/proscribed uses of the equipment.

Then there is the whole area of injury during the game, diagnosis, and management of the player. I read the book “Don’t worry it’s just a bruise” written by an NFL team doctor, and the level of drug useage etc employed to keep key players on the field, and the entire culture around that playing injured. Motorcycle racers ride injured all the time, break a few bones in an off during a practice round, back on for the race: this is not simply an NFL problem, you are dealing with tunnel vision athletes, and as such, very often they may require protecting from themselves, particularly in the case of a concussion where cognitive function will be impaired, and responsible, informed decisions cannot be made.

Ultimately, assuming that the draconian measure of an outright ban, or withdrawal of various participants does not end the game, insurance coverage would seem to be one avenue that could be explored. Of course the issue immediately that comes to mind would be “pre-existing conditions.” Where current players have been playing since grade school, all the way through to pro-level, the insurance risk becomes far higher, and of course, ultimately the insurance would have to commence at the start of the football playing career, in the PeeWee leagues, and be maintained continuously through the playing career.

Tail risk would be a major issue for the insurance companies, someone who played through say College, and developed problems say ten years later, attributable to football injuries. This would be a major stumbling block.

Of course, the game could retrogress as far as protective clothing is concerned. Make the padding far less protective, thus reducing the speed of collisions: remove helmets, return to the leather protective headgear, this will remove the current trend of tackling with the head as a weapon. All you lose are the slo-mo replays of hits that lift people into the air and popping off helmets etc.

Either way, it will be interesting to follow this case and see how it all plays out.

Pretty miserable industry currently with all the natural disasters around the world. Time to raise rates. I’ll be watching this one while I have a look at the financials.

Congress apparently asked the same question:

Multiple factors, including falling investment income and rising reinsurance costs, have contributed to recent increases in premium rates in our sample states. However, GAO found that losses on medical malpractice claims— which make up the largest part of insurers’ costs—appear to be the primarydriver of rate increases in the long run.

And independent of Congress:

Under the fee-for-service model that most health insurance plans use, physicians make more money with every office visit and procedure they do. That gives them a built-in financial incentive to push for more, though not necessarily better, health care, says award-winning journalist Shannon Brownlee, author of “Overtreated: Why Too Much Medicine Is Making Us Sicker and Poorer.”

Covering preventive care is low on most insurance companies’ priority lists, even though doing so could help patients avoid serious illnesses and their complications — as well as their pricey treatments. “We pay for costly interventions like bypass surgery or chemotherapy to treat diseases at the back end instead of focusing on lifestyle changes to keep patients healthy on the front end,” says Aaron Carroll, M.D., director of the Indiana University Center for Health Policy and Professionalism Research. Placing a priority on preventive care would also save billions: One recent report showed that investing just $10 per person per year in programs on exercise, nutrition, and smoking cessation could save $16 billion per year in another five years.

Experts call it defensive medicine. “Doctors often order unnecessary diagnostic tests, procedures, and therapies to cover their butts in case of a legal dispute,” Caplan says. The more stuff your insurance company has to cover, the more it will pass those costs to you.

From The Economist

Arguably, the one of the few good things in the bill is coverage of preexisting conditions. The rest looks like rancid sausage. The biggest problem is there is not a single thing in the bill guaranteed to lower health care costs. We have to take it on faith that the plan will save money.

Insurance cannot include pre-existing conditions. A system of insurance requires that premiums be collected from a pool of low-risk people so that funds are available in case a high-risk event befalls a particular person.

Risk, must be a prerequisite of insurance. Risk being defined as an unknown future event that carries an actuarial probability of occurring. This is a legitimate use of statistics, based upon distributions that are controlled through nature, viz. mortality tables.

By allowing pre-existing conditions, the future is known. There is no risk, thus, insurance is a totally inappropriate solution to the problem. Also created is an inbuilt bias that would guarantee failure. That is the skew imposed by the withdrawal of currently healthy insurable risks. By paying the fine, you can opt out, only to opt back in, when you are no longer a risk, but a known event.

The US want more of their citizens covered by Medical insurance, various ploys have been thought up to defray the costs from the lower incomes.

One of the fundamental problems is that a diagnosis is just so expensive, and it’s totally unnecessary. As a clinician, I start with a thorough medical history, which will mandate any clinical testing required. At this point a diagnosis is made. Further investigations, which are your myriad blood tests, MRI scans, CT scans, etc are not required to make a diagnosis, only to try and confirm a diagnosis.

In the US, doctors run every test imaginable, and they are very expensive, needlessly, and primarily to escape any medical lawsuits. The quality of their diagnosis does not improve, in fact I’d guess it actually falls off.

It is the cost of paying for these myriad tests that push medical insurance premiums so high. Lose the tests, unless required to confirm an existing diagnosis, and your medical insurance costs will drop significantly.

By Jon Markman
Nearly seven decades ago, the eight months between Germany’s invasion of Poland in 1939 and its invasion of France in 1940 was known as the “phony war” — a period of escalating anxiety, denial, appeasement, danger and death, but nothing like the murderous global train wreck soon to follow.

Likewise, we may come to look at the period between July 2007 and January 2008 as a sort of phony war in the worldwide credit crisis, because although the market has fallen 15% since summer, there have been no defaults of key bonds or asset-backed securities. The curious lack of real blowups has led even seasoned observers to believe that fears were exaggerated and that chaos will be averted.

In reality, however, the skirmishes we’ve seen so far might be little more than a prelude to a deeper, harsher, longer decline than most yet perceive possible. And in a very postmodern twist, it is beginning to look like unexpected consequences of an investment instrument designed to mitigate risk could turn out to be the nuclear option that bombs the globe into the financial equivalent of World War III.

Banks left exposed
That instrument is the credit default swap, or CDS. It was developed as a way for bondholders to buy insurance against the possibility that companies might fail to pay their debts, and later it morphed into a way for big traders to actively bet on the likelihood of the default of bonds and other credit instruments. But what is only now becoming clear is that major U.S. and European banks and hedge funds bought up to $20 trillion worth of that insurance to offset their exposure to mortgage-related securities they owned. And those banks and hedge funds are discovering the sellers of the swaps may not pay up.

This leaves already deeply troubled banks virtually naked at just the moment they most need protection, as the pace of credit defaults is likely to accelerate this year so long as the Federal Reserve remains behind the curve in cutting interest rates. It’s as if the banks already have pneumonia, and they’re now being marched into a snowstorm wearing little more than bathrobes.

The problem surfaced to an important degree in a footnote to the news last week that Merrill Lynch (MER, news, msgs) would take an $11.5 billion write-down of bad debts for the fourth quarter. Of that amount, $3.1 billion was a write-down of credit default swaps that Merrill had purchased from bond insurer ACA Capital to hedge the risk of owning a lot of collateralized debt obligations, or CDOs, which are leveraged bundles of asset-backed securities. (In a typical CDS transaction, a debt holder or speculator agrees to pays 1.5% or more per year for $10 million worth of insurance on a specific slice of a debt security.)

This means that not only is Merrill unprotected against a default in the CDOs, but it has lost all the money it has paid for that insurance. It’s as if you had paid $200,000 in premiums over the years in a $1 million life insurance policy for your spouse, and when a death occurs not only does the insurer tell you it’s broke and can’t pay — but your premiums are down the drain, too.

Don’t count on insurers
Several other major banks and brokers, such as the Canadian Imperial Bank of Commerce (CM, news, msgs) and Lehman Bros. (LEH, news, msgs), have been stiffed by ACA to the tune of billions, and all have let the insurer seek more capital before forcing it into bankruptcy. So the case gives us just a taste of what may come. Consider that ACA was no fly-by-night outfit. It was AAA-rated and met all standard benchmarks for safety. Yet those benchmarks now look ridiculous, as the company was allowed to provide $60 billion worth of guarantees on a capital base of just $500 million.

Can you imagine, as a citizen, if you were allowed to collect fees on $60 million worth of loan guarantees because you owned a house worth $500,000? It’s nuts.

Specialty bond insurers such as ACA and troubled Ambac Financial Group (ABK, news, msgs) at least are well-known companies subject to modest scrutiny. But because we are coming out of a long period in which debt defaults have been unusually low, hundreds of little-known hedge funds, pension funds and insurers worldwide were lulled by a false sense of complacency into the practice of selling CDSs — and their ability to pay up in the event of widespread defaults amid a long, hard recession is not just in doubt but completely unlikely.

In other words, if you think it’s hard to get your insurance company to pay off in the event of a car accident, just wait until you hear the screaming from CDS holders in the next couple of years. Here are a few ways insurance sellers will try to jump off the hook, according to derivatives expert Satyajit Das, who spoke to me this week from Pune, India:

Documentation difficulties. Ever go into a store to try to return a piece of merchandise and forget your receipt? Or have you had clerks point out that the return period expired two weeks ago, or that the fine print says the warranty is not good if the package been opened or if the item was bought on a Tuesday, or that they’re sorry, but Bob, the guy who wrote the receipt, doesn’t work there anymore, and current management can’t honor it? Das says CDS sellers’ attorneys have innumerable ways of claiming your contract does not apply. The big problem is that the standard CDS contact is a trading instrument that is standardized for simplicity and may not match the risk in the way its owner expects, even if the owner is a sophisticated investor like Merrill. It cannot be tested except by a real default, and by then it may be too late.

Weakness in the instrument. If you bought a CDS contract on the bonds of a company that has been bought by another firm, the new owners may not be obligated to pay up. This is particularly true if the original “reference obligor,” as they say in the business, is based in one country and the new owner is based in another. Foreign courts might not enforce contracts. Ownership change can also change the credit risk of a derivative in unforeseen ways, preventing you from even having a seat at the table to protect your interests.

Credit event definition. CDS contracts rely on a trigger to go into effect — typically a sharp downgrade, failure to make a payment or bankruptcy. But CDS buyers may not be protected against all defaults in all currencies, particularly if a bondholder restructures rather than enter bankruptcy. CDS holders may thus have trouble proving a default has taken place. Additionally, CDS sellers may be in such dire straits that forcing them into bankruptcy may exacerbate losses.

Settlement and collateral problems. The CDS holder must deliver a defaulted bond or loan, but today CDS sales are six to 10 times larger than all bonds outstanding due to the way they were resold and leveraged. In the case of car-parts maker Delphi (DPHIQ, news, msgs), protection buyers received an average of just $3.6 million per $10 million CDS contract, meaning they were not fully hedged and had no further legal recourse to recover.

Counterparty risk. This is when you realize that CDS contracts don’t eliminate credit risk — they only transfer it. Instead of just worrying if a bond will pay off, now you have to worry about the health of the insurer. Transference of risk was the main reason to buy CDSs, but in an era of extreme leverage, the example of ACA Capital shows that no counterparty is safe, especially as many banks and funds have “daisy-chained” their risks together.

In September, Das told us he believed the unwinding of the great post-millennial credit bubble had barely begun. Now he thinks that the game is finally in the first inning, with much more pain and heartache to come. He points out that all of the new capital raised by UBS AG (UBS, news, msgs), Citigroup (C, news, msgs) and Merrill Lynch has only made up for the losses they have acknowledged so far in the fourth quarter of last year, and that if they continue to need to write off their credit default swaps and loans as customers sink under the weight of recession and default on loans, they will be taking equally large deductions against earnings in every quarter of this year and into 2009.

With at least $1.5 trillion in off-balance-sheet debt coming onto their books and tens of billions of dollars in CDS contracts potentially up in smoke, Das figures the banks will need $200 billion in new capital to shore up reserves at the same time they suffer $100 billion in real loan losses. If they need $300 billion — and so far the sovereign wealth funds have, with some reluctance, put up only around $25 billion — you start to see the potential size of the problem that lies ahead.

“The hole is bigger than they or their investors expected,” Das said. “And they’re still digging.”

In short, though it appears the Federal Reserve has answered its wake-up call with an interest-rate cut of unprecedented size, I continue to recommend that you treat financial stocks with skepticism. Their Maginot Line has been breached, and reinforcements are bogged down.

A while back in this post https://leduc998.wordpress.com/2008/09/23/its-an-insurance-problem/#comments I postulated that at it’s heart, the credit contraction has proven so intractable due to the systematic fear of a systemic failure. The Banks, Corporations, and now the average depositor have no confidence that their Bank, financial institution will be deemed worth saving, thus all confidence is slipping away, with the consequences observed to date.

If the problem is one of confidence in survival, then insurance can be provided by the “government” as the insurer of last resort. The government is already implicitly insuring via guarantees in any case, by making the insurance explicit and formalising the guarantee of the system, the government will gain leverage on the capital it puts into the system.

This is important as the notional value of CDS [which are currently at the heart] is huge, some estimated $63 Trillion. Thus the leverage the government gains by using capital sparingly gains more bang for the buck.

Already we see moves away from TARP to the idea of recapitalizations via Preferred Stock investments. However, Preferred Stock values due to the CDS values involved could evaporate overnight, necessitating a further bailout [or further failures, which currently would be a mistake]

The government is in effect insuring “tail risk” which in essence is the trigger to a systemic failure. The value of tail risk is currently unknown, which is why the Banks are now hoarding as much capital as possible. While the exact figure is unknown currently, it is bound to be large.

The government by only using resources where required, saves capital from banks that eventually survive on their own capital.

The government should offer to sell credit insurance on portfolios of assets that were rated AAA as of July 2008. This limited set of assets are targeted in order to focus in on the problem of systemic risk. If the assets already have limited insurance from a private issuer, the government should offer a top-up policy that covers everything beyond what the private issuer has already promised.

These are of course the sliced and diced tranches of AAA rated MBS that were in reality no such thing, and on which Banks, Hedge Funds etc have increased their bets via huge leverage in the black box of OTC derivatives via CDS on failures in these rather toxic assets.

The Treasury could implement this approach immediately under existing provisions of the buyout bill. Section 102 explicitly allows the Treasury to sell credit insurance, and to segregate premiums received in a special Troubled Assets Insurance Financing Fund.

In summary, the freezing of credit in the inter-bank market, the commercial paper market, the LBO market and Corporations draining previously agreed credit lines have at their heart the same fear, that someone who they extend credit to, on any timeframe, might, due to their unknown third party exposures, cease to exist overnight. Government insurance against this tail risk, would start to ease this lack of confidence.

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