Insurance--Ponzi Scheme or Elegant Tool?

[GGT]

Been taking a hard look at the concept of insurance. So many types, and it's part of our lives in so many ways. Life, Casualty, liability, malpractice, homeowner's, auto, health, flood....credit default swaps....we've come to think of insurance as a consumer safety device. But does it really work as intended, or is it just another way to get our money while providing false sense of security?

Besides being a massively huge industry, with so many bureaucracies and regulators, it's still a mish-mash of middle-men. The latest news is about private mortgage insurers (PMI) rescinding policy pay-outs while passing the buck to others. Sounds familiar.

Mandated insurance, premiums paid for years, then bam! you can't make a claim, or use it for its intended purpose.

Mortgage Insurers Won't Pay on Bad Loans

Published: Wednesday, 10 Mar 2010 | 2:36 PM ET Text Size
By: Diana Olick
CNBC Real Estate Reporter

"[Mortgage insurers] claim rescission rates have shot up from a historic rate of around 7 percent to as much as 25 percent over the last few quarters." -- Moody's Resi Landscape

When I saw that, I thought, well here is the mortgage insurance industry, faced with an historic number of claims, trying to save itself at the cost of the big banks.

I mean, if you buy insurance for a product, and something bad happens to that product, then you should make a claim and get paid back by the insurer.

That's the definition of insurance.

But just like everything else in today's housing/mortgage market, nothing is as it should be.

Mortgage insurers are rescinding (denying) claims, claiming themselves that the loans were fraudulent and misrepresented to them.

"The broker dealers, Bear Stearns, Countrywide even ResCap that was part of GM at the time, they used underwriting standards that were a little bit looser than what we see with the normal conforming market," says Chris Whalen of Institutional Risk Analytics. "In those cases, the default rates are in double digits and there's a lot more claims for what we call rescission or really putting back the loan to the originator by the insurer and saying, 'Hey, this loan wasn't kosher, and I shouldn't have insured it in the first place.'"

It's not exactly news that poor mortgage underwriting was the hallmark of the housing boom, but then you have to ask: Where were the checks, the safeguards, at the mortgage insurers? Where was their underwriting?

"They have a responsibility," argues insurance recovery attorney Rhonda Orin. "The applicant submits an application and then the mortgage insurer, they're not lemmings, they're supposed to check it. It isn't a one way street that they had no recourse but to accept at face value every single thing in the application."

So the banks are now left holding the bag on these loans, which could be a bag upwards of ten billion dollars by Orin's own estimates.

Okay, so the banks were bad, but the insurers didn't do their homework, so who should pay?

Well here's the part that troubles me.

Orin claims the insurers aren't just crying foul on the underwriting, they're actually using rescission now as a business practice because they're looking at such huge payouts that when they're done there will be very little left for their shareholders.

"I found it described in earnings calls to investors, to give comfort to investors by mortgage insurers saying, 'No need to downgrade us, we have a policy in place to deal with all of the insurance gone bad, which is we're going to rescind it'" Orin tells me.

Well that's not exactly kosher either.

And hence the lawsuits.

Bank of America [BAC 16.85 -0.27 (-1.58%) ] is suing insurer MGIC for unpaid claims, and insurer MBIA is suing the bank Credit Suisse [CS 49.83 0.23 (+0.46%) ] for fraudulent misrepresentations about mortgage backed securities. In other words, the lawyers win.

I asked MGIC for a response, but they declined. I asked Bank of America to discuss, but they declined as well.

I don't have to carry PMI b/c I made a down payment more than 20% of the loan, but my mortgage company still requires I carry homeowner's. I wonder if the servicer (my loan was bought by Fannie Mae) worries if I'll default....and the mortgage isn't insured?

You'd think most of the defaulting loans would have PMI....but they won't pay-out after default either! Will they refund all those premiums people paid?




edit to add Unemployment Insurance, Social Security Disability Insurance.....

[Hazir]

Well, I don't have a PMI on my mortgage, and didn't have one when the agreement was signed.

I think we should differentiate between ponzi schemes and scams. Insurance companies using tricks to wriggle out of paying up I would classify as a scam. Which is a little bit different than the ponzi scheme the actual insurance business is. Basically the money that goes around in it is the money that we as a society expect to loose per a set period and then we all just hope the negative lottery will only hit so many people as we have estimated. So yeah, that's a ponzi scheme indeed, but a legal one.

[GGT]

Why wouldn't a legal ponzi scheme be considered a scam?

[Hazir]

Semantics

[GGT]

Anecdote: I'm trying to calculate if I should let my health insurance lapse, just stop paying the $300/month premiums. It's just a basic CAT plan, no outpatient services/tests/meds are covered. None. 80/20 with $5,000 deductible (that only kicks in if I'm an INpatient and using a preferred network) with exclusions for my breasts and uterus.

Basically that means I'm a cash payer. Most services now are outpatient. I didn't want to take the risk that a car accident or some other 'catastrophe' would land me in ICU for a month and bankrupt me (or my kids). But now I'm not so sure that's the best way to go.

Adding up all the premiums over the years would have been cash I could have saved in a HSA or something gaining interest, even a paltry 2% is better than none.

[Dreadnaught]

Insurance is a ponzi scheme as much as banking is. Everyone can't get all of their money out from a single bank at the same time. Just like every insurer can't pay out the maximum value of its policies all at the same time.

Which is to say it's an elegant tool under most circumstances. But obviously lots of supposedly savvy people mis-valued debt and default rates. Though claiming fraudulent information seems a bit moronic without some solid proof. I'd be curious to see what their particular claims are.

[ar81]

Insurance companies use money as inventory (jusr like banks and other financial entities), and money can't add value to itself. As you may know, services and productive companies that produce create value added through the transformation of physical assets, and this value added is what allows them to profit. Since money can't add value to itself, the only way to make money is to take money from other people's pockets.

Insurance accounts for 16& of US GDP, and since GDP is incorrectly understood as a measure of value added, instead of merely a sum of transactions (which is the right way to understand it), it is clear that US GDP as a measure of value added is overestimated. Price is what you pay, value is what you receive. Financial business makes money by delivering less value than the price paid, and in the case of banks, they are allowed to create money out of thin air.

[Being]

Money evaporates.

[ar81]

Let's se how money is created by a bank.
Let's suppose a deposit of $1000 yook place and let's assume a required reserve ratio of 20%.
It means that 80% of the deposit can be used for lending, and 20% will go to FDIC.
So John borrowed those $800 and those were deposited in his account.
Now the bank can lend 80% of $800 (which means $640).
Mike borrows $640 and the money is deposited in his account and now the bank can lend $512, and so on.

If you make the sum, after a significant number of iterations, $1000 went to FDIC and $5000 were used for loans.
$5000 were created out of thin air in the accounting books and they exist as "collateralized debt obligations" or CDO in the books.
This money will not create inflation since it is backed by borrower collateral, but interests are not collateralized.
If the borrower defaults, the imaginary existence of the money becomes apparent. So the bank takes the collateral, transfering the loss to the borrower, and the interests will be reflected as a "loss".
In the case of NINJA (No Income No Job no Assets) loans, principal and interests, created out of thin air will be reflected as losses. So banks lost money that never existed, a toxic asset, fake money.

So as you see the money of deposits is not used to lend and of all people who deposited money came to claim their money, banks could only pay a fraction.
It is some sort of Ponzi scheme.

This money that was created in the books and never existed and was not printed by the government is what people call "toxic assets".
The mortgage crisis would not go too far if banks were not involved in investment banking.
This allowed banks to pass losses to investors.

This explains how losses were passed to investors:

* Synthetic collateralized debt obligation (synthetic CDO)

And this explains the scam nature of banks

* Money as debt
* Money as Debt II Promises Unleashed

If private banks would be nationalized, not by buying bank shares, but by turning them into government agencies, the money created with interests would be backed by the goods bought with government spending, so no toxic asset is produced and interests would be some sort of tax. The problem of being private banks is that interests or even loans would be money that evaporates.

And if you are "scammed" by a national bank, at least you will see the money reflected in government spending that helps the nation.

[Being]

Simply put, money went from pocket A to pocket B. Money did not evaporate. When was the last time you heard of the U.S. decreasing its money supply?

[Dreadnaught]

Jesus Alpha, the insurance companies use their pile of money and invest it. It's stunning how much you post without actually knowing about the issue at hand.

float is simply cash received from customers that hasn't been paid out yet for claims and expenses.

The more float a company has, the more investment income it can generate. That's a good thing. From 1967 to until 2005, Berkshire's float increased from $20 million to $49 billion. Using Buffett's investing genius, this float has created tremendous value for Berkshire shareholders.

http://www.fool.com/personal-finance...ics-float.aspx

[ar81]

Simply put, money went from pocket A to pocket B. Money did not evaporate. When was the last time you heard of the U.S. decreasing its money supply?

It did not evaporate since TARP prevented it from happening. Fake money became real money when banks took taxpayers money and transferred the loss to taxpayers. Is TARP a socialist subsidy (a gift, not a loan to banks) by Bush administration?

Reuters: Taxpayers hit as TARP takes a new turn
Midwest Banc Holdings Inc (MBHI.O) agreed to swap $84.8 million of preferred shares it sold to the U.S. government in 2008 for securities that will convert into about $15.5 million of common shares -- roughly an 80 percent loss to taxpayers. (...) "There's a lot of funny stuff going on here," said James Ellman, president at hedge fund Seacliff Capital in San Francisco. Others say it is a sign of the tough choices the Treasury faces dealing with banks that remain weak despite receiving government capital. In some cases, taxpayers must choose whether to lose 80 percent of their money, or all of it.


If government runs out of money, it will sell bonds and new money is created without increase of production, adding inflationary pressures. The problem US has is that all that fake money is being absorbed by government, which creates new money by raising government deficit and debt. This is where the risk of future hyperinflation comes. When Banks have covered all their fake money with real assets and lending starts again, inflation will come. If US decides to export inflation using monetary policy, jobs will be exported too.

The current design of US economy is inflationary, so it gives only 2 choices: absorb inflation or export jobs. It is a lose-lose scenario. To reduce the creation of inflation, US government should nationalize profitable banks (not failed banks), so interests would be backed by goods paid with government spending, so no inflation would be produced by the financial system and government deficit and debt would be reduced by bank profits.

David C. Korten (MBA and PhD at the Stanford University Graduate School of Business. served for five and a half years at faculty member of the Harvard University Graduate School of Business) in his book "Agenda for a New Economy: From Phantom Wealth to Real Wealth" described this crisis like this:

It seems a bit odd that we have experienced economic collapse because of a credit crunch, an inability to borrow, at a time when the world is awash not only in debt but also in money. Business Week’s July 11, 2005, cover story shouted “Too Much Money” and spoke of a savings glut. Its June 11, 2008, European issue reiterated the theme, “Too Much Money, Inflation Goes Global.”

Most discussion of the financial crisis focuses on the details and misses the big picture. The problem is twofold. The economic system is awash in money, but it is in the wrong places. Second, virtually every dollar in the system is borrowed, because we rely on banks to create our money by lending it into existence. No debt, no money.

As wages fall relative to inflation, the bottom 90 percent of the population is increasingly dependent on borrowing from the top 10 percent to put food on the table. But when the less fortunate can’t repay their loans, the rich people stop lending. Most loans continue to be repaid, but because the default rate is rising and the crazy system of derivatives trading makes it impossible to separate good debts and responsible borrowers from bad debts and deadbeats, banks are afraid to lend to anyone. As the good loans are repaid, the supply of money shrinks because new loans are not being issued.

The demand for real goods and services begins to fall because people don’t have the money to pay for them. Businesses lay off workers, who consequently cannot afford either to repay their debts or to put food on the table. The problem appears to be a lack of money, even though the total money in the financial system is far more than enough to cover real-wealth exchanges in a rational real-wealth economy.

It all traces back to a money system that issues money as debt and seeks economic expansion for the sole purpose of generating new demand for debt to create the money to pay the interest on existing debt in an ever-escalating spiral to a never-never land high in the clouds.

Jesus Alpha, the insurance companies use their pile of money and invest it. It's stunning how much you post without actually knowing about the issue at hand.

Yes they invest. They may invest in not so profitable productive business, or they may go for the risky speculative markets of stocks and derivatives. But the core business of insurance goes as follows. Let's take health insurance. So you calculate your costs as:

+ Estimated cost of treatement = sick people /population * Average cost of treatment * Number of customers
+ Overhead
----------------------------------
= Total Costs

Notice that

Insurance Fee = (Profit + Total Costs) / Number of customers

Also notice that CEOs are part of overhead: Forbes - CEO Compensation - Insurance

You may see a CEO compensation of $27 million. It means that your insurance fee is paying for a CEO that costs very similar to an army fighter plane. So you are not paying for health, you are paying overheads, and the investment income is not part of the core business of insurance companies. Will they lower your fee because investments were succesful? No. They just will show off to make a bigger bonus. Their business is to collect more money and give you less money back. They produce nothing, and their inventory is money and money can't add value to itself, so where do you think the money of profit comes from?

Reuters: Consumer group sues California health insurer
Consumer advocates filed a class-action suit against Anthem Blue Cross on Monday, accusing California's largest for-profit health insurer of illegally using drastic rate hikes to force customers into inferior health plans.

[Silver]

This is the 2nd time I've forgotten that GGT is a woman

At any rate, there seems to be an easy fix for all the insurance hooplah. Have the courts enforce contracts consistently. Then they can't just weasel out of your claims for no real good reason.

[GGT]

Insurance is a ponzi scheme as much as banking is. Everyone can't get all of their money out from a single bank at the same time. Just like every insurer can't pay out the maximum value of its policies all at the same time.

There are capital requirements and leverage ratios (regulated and supervised, supposedly). Insurers went beyond risk pools for their clients' policies and moved funds into investment vehicles---forget about massive filings at the same time, like after a hurricane, that's probably factored in---but now they do have to worry about a 'run on the bank' scenario, from investors/shareholders. Remember AIG?

Which is to say it's an elegant tool under most circumstances. But obviously lots of supposedly savvy people mis-valued debt and default rates. Though claiming fraudulent information seems a bit moronic without some solid proof. I'd be curious to see what their particular claims are.

For PMI rescission it looks like they're balking at false valuations from appraisors and RE agents (2 BR in a slum valued at $500,000), or predatory lending (giving a $500,000 loan to a cashier from Taco Bell). Critics are saying the insurance underwriters didn't do their jobs.

Sounds to me that NONE of them did their jobs or practiced due diligence. They wanted to move property, make deals, make profit on transaction fees or premiums. Even gov't agencies loved the scheme since it brought in tax revenue.

That was their business model, profit without prudence. If insurance is the "elegant tool" it was misused, almost like another accounting trick.

[ar81]

Sounds to me that NONE of them did their jobs or practiced due diligence. They wanted to move property, make deals, make profit on transaction fees or premiums. Even gov't agencies loved the scheme since it brought in tax revenue. That was their business model, profit without prudence. If insurance is the "elegant tool" it was misused, almost like another accounting trick.

Their bonuses pay them for profit and law allows them to pass losses to others or to camouflage numbers behind accounting books. So you can make a gain and pass losses to others. There is no incentive for responsible behavior.

Reuters: How free markets sank the U.S. economy
Two years ago, a poisonous brew of bad economics, lax regulation, and egregious behavior boiled over, scalding the financial system and pitching the United States into its steepest downturn since the Great Depression.

[GGT]

I was kinda hoping Lewk would pop in here and give his opinion. Usually he reserves Moral Hazard gone wrong for gov't fiddling in Freeee Markets, but the same might be said for Big Insurance.

False sense of security via many middle men, playing on peoples' animal instincts, encouraging risks we ordinarily wouldn't take.

ie who in their right mind would buy/build property on an earthquake fault line, in a valley that gets mud slides, or near scrub and trees that cyclically lights afire (CA)? Who would buy/build on an eroding shoreline with hurricanes and tornadoes every year (FL)? Nobody. Well, unless they have Insurance.

Lewk likes it when private insurers leave the market b/c they can't legally raise their rates, but complains when gov't steps in with FEMA or Fed Flood Insurance. In reaity, insurers will cover ANY property (or mortgage) with ANY risk, tagging on high premiums. If you can pay, you can stay. Then they rescind after the fact. Doesn't sound like a sustainable model for anyone but the very wealthy, insurance companies, and lawyers.


EDIT: There's also the notion that unemployment insurance "encourages people to stay unemployed for longer periods of time". That over time it changes attitudes and turns into another "entitlement". I think it probably goes both ways, most would rather work than stand in unemployment lines or get half salary from gov't.

We'd still need a safety net of sorts, especially in times like this where folks can be jobless for almost 2 years, with no prospects. Did unemployment insurance give everyone a false sense of security, and instead we should have focused on things like affordable health care or housing, or inexpensive food and utilities?

[ar81]

There's also the notion that unemployment insurance "encourages people to stay unemployed for longer periods of time".

No, unless you'd get the money forever. People can get a job with:
1.Government
2.Companies
3.Selfemployed in informal markets
4.Criminal organizations

If a person does not have an income, a choice needs to be made.
If jobs were just ther for people, easy to find like "finally we found you, you'll begin tomorrow" that could apply.
But jobs have never been that easy.

Jobs can be destroyed in minutes, and they take years to be created.
Companies are not in a hurry to hire, as a hiring process could take 3 months, while people can get fired in seconds.
Immigration, jobs going overseas, shows that jobs are scarse, a problem that creates poverty and exclusion of people from the system.

[GGT]

I did not say it was MY notion. But it is out there as a behavioral theory. Mostly used as a political wedge when discussing "entitlements" or safety nets.

[Dreadnaught]

This is the 2nd time I've forgotten that GGT is a woman

WTF?

At any rate, there seems to be an easy fix for all the insurance hooplah. Have the courts enforce contracts consistently. Then they can't just weasel out of your claims for no real good reason.

I think the problem is organizing potential litigants. Though if this were widespread, it would be one of the few instances that class action lawsuits could work. The downside is it seems winning wouldn't do anything; the insurers have nothing to pay with.

There are capital requirements and leverage ratios (regulated and supervised, supposedly). Insurers went beyond risk pools for their clients' policies and moved funds into investment vehicles---forget about massive filings at the same time, like after a hurricane, that's probably factored in---but now they do have to worry about a 'run on the bank' scenario, from investors/shareholders. Remember AIG?

But they are supposed to invest their money pool, not just sit on it. If anything, that pool of investment capital leaves them more capable of paying out policies in instances like natural disasters. The problem of course is economic disasters.

Do you really think they should just sit on that money and wait for some cataclysmic wave of claims to bankrupt them?

PS- Methinks this belongs in the debate forum, moving there unless there are objections.

[ar81]

I think the problem is organizing potential litigants. Though if this were widespread, it would be one of the few instances that class action lawsuits could work. The downside is it seems winning wouldn't do anything; the insurers have nothing to pay with. But they are supposed to invest their money pool, not just sit on it. If anything, that pool of investment capital leaves them more capable of paying out policies in instances like natural disasters. The problem of course is economic disasters. Do you really think they should just sit on that money and wait for some cataclysmic wave of claims to bankrupt them? PS- Methinks this belongs in the debate forum, moving there unless there are objections.

As I said, without investing a single dollar insurance companies will have profit. Investment takes the money people paid and puts it in a gambling of financially risky games. Remember that the highest the profit, the highest the risk. Ponzi scheme is just a game that is profitable for everyone, except those who are last in the game.

One of the problems of the financial system is that no one ever questioned the nature of those business or their effect in macroeconomical terms, until US crisis took place. Capitalism is about using money to buy real assets to produce value added by transforming physical goods. Money needs to be created in the same proportion of production increase to avoid deflation.

Financial system is a machine that prints fake money, produces no value added, and takes money from people to compensate such fake money. It has the problem that it adds inflationary pressures when money not backed by goods is created. Such a problem is an inefficiency of the current design of economy, so the only ways to deal with them is to export inflation and send jobs overseas, or absorb the shock of inflation. Such a system that produces nothing relies on perceived value that not always reflect real value (usefulness value) and the gap becomes a toxic asset. Since this system relies on perceived value determined by human emotions of ignorant investors that behave like a herd, speculation takes place, bringing shocks of highs and downs, that bring losses to many people and huge gains. So financial system is more a casino to make bets and do gambling, than a real capitalist system. People do not realize because they were educated with the concept that value is perceived value.

Not too many people use to understand macroeconomy, or the way microeconomical financial programming works, because academy educates people to see things using microeconomical approach. This is why people never questioned the nature of the financial system and never challenged the concepts that are taught, in terms of the effect of its use for the economy of the nation. So you have people with ideology determined by academic ideology and microeconomical views (not here but in the streets), defending a system that sinks the nation, but they feel pride of such system because of a matter of nationalist ego.

I may dare you to question everything you have learned. The system has severe systemic failures.

[GGT]

But they are supposed to invest their money pool, not just sit on it. If anything, that pool of investment capital leaves them more capable of paying out policies in instances like natural disasters. The problem of course is economic disasters.

For property insurance--ideally they should be able to pay out after 'worst case scenarios' from their premium pool, not just relying on Wall St to beef up the balance sheet. That would mean premiums would by very high in high risk areas, unless regions are grouped together and average out the cost. Many people today complain about that, being 'forced' to help pay for (by proxy) hurricane prone seaside dwellings or tornado alley mobile homes.

OR they could refuse to insure property in high risk places (like New Orleans below sea level with substandard levees).

OR they invest part of their money pool to keep premiums down, but that shouldn't mean counterintuitive investments where policy holders are encouraged to actually file claims (like real estate ventures or MBS in New Orleans).

Do you really think they should just sit on that money and wait for some cataclysmic wave of claims to bankrupt them?

Like a run on the bank? Even FDIC isn't capitalized for that scenario, but all insurers can limit their exposure. Instead of insuring everything and everyone, expanding the industry to huge proportions, then using rescission as a way of reducing their liability, they could get back to a simpler business model. Just like deposit banks could go back to their boring, safer model of traditional banking instead of investment banking.

*Was AIG an insurance company with a hedge fund, or a hedge fund with an insurance company?*

If it's their duty to keep their business solvent, then they shouldn't do things that risk taking their company down the tubes. And no, another insurance product to protect against bankruptcy isn't the answer.

They shouldn't be passing the buck to everyone else, but that's what's happening. No one is accountable or responsible, it's always someone else's fault. The regulators, legislators, ratings agencies, underwriters, accountants....big circle jerk with everyone saying "It wasn't me!" and pointing fingers at the next guy.

The insurance company is MBIA, the once-dominant insurer of municipal bonds that went badly off course when it decided to insure things like mortgage-backed securities and collateralized debt obligations.

http://query.nytimes.com/gst/fullpag...=&pagewanted=1



<Don't even get me started on Health Insurance. It's NOT health care; it's not even an effective way to help pay for health care.>

[Dreadnaught]

For property insurance--ideally they should be able to pay out after 'worst case scenarios' from their premium pool, not just relying on Wall St to beef up the balance sheet. That would mean premiums would by very high in high risk areas, unless regions are grouped together and average out the cost. Many people today complain about that, being 'forced' to help pay for (by proxy) hurricane prone seaside dwellings or tornado alley mobile homes.

OR they could refuse to insure property in high risk places (like New Orleans below sea level with substandard levees).

OR they invest part of their money pool to keep premiums down, but that shouldn't mean counterintuitive investments where policy holders are encouraged to actually file claims (like real estate ventures or MBS in New Orleans).

You do realize you're being totally hypocritical, right? You're saying that you want insurers to invest, but think they should be banned from making investments that lose money. They do invest to keep premiums down-- a larger amount of assets on their balance sheet enables them to have a capital cushion to compete for new policies on price.

To be explicit about this: if insurance companies didn't invest, policies would be more expensive.

The problem here is that MBIA insured (not invested in) things that blew up all at once.

[EyeKhan]

I used my homeowners insurance once, when the drain in my bathtub leaked and destroyed my living room ceiling and walls. Boy was that a mistake. As it turns out, insurance companies don't like when you use your coverage. They want to raise your rates, they want to deny you additional policies later on, they want to drop you, and if you have your auto insurance through them too... yikes. Now I know what my homeowner's insurance is good for: catastrophe. I maxed out my deductables and got the cheapest rate possible and will only use it in the event of a major disaster to my home that I can't pay to fix out of pocket.

[GGT]

Dread, have a cup of coffee and read my post again.

Never said a damn thing about banning certain investments. Gave 3 options insurers have, one is higher premiums.

Also complained about the industry insuring any/every thing, even when it's high risk. As AIG and MBIA did.

[ar81]

Also complained about the industry insuring any/every thing, even when it's high risk. As AIG and MBIA did.

People confuse risk with familarity. I bet that people did not think Madoff meant a risk.
How would you define risk?

[GGT]

People confuse risk with familarity. I bet that people did not think Madoff meant a risk.
How would you define risk?

That's a loaded topic. Besides waking up every day, life has risk all over it.

But in business I'd start with conflict of interests. That means rating agencies shouldn't be paid by the very entities they rate. That means using insurance and calling it health care is an oxymoron. For-profit insurance is based on making money off of sick people or excluding them, rescinding policies, doing what they can to NOT pay out. Investment insurance vehicles gives speculators a false sense of security, even bail-out mentality, and increases risky behavior instead of modifying it.

[ar81]

That's a loaded topic. Besides waking up every day, life has risk all over it.

But in business I'd start with conflict of interests. That means rating agencies shouldn't be paid by the very entities they rate. That means using insurance and calling it health care is an oxymoron. For-profit insurance is based on making money off of sick people or excluding them, rescinding policies, doing what they can to NOT pay out. Investment insurance vehicles gives speculators a false sense of security, even bail-out mentality, and increases risky behavior instead of modifying it.

I can't agree more with you.

This is the definition I use:
"Risk comes from not knowing what you're doing. " -- Warren Buffet

[Dreadnaught]

Dread, have a cup of coffee and read my post again.

Never said a damn thing about banning certain investments. Gave 3 options insurers have, one is higher premiums.

Also complained about the industry insuring any/every thing, even when it's high risk. As AIG and MBIA did.

I don't drink caffeine.

And I still don't follow your point -- you're basically saying that some investments are just too risky for an insurance pool, which is categorically true but also a product of hindsight.

[GGT]

I don't drink caffeine.

And I still don't follow your point -- you're basically saying that some investments are just too risky for an insurance pool, which is categorically true but also a product of hindsight.

That's called LEARNING, using hindsight to assess what worked/what failed. And it's not just about investments.

I'll refer back to the OP now---the concept of insurance (pooling and managing negative risk) is in the background of nearly all the problems we face. It either gives us a false sense of security (from health insurance to homeowner's) or distorts our behaviors (removing swing sets from playgrounds, cover-your-ass defensive medicine).

It's a conceptual discussion (which is why I put thread in GC) that has economic and legal impact, a huge influence on our 'animal instincts' and behaviors. That's why the traditional insurance industry is so huge; there's a product for every niche of life. We can insure our pets, cars, homes, valuables, business/professional liability, medical malpractice, even a model's legs. We insure unemployment and disability, illness and old age, retirement pensions. We even have life (death) and funeral policies.

The non-traditional 'insurance' shows up in agencies with oversight like Consumer Protection Safety Admin, FDA, OSHA, FAA... even the Federal Reserve as lender of last resort is viewed as insuring the safety of our credit markets. We can insure assets and ABSs, mortgages and MBSs, defaults and CDSs, deposits with FDIC, Madoff victims had a type of insurance thru a securities facility beyond SEC. I'd even say local police and fire departments are a type of community 'insurance' that we pay thru our collective taxes that act as premiums.

So, which of these insurance tools are elegant and worthwhile, and which are mostly schemes that keep lawyers and underwriters gainfully employed, legislators hung up in committee, and people walking around with a fake blankie (or the umbrella one provider has as its logo)?

Not only is there no such thing as an accident or mistake now, we expect safety in every area of life. Or at least someone else to blame or sue if things go bad. I think insurance has reinforced that idea, and lets too many people off the hook for, ironically, doing bad things.

[ar81]

How about an insurance in case of supernova explosion?
Insurance is a business that produces nothing, and is based on people's insecuritiies and fears.