Sunday, July 29, 2012

Insurance IV

Thanks for bearing with.

I've attempted to place into conversation a couple of concepts about insurance, found in Insurance, Insurance II, and Insurance III. Regulatory costs are those costs forced upon insurance companies by regulatory agencies. There are two types of regulatory costs; internally generated costs and externally generated costs. In Insurance II, I bring up the model of insurance that to many serves as the pure model of insurance; Lloyd's of London. LL was the paradigm of insurance to many of us for years. It was a market place of investors who would decide whether or not to accept the risks posed by your activities, originally maritine, but later, for any associated economic activity. If you listen to reports about economic activity, what you may hear from time to time is the expression, "to short" your investment. Insurance companies attempt to compete for your business based upon shorting positions. They "buy" the cost of replacement of an entire vessel--in the case of maritine insurance--at a level lower than the actual cost of the vessel, in order to create a lower cost of coverage. Basically, this drives down insurance costs, as investors are willing to take greater risks against downside, in order to gain the premium to insure the vessels at question.

How is it that brilliant men, smart investors, great business men are willing to short their own positions, in order to gain the cost of insurance coverage?


What is the difference between an insurance company and a bank?

Absolutely none.

How do banks make money? Fractional reserves.

When the downturn in 2008 occurred, what is it that had occurred with the banks, versus what had occurred with insurance companies, such as AIG? Books will, and have, been written. For me the bottom line is, AIG took risks that it shouldn't have taken. There were investors and economists that warned the entire housing industry, from banks, to mortgage companies, to insurance companies, that the promises of federally guaranteed loans were going to find themselves under water.

The point is, we knew that the policies of the federal government were leading us to a place where the promises we had made to our citizenry were no longer affordable, and yet, we lacked the courage to tell those who voted for our politicians, that the breadboard was bare. A Mother Hubbard redux.

So, to repeat, how do banks make money? Fractional reserves.

In my take on reality, the most important question that needs to be asked about current government law, policies and planning, is what effect are those exogenous variable going to have on insurance companies, and why is it  that the most brilliant economists are hired by insurance companies?  Small shifts in exogenous variables can impute huge increases in profitability by the companies engaged in economic activity within the markets described by those variables. 

Let's re-state that. If you are a large insurance company, you are going to be receiving millions, hundreds of millions, and yes, billions of dollars in the simple quest to cover against loss. You give me a percentage of the value of your possessions, and I'm willing (as an insurer) to cover you against accidental loss for the full price or cost of those possessions, for a fraction of the value of those possessions. You pay me a fraction, I'll make you whole.

This is insurance.

And the dumber you are, the more risk you assume.

The richer you are, the more assets you have, the lower your costs of insurance are going to be. You may end up paying more for insurance than someone with a lower income, but the more you pay, the better protected you are going to be. And as a percentage of income, you can afford comparatively cheaper insurance. Billionaires pay proportionately less for coverage than you and I.

Can you figure out why?

Moving on.

Banks make money due to fractional reserve banking. Banks do not need to hold in their vaults, the entire value of the deposits held, as a liability of the bank. For those with basic bookkeeping, assets equal liabilities plus equity. Would you expect your Savings and Loan to have all the cash deposited in your local S & L standing in your S & L' s vault? Of course not. If you've been induced to deposit your cash in an S & L, part of the marketing of an S & L is in the argument that S & L's typically are lending sources for you and your neighbors; small loans for auto and appliances, large loans for homes. S & L's had for years an advantage for this type of lending, not seen since the passage of the deregulatory bill in 1983.  Changes in tax laws, changes in regulation have all contributed to the decline of S & L's. But the reality of small banks, S & L's, credit unions still exist. None of these depository institutions maintain on hand an hundred percent of their depository obligations. If you deposit an hundred dollars into any financial institution, only a fraction of that deposit will be held, on hand.

Remember "It's a Wonderful Life"?

Jimmy Stewart finding out that he couldn't meet the payment demands of his correspondent bank?

Remember, this scene took place before the FDIC was established.

But think about it. "It's a Wonderful Life" wouldn't have been a picture without one crucial scene; the theft of payment.

And then the movie goes on. The "rich" guy is corrupt. Unquestionably. Just as are so many of us. Including Jon Corzine. The bundler who lost millions, and still hasn't been indicted by the Obama Justice Department. MF Global is one of the most egregious examples of "Potter" in recent history. But...nothing.

Insurance companies hired on early in the debate over public health care. Obamacare. Why?

Because, insurance companies hold fractional reserves against their possible liabilities, just as do banks.  But most of us never look at our insurance companies as having the same fiduciary responsibilities as we do the banks we deal with. And that's not an intelligent  position to take.

Of course insurance companies have the same responsibilities and liabilities as banks. But you never hear our President railing against the insurance companies.

Why is that?

Because of ObamaCare.

ObamaCare is the biggest shift in assets, from personal to corporate, than has ever occurred before in the history of the world.

Remember, that banks don't hold your deposits in a vault. They only hold a fraction of their liabilities in their vaults, and have determined that there is only a percentage of what they owe, that will ever be demanded, on any particular date. Bank runs are dangerous, since a bank run would mean that all depositors would be asking for all their cash at a single point in time. (No wonder poor George argued against the bank run in the video above!)

Insurance companies, however, are a little bit different. Not being a bank, the beneficiaries of an insurance company are different from other holders of equity. We're all aware of our FDIC insurance. What insurance do you have against the payments paid for an insurance policy, in the event of your insurance policy holder's failure? What is the limit of the liability of such a failure?

I think I have given you a lot to think about. You own some insurance, whether it's only automobile, or homeowner' s insurance. If you own a company, or invest, there are other types of insurance available. Imagine, you own a portfolio of mortgages. Can you find insurance against loss for that portfolio of mortgages?

Would you be surprised to find out, that you can insure yourself against loss against a portfolio of mortgages that you own? And, wouldn't you expect that someone would be willing to insure you against loss for that type of portfolio?

Friday, July 27, 2012

The Horror

The horror has begun. I live in a rural county, where real jobs are hard to find. Due to our proximity to the ocean, there is a lot of land here that is admired. This county has had environmentalists halt development of rare, recreational uses, due to concerns over such things as sand dunes. Building too close to a sand dune is a bad thing, I've found out, especially if the "building" was a putting green.

The real horror is the changes that have taken place in banking laws.

Living in a rural market, with depressed housing values, a shrinking business community, has led to businesses with loans finding themselves "under-performing" under the new rules created by our Congress, after the latest let-down in 2008. In order to protect "us", the American public, from unregulated Banking Operations, rules have been put in place that prohibit banks from using their discretion in determining whether or not a loan to a business is acceptable, or not.

Today, my best friend lost his multi-million dollar business, due to accounting rules.

It isn't my friend who lost out. It was his customers who lost.

He carried a segment of our community after the downturn of 2008. The guys who built homes. He carried them, and then, when the slope of debt and payment was finally turning, bank regulations killed him.

Whenever you hear that we need more regulation, remember my friend. Banks should do, what banks should do. Bread makers should do what bread makers do. Government should do what they do best.

Roads, defence, postal service.

Beyond that, government is an hindrance, not a solution.

Government regulation has helped us deal with certain problems. Excessive air pollution? Excessive water pollution? Sure. Because of differences in states' laws, water and air pollution were issues that needed federal intervention. But federal regulation has gone out of control. When federal regulations of a regional bank can kill a local company based on rules out of Washington, D.C., then the power of federal regulators has been expanded past the diminishing values of the regulation. That is, the costs to society have increased against the value of the supposed protection of the regulation.

And it isn't just banking where this is happening.

When you hear someone complaining about the costs of regulation, it isn't just banking, or retail, or mining, or manufacturing. The costs of regulation are imposing costs on customers, on investors, on employees. We are driving down employment, increasing costs for building new products, and killing entrepreneurship.

For what?

Lower risks?

Government regulation hasn't ever, ever, ever, solved a thing. Thieves prosper because they are thieves. Government regulators prosper because they are government regulators. Has a single death ever been prevented due to regulation of guns, murder, being a dick or being stupid? People die from all types of causes. But have a gun involved, a car, alcohol, then: let's pass another law. Killing someone has always been a crime, back unto the days of Cain and Able. And yet, we find the loudest voices calling for new legislation prohibiting killing someone for some reason.

Why haven't we solved the problem of murder? Why wasn't this problem solved three thousand years ago?

The end of murder, theft, cheating, embezzlement?  Why is it, at this moment in time when we are being confronted, for the first time, with these human weaknesses?

Why is it, that we need to re-discover the truths our Founding Fathers had been cognizant of, when they were facing the problems that we face today? Is there a role for writers, such as Locke and Augustus, in our lives, today?

Schools don't teach Aristotle, Plato, Descartes, Hume, or Galileo. Men who observed simple truth, and said, "here is a simple, observable truth. Deny it." There are things that are undeniable, and yet today, undeniable truths are being found to be objectionable. Take the recent unpleasantness of being gay. A kid was denied his participation in a Jesuit program for minorities, since he found himself unable to accept the teaching that being homosexual was the same thing as being heterosexual.

We are told every day, that gays being married is just the same as heterosexuals being married.

I guess that it is pretty easy for someone who has no sexual distinctions to find the above assumptions valid. But what if you find that you have certain sexual distinctions? A majority of people do find themselves able to ascertain their sexual distinction. When it comes to mating, a preponderance of participants find themselves drawn to persons of distinctly different sexual preference...or what may be called, "gender."

Boys have dicks, and girls have pussies. Two dicks are one too many, and two pussies are a dream.

What is a visceral reaction for most seems to be indictable for the gays. Whether it's a coach at Penn State, or a volleyball coach at the local high school, the problem is, gay behaviour isn't the norm, it isn't acceptable, and it isn't normal. But the question of how we've come to a pass, where gay behavior is as  acceptable as inordinate banking regulation ends up being the product of a societal belief that the arbiter of  what is fair, or unfair, must necessarily be the government.

The horror lies, in letting someone else decide for you, what is right or wrong.

We can't vote on what is right or wrong. You face that decision eleventy times each day. You don't think about what laws, regulations or rules have been written; you think about what is right. As is your God given gift.

The horror is that, you've been told that you can't decide for yourself what is wrong or right, even though the greatest impetus has been found to be that which you decide for yourself, from Aquinas to Einstein. The truth cannot be hidden. If you find yourself condemning people who decide for themselves what is true and what is not, to what school of thought do you find yourself adhering? What are the rules for you, if you find yourself decrying found truths of anyone else?

We'll take care of you. Vote for me, and you'll be assured of a future. How can something as valueless as a vote assure anyone of anything? There's only one thing that will take care of you; your self. And never forget it. Have you made plans for when your worst nightmare takes place? I have. It isn't pretty, but things will get by.

If you don't have a plan, mebbe it's time to think about it. Or, better yet, simply vote. Simply vote to allow us, as adults, to take care of ourselves.

It's radical, but it's what America was built upon, since its inception. It's not Obama's vision of hope and change. And for me, that's what makes it workable.

Tuesday, July 17, 2012

Be Very Afraid

CNBC doesn't allow for embedding. Open the link below in a new window, and follow along with the transcription. It's worth your while, if only to give yourself a fundamental starting point in terms of how economists define national income accounts. If you have any questions, feel free to ask.

It isn't the answers you don't know you should ask for that should bother you. It's not knowing how to ask those questions that would lead you to answers that you should know that you should be bothered by.
good evening, i'm larry kudlow. this is the kudlow report. the top story tonight is the economy. retail sales are down for three straight months. normally that's a recession signal. for the sake of the country, i hope i'm wrong about the recession. our experts will weigh in and we'll preview ben bernanke's critical mid-year testimony coming tomorrow on the state of the economy and fed policy. also this evening, instead of trying to anti-depressant off for a session the president is in full election mode, once again demonizing business. take a listen. if you've got a business, you didn't build that. somebody else made that happen. well, economic -- kelly, too. the dow closed down on the lousy economic news. it's the 7th down day in the past eight. the new york times article alleging analysts with ethically dubious behavior once again suggesting the stock market may be rigged against the little guy in favor of the big guys who get the key research first. gretchen morgenson is my exclusive special guest. the big news today, the drop in retail sales, the third consecutive drop caused major recession fears. i think the drop in sales is closely related to the slow down of jobs. lononfarm employment. you will see the same decline down to 75,000 a month. fewer incomes. lower incomes. you will have people spending less. now what does it mean to gdp which is the ultimate recession indicator? take a look. hold onto your hats. a simple formula. gdp equals consumption, c, investment, i, that's housing and business investment. the g is government spending which has been faltering and x minus m is trade. that means we import more than we export. the proportions, consumption is 70% of the demand side, 15% investment. 18% is government spending and minus 3% for the trade sector. add them up to 100%. retail sales are about 40% of the c, that's a big number. in fact, retail sales overall are about 28% of gdp. so you have more than a quarter of the economy falling for the third consecutive month. that gets everybody worried. people are talking about 1% growth in the second quarter ending in june. that's less than half of the first quarter which is 1.9%. the question is are we going into recession and is this a trend for the rest of the year? now we bring in our distinguished panel to discuss. joining us now we have macro strategy president dave goldman, joe lafornia and cnbc contributor, diane swonk from mesirow financial. i don't want a recession. let me say it off the top. the numbers worry me. i hope i have the analysis remotely right. what's your take? will it be worse? what happens in the third and fourth quarter? i hope it's not a recession as well. we are close to a stall speed. the risk of recession is the highest since the on set of the financial crisis because of what's going on in europe and the fiscal cliff in the u.s. clearly the jobs picture is back from the unseasonably. you still didn't have people on discretionary spending. food and drink con tracked which is important because many people were hoping lower energy prices would allow people to spend a little more on discretionary things. that didn't happen. that could be the only saving grace. that's a very important point. you have the big tax hike staring us in the face. what about retail gasoline? it's gone nationwide from about $4 a gallon down to $3.40. de facto tax cut. that's helping us. it is one of the automatic stabilizers out there. you're right. employment numbers have been lousy. that's a generous number for the employment numbers. uh'm looking for 2 to 2.25% in the second part of the year. that's becoming my optimistic forecast with a lot of down side risk. it's muddling along at best. dave, uh want to ask you about q-2. will it be a negative number, positive, 1% number? then i want to go to the third and fourth quarters. i think we squeak by at 1%. we kind of have a digital outcome with the selection. as we have discussed we saw in the first quarter a breakdown in the investment machine. we have more profits than ever, but the profits are going into mattresses, not into the kind of things that create jobs. no investment, no jobs. no jobs or retail spending. we have seen under obama's watch the average family has lost about 40% of net worth. so the incentive to save and rebuild net worth is powerful. with those huge headwinds we barely squeak by. if obama is re-elected we have recession in 2013. joe, i interviewed alan greenspan last week. an interesting point. he was not predicting recession. but he said because of the massive deficits we are facing for a variety of reasons, health care entitlements, you name it. people worry we can't pay our bills, that we have to jack up taxes. joe, greenspan said people aren't making long-term investments in structures, factories. they are not buying homes for the long run. this is holding back employment and this is why sales are slumping as we see today. is greenspan right? how big a problem is this going to be? certainly he's onto something if you talk to business people. they say the same thing. they say the fiscal cliff is an inhibitor to hire. if we look at the university of michigan consumer sentiment data we see the very weak readings on sentiment largely reflect a lack of confidence in government policies as they are generally defined. i think he's onto something. it's hard to quantify. diane is right. we have a muddling through environment. because the corporate sector is healthy enough, i don't think we'll have a recession. we'll muddle through, get 2% growth. hopefully some clarity after the election will give us activity. i don't see the 2% growth. larry, at one -- 1.9% growth in the first quarter. you may have mentioned it, diane. a lot of people are marking down second quarter growth to 1%. you know better than i know 1%? heck. that's just above the tree line. barely above water. it's a stall rate. anything goes wrong, inventory correction, a weird thing in europe or china could sink us. i spent the last week with 25 economists from around the world representing much of the world economy. all of us were more scared than we have been since 2008. that said, it does look like china will jack up growth by buildingot l a of bridges to nowhere. not the most productive way to do it but they can generate gdp. that's important. i think we are going to see -- we have seen investment revised in the first quarter. investment isn't near where it should be but i see the economy as the flip side of the 1990s. ironic for greenspan. we had a period of irrational exuberance, quoting alan. robust growth. so much certainty about the future we were willing to invest in companies without revenue let alone profits and throwing all caution to the wind. we have the flip side of that y. we have subdued growth and uncertainty regarding policies in europe, in the u.s. both parties are guilty on this. last year at this time we grew under 1% with a 20% contraction in the second part of the year. we had to down grade and the economy accelerated to above 2%. the notion that we can't get above 2% is mistake. that's still possible. i'd like to see it. i'm waiting. david, one thing that's good. banks are making loans. that's from your own last report. ben bernanke urged the banks to loosen the strings more. why does he have to keep paying 25 basis points on the excess reserve bank deposits sitting lying at the fed. why not do what the european central bank does and stop paying 25 basis points and maybe get banks to push the money out more throughout the economy. people aren't short of money to invest. when greenspan. they revised it. it's now 1.7. well. investment was three times profits. now it's around one times profits. lowest level of profit since 1947. that's lack of spirits, and a hostile environment. i think we are stuck at 1%. i want to sell this and i'm not having luck. i don't think the fed should pay interest on the unused bank deposits. there is one and a half trillion dollars worth. let them stop it. maybe they will push out the money. the european central banks stopped paying money on unused deposits. why doesn't the fed? the pro with the banks is you have a regulatory onslaught. the fed of course taking volatility out of the market, lower the long end hurts net interest margins. a lot of things are just beyond the rate of excess interest paid on reserves holding us back. it's really much more regulatory than anything on the monetary policy front which i wish the fed appreciated more. it's not as much of ap issue. talking to my european banking friends they are envious because they think it is a good deal on regulation which is scary. bank loans are growing. most are student loans. i hear that we are not going into recession by the skinny skin skin of our teeth. david goldman, joe lavornia and diane swonk, thank you. coming up, is the stock market

Saturday, July 14, 2012

Insurance III

Exxon Valdez.

The inflammation that occurred was new. One ship, due to the troubles of the Officer of the Deck, foundered. You can blame Captain Hazelton as much as you wish, the problem is, the Officer of the Deck failed to follow the course charted. Let's assume I'm drunk now. The words you're reading are the words of a drunk. Does that make the truth, the honesty, or the accuracy of the words I'm typing false? If I'm Captain Hazelton, leaving the bridge, giving orders underway to the Officer of the Deck any more or less important?

Maritime law is a special province for legal professionals. Contract law is, again, a special province for  legal professionals. Why? Because so much of maritime law relies upon international agreements, and contract laws simply derive from the country in which those contracts are created and agreed. Regulatory change doesn't always come from regulating agencies. At times, regulatory changes come from courts. Should courts engage in regulatory change? Taking a look at the Constitutional roles played by the Courts, the Executive and the Legislature, it's obvious to the casual reader that regulatory changes can only occur in the Legislative branch of government. That is, only one branch of government creates, or proposes, law. The Executive's role is in the administration of that law, and the Court's role is one of ensuring enforcement of the Law.

If you were to be involved in insurance, what role would you play? Purchaser, provider, or underwriter? The most common role of participant in the market for insurance is as a purchaser. Concomitantly, to be a purchaser requires as a necessary component, a provider. What both parties rely upon is the underwriter.

Underwriters asses risk.

During World War II, thousands of ships carrying oil were sunk. If you were a crewman on a ship carrying oil during WWII, the idea of being sunk was not an attractive thought. No one wanted to be sunk at sea in the Northern Atlantic. But worse, the thought of fire starting on the oil floating on the water...when all the water around you was soaked in oil. Temperatures of burning ships reached hellish levels, and the men who were finding themselves abandoning ship found themselves entering the gates of Hell. The shores of Nova Scotia, England and Ireland, France, and United States' states of New York, New Jersey, Georgia, North and South Carolina, all were victims of sinking which were occurring daily during the years from 1939 to 1945. Hundreds of millions of barrels of oil were spilled in the Atlantic during those years.

One account lists 1554 ships under U.S. flag were sunk during WWII. That's just U.S. merchantmen. Add in German, French, British, Australian, Chinese, Indian, ships from all corner of the world, and you see that this is simply a tip, if you will, of an iceberg of incomparable size. 

When the Exxon Valdez found itself grounded due to a navigation error, 260- to 750-thousand barrels of oil were spilt. So, twelve million gallons. Or, about 789 swimming pools. We were told that the Exxon Valdez spill was the largest disaster of its kind. Which is demonstrably false. But headlines lead. And regulations change.

The Exxon Valdez is important in many ways. Regulations over ships' construction, regulations over ownership of vessels, regulations over implicit and explicit liabilities of carriers and contractors, all were changed within years, and most of these changes occurred outside of the legislative process. Those who would assert that "regulation isn't affecting commerce" are simply without any exposure to the real world of commerce. The whole concept of corporate law was affected as a result of Valdez. There is no longer an "arms length" available to charterers of ships, and in the main, when you rent or contract for carriage, you need to look at the rules promulgated after Valdez and then ask yourself, if you, or your company are truly divorced from the actions of your contracted providers?

Not all changes in regulations occur in the offices of federal or state bureaucrats. Some of the most significant changes, and I would assert, the most onerous changes in regulation, have occurred in the court system.

Within recent memory, the bankruptcy of General Motors should be at the fore-front. Secured holders of equity were bitch-slapped by the Obama administration in favour of the unions which support the Democrat Party. I haven't yet heard of any court case where the flaying of our nation's bankruptcy laws were taken to a court, and hear pleadings on either side. Whole chapters of law were demolished due to the abdication of the Courts. The recent Roberts' Court rulings on ObamaCare aren't the first examples of judicial malfeasance. Simply, the most recent.

The last few posts have been meant to be illustrative of the ways changes in regulation can or may occur. I think the knee jerk supposition is,  that bureaucrats in Washington, D.C. are the villains in the piece. They are, and in ways that are nefarious and at times, invisible. But insurance companies are able, in the main, to pace those types of changes. (Although, it must be said, that the acceleration of regulation, and the volatility  those changes have had, have led to an abrupt acceleration of bureaucratic regulation during the present administration.) Insurance companies' underwriters can attempt to read tea leaves when it comes to important judicial decisions. But as we've found, Courts are not predictable. The actions of courts can be the most expensive components in determining future costs, compared to legislative or regulatory changes.

The consequence of Exxon Valdez was profound. It is easy to say that requiring all vessels to be double-hulled is only "common sense."

Common sense, to whom? Coming from a common historical experience, losing millions of gallons of crude oil has never been know to create any type of long-term harm. It has been known to create millions of short-term pictures. And angst. But requiring an entire fleet of ships to change hull design? In a penstroke, judges created costs associated with the carriage of crude oil that have been passed on to you and I, the consumers for bulk oil Is the likelihood of  environmental disaster different today, than it was before Exxon Valdez?

EV was an extraordinary event. A combination of stupid and geography.

And politicians respond by legislating against stupidity.

They may as well legislate perpetual motion.

We'll look at "regulatory" costs next.

Friday, July 13, 2012

Insurance II

Last time we looked at insurance, we ended with several questions unanswered: How does regulation drive up costs? And lower benefits to insurance subscribers?

Back in the original post, we looked at ships' insurance. If we had a thousand ships, and each ship paid a thousand dollars for insurance, how much money would the insurance company have? One times a thousand is, a thousand. A thousand times a thousand is a million. A million times a thousand is a billion. Remember this scaling when you have any conversations about fiscal matters. How did we reach a point where being a billionaire is a big thing, but our government spending "trillions" of dollars isnt'? How many billions does it take to make a trillion?

To answer the question, then, a thousand thousand is a million dollars. Let's take for example, one of the world's most beautiful ships, the Cutty Sark. She was built for a cost of  £16,500. If an actuary were to assess the potential loss facing the owners of the Cutty, they would assess the owner of the ship a fraction of the ship's cost, to cover the potential loss of the ship due to certain circumstances, among which would be pirates, foul-weather, and acts of war. Given the conditions of loss, there might be certain limits of coverage for the loss of the vessel. Additionally, there might be coverage for the value of cargoes carried by the ships, and they, in turn, might be limited in loss coverage due to the circumstances of the loss.

The key to successful marketing of insurance coverage wasn't the promise of safety from loss. If you or I were unprepared to provide another with an hedge against loss, you or I might ask for a bond in the full amount of value of the asset. Give me the full value of your article, and if there's a loss, I'll return the value of the loss to you.

Not really a great hedge, is it?

If you could insure against loss, for a fraction of the value of the item insured, would you then be interested in purchasing an hedge that would provide making you whole, in the face of loss? And what, in the word's of President Obama, would be a reasonable betting line against loss? Let's not dawdle over the understanding of the world's smartest man. The simple explanation is, there are guys out there, in the world today, who do a thing called math. I know it isn't sexy, and for certain sectors of our population, the mere mention of mathematics is a game changer...don't go there.

If a thousand ships set sail, and 999 return after a year's sailing, then the loss of a ship is how likely?

If a thousand ships set sail, and 999 return after ten years of sailing, then the loss of a ship each year is how likely?

If we take a thousand dollars for a thousand ships, for ships that cost $25-thousand dollars, what is the apparent liability for the insurer, when in a year a thousand ships sail, and 999 return? (I'm doing a math thing with the Cutty at £16,500 being equivalent to $25-thousand bucks.)

It shouldn't take a math wizard to note that an insurance company with these defined rates against these defined risks, would be doing very well! Very well, indeed!

So, a market like Lloyd's offers insurance. The market is profitable, and if fact, extremely profitable (under the conditions cited.) But Lloyd's isn't an insurance company, it is a market. Certainly, a market with stringent requirements, but with Lloyd's is a group of insurance underwriters who represent investors in insurance and reinsurance firms. Proposing a request for insurance coverage to Lloyd's elicits a response from the Members, who on their own, judge the potential costs against possible claims arising from the queried insurance proposal. The ships owners of the Cutty Sark would have asked the market for insurance, and then had received various quotes from members, from amongst which would have been chosen the most favourable of terms and conditions for the sum of protection against loss being offered.

Within the very dynamic of Lloyd's was the competition amongst the members to gain access to a contract to provide insurance coverage. (Lloyd's was the first insurance exchange.)

All of these market forces were at work, amongst competing members of the exchange, to provide a guarantee of coverage, at the best terms, and at the lowest possible prices. .

Enter the conditions above; regulation. What are the effects of regulation? The market of Lloyd's is illustrative of the temptations toward regulation. A study of Lloyd's would be a starting point for any legislator who wished to impose regulation upon any industry.

Ship owners were required by law (regulation) to provide for the loss of sailors to their families. Ship owners were amongst the first employers who were required to provide payment for loss of life to survivors. In fact, many, if not most, conscriptees into the United States military were surprised to find that their lives were being insured on their behalf by Uncle Sam. Insurance against loss of life is a fairly new invention. An hundred years ago, people died. That was it. Their heirs inherited, life moved on.

Enter the Death Tax. In 1916, America introduced the Inheritance Tax. Then, further regulation introduced another tax, the Gift Tax. Simply dying wasn't enough. Progressive reform meant that the wealthy, even in death, had more than that which those who hadn't, deemed to be excessive. Life insurance was instituted to cover the shortfall in the value of an estate, and the penalty of death under the newly established estate taxes. And, only the wealthy opted to provide themselves with coverage. When young military conscriptees were introduced to their first insurance policies, many of them couldn't understand the value of the policies being provided. They were all coming home, after all.

From the farm, where people simply died, whether from getting kicked by a horse, getting mauled by a cougar, lost in the woods, broken leg while plowing, to a moment where loss could be indemnified generally was a stretch. It was an expense that couldn't be afforded, since most people were dealing with subsistence issues; enough money to eat, to clothe themselves and their families, provide housing. The pinch in life insurance was prompted by a change in tax laws for the rich. Most Americans weren't affected by inheritance taxes.

But the supposed theme of this post is, when regulation changes affect changes in costs for insurance. The regulation that imposed costs for the wealthy, increased the costs of insurance for the wealthy. The wealthy looked at inheritance taxes, and immediately looked for ways to indemnify themselves from loss. What any successful hedge would attempt to do. For most people, the cost of insurance wasn't a consideration; when they died, their estates were passed onto their progeny. Life insurance was a rich man's tool. Government payments for the loss of life during the wars introduced the idea that a man's life could be viewed as an asset, against which the loss of that life could be insured against.

For me, the introduction of insurance of any kind occurred in Junior High, when I signed up for extracurricular sports. As a part of playing football, I received a card explaining that I was covered for certain losses: an eye for $200, or $500 for both, that kind of thing. The card listed my coverage for one finger, one toe, an arm. Being a kid, I totaled all the potential losses and decided that one arm, one leg and an eye was the most I'd be willing to lose.

I, like millions of other kids who played sports, never lost anything. (Drat!) We never cashed in on the loss of limb insurance provided us. But, again, most ship owners never lost all their ships, all their crews, all their cargoes. (Drat!)

Let's leave this line of thinking before the idea of insurance fraud pops up.

Let's simply talk about actuarial tables. Maybe, you've never heard the term. Actuarial tables are really cool, and simply take all the available data on loss, whether its shipping loss, loss of arms playing football in junior high, or probability of death of old rich guys, and susses out where you, as an individual against the backdrop of all these statistics, stand. Insurance companies have gazillioins of statistics. (Yes, I looked briefly at a career as an actuary. The numbers are truly cool. And, my second oldest sister had a career at one point, working for the actuaries of Standard Insurance, a Portland company. Her job was cool, at least to me.)

Simple coverage for intramural athletics is easy to figure out. Put out ten thousand policies, and see how many claims there are. Put out fifty thousand policies, and see how many claims there are. Put out a million policies, and see how many claims there are. With a million policies at ten dollars each--prepaid--how many claims for an eye could be claimed before the insurer lost money? That's like 50-thousand one-eyed kids! Per year! If there were a sport claiming that many eyes, how long would that sport last?

America loses Fifty Thousand Eyes! Or, worse, American Youths Lose 50-Thousand Eyes!

When an activity becomes too risky, normally, the activity declines in popularity. Not always. But, that's for a later post.

Actuarial tables determine costs for insurance. The likelihood of an occurrence. My old stat prof used to tell the joke of the prof who was awarded an honor, but who refused to fly to New York to accept the award. The story goes, that the likelihood of the plane being a victim of a hidden bomb was too great, although slight, for the professor of statistics to fly. On the day the members of the Statistics Department were making their way onto the flight to take them all to New York, they turned and saw the reluctant professor waving his arms, asking them to hold the plane. As he boarded he was asked, "what changed your mind?" The professor said, "the chances of a single bomb on the plane was too great, but the chances of their being two bombs, was insignificant." And, at that point, pulled up his jacket and revealed another bomb.

That isn't the way statistics work, nor how statistical inference works.

Insurance, rather than projecting the worse case scenario, often invokes the best case scenario, in fact, without the best case scenario, insurance couldn't survive. Given leave to itself, insurance would do exactly what it is intended to do; give the purchaser an hedge against unforeseen outcomes. But actuary tables can't predict changes in regulations. Regulations come from legislatures, and the causes for legislation don't often, or at all, reflect the realities of those who wish to manage their exposure to risk.

Let's take a look at the Exxon Valdez. And changes to maritime regulation.


Thursday, July 5, 2012


Insurance is a wise thing to have.

I have insurance on my house, through a home owner's policy, on my car, through an automotive policy, on my employees, through a Worker's Compensation policy, and my business, through a commercial policy.

The contents of my house are either covered by my home owner's policy, or by my commercial policy. It's amazing to me that I'm able to cover my business, my employees, my home, my automobile against claims in the millions of dollars, for a few thousand dollars each year. There's only one form of insurance that I can't afford; health care insurance.

Why is that?

My home owner's policy is defined by the value of the structure. If my home were to be blown down, burned down, driven though by an four-by-four, the value of the structure itself would determine the cost to replace the entire structure. (Be careful, and make sure you purchase replacement cost insurance.)

Both the insurance company and I have a good idea of the value of the structure. Given the size of the structure, it would be easy to estimate accurately the replacement cost of that structure. And given the chance that I'll either see this home blown down, burned down, or driven through by an four-by-four vehicle, the chances that this home will be destroyed are fairly remote. I have had wind-storm damage, and it was expensive. Not at all equal to the cost of the entire structure, but expensive, nonetheless.

Burned down, the costs would be higher, since the insurance policy I have doesn't cover the structure alone, but to a certain extent, the contents--my personal property versus the real estate property--contained in the structure. My home owner's policy wouldn't pick up the entire cost of the loss of property inside the building, since I also operate a business inside the same structure. At that point, my commercial insurance steps up to provide against loss for the equipment housed in my home, but owned by my corporation. And I think it would be fair to say, that the value of the commercial equipment in my home is at least as valuable as the structure, and my personal property.

My automotive insurance isn't expensive because I drive an expensive vehicle. It's expensive because of the protection I need to have, should I get involved in an accident. I need to have enough insurance that if I'm involved in an accident, that insurance is significant enough, to allow me to hold my company from being held hostage in any lawsuit arising from such an accident. If you carry the "minimums" required by law, you'll have a lower insurance cost. But if you have an insurance policy that seeks to indemnify your holdings from suit, you'll need to pay significantly more for adequate driver's insurance. And my advice is, to always have a bit more insurance that the total value of your assets. Yes, it is more expensive. But accidents and attorneys present a one-time cost that you'd not be able to recover from.

Likewise, my commercial policy covers more than the minimums that some might feel sufficient to cover the risks of conducting a business. By contract, some of the companies I do business require me to have at least two-million dollars worth of liability coverage, in order for me to do business with them. I'm not alone. There are small-business owners all over the place, facing the same costs, simply to endeavour to conduct themselves in their business activity. From donuts to table-tops, the people who provide the services and products that an economy demands, requires small- and large-business owners to provide assurances that if tragedy strikes, compensation will not be halted due to the cash-flow problems of the individuals affected by such tragedies. My two-million dollar coverage is by no means the limit of coverage requirements, simply the "first notch," in many cases. As businesses grow, as the amount of exposure increases, insurance assurances climb in amounts--and price--into millions of dollars for single projects or companies.

Fortunately, economic risks and costs have been present, and insurable, for hundreds of years. Some of the earliest forms of insurance were related to mercantile trade, as companies, notably Lloyd's of London were formed, and laws were passed, such as the British law that required certain coverage for sailors, in the 17th and 18th centuries. ( From memory, if earlier examples exists, please append.)

Point is, what the ship owners realised, and the British government, in terms of sailors, realised, was that there was a need to indemnify individuals from tragical outcomes. A ship at sea, going down with all hands, would not end up well. To assure the families of the men who travelled on ships of indemnification against loss resulted in what we know of as, today, insurance. Assure, insure, indemnify. These are the terms covered by insurance policies. And shipowners were required by law to indemnify their sailors' families from the loss of any sailor's life. Which I think presents itself as an interesting argument, given the current political conversation on the requirements of health care insurance. (Presented as a quibble, not in good faith.)

The key to all of the above insurances mentioned--with the exception of medical insurance--is that there are clearly defined limits. And, all these forms of insurance--with the exception of medical insurance--can be defined clearly by limits and coverage. An English sailor's life in 1790 might have been deemed worth five-thousand pounds. Or, two-thousand pounds. Whatever.

And that "whatever" is important. Whatever an able-bodied seaman was worth, the owner of the shipping line was required to pay the sailor's family if he lost his life while serving as a merchant mariner. It's the same type of thing you see if you buy accidental death and dismemberment insurance. You get a table that tells you a finger is worth five-thousand dollars, a foot is worth ten-thousand dollars, and maybe an arm is worth 15-thousand dollars. I remember seeing one of these charts when I first purchased insurance around forty years ago, and wondered what limbs and digits I'd be willing to cash in to create a reasonabl investment pool?

Insurance was a fairly easy product to purchase, and fairly easy to evaluate, in terms of whether or not the protection offered was worth the potential value of claims that could arise. Given the condition of ship and crew, the reputation of the Captain, merchant vessel insurance was priced to attract the purchase of the insurance, pooling the potential losses of a single vessel against the pooled losses of all insured vessels.

Insurance companies used low subscription rates to induce the purchase of insurance. But that wasn't where insurance companies made their money. A thousand ships, each a thousand dollars. A thousand thousand is how much? In cash. And that money was never let lie idly. Under a concept that is known as "fractional reserves," the balance was put into investments. To the degree with which an insurance company is, or was, successful in its investments, the costs of insurance were either raised, or lowered.

Insurance companies with successful portfolios were able to provide lower insurance costs than insurance companies with less successful portfolios. Same coverage, lower costs.

How does this apply to the questions we're facing when it comes to health insurance?

Perhaps the question should center around the types of legislation that have occurred since the 18th century. How does regulation drive up costs? And lower benefits to insurance subscribers? For me, its obvious. For a later post.

Tuesday, July 3, 2012

Freedom or Unionism?

AFL-CIO President Richard Trumpka on freedom.

"Let’s call this right-wing 'freedom' catch phrase what it really is: a grossly political strategy to dupe the public, which holds the word 'freedom' as something sacred."

Trumpka was raised Catholic.

Will is appetite.

One of the writers who brought this to my attention, was Saul Bellow.  Mr. Bellow died a few years ago, but a few years after I was born, he wrote a book called Henderson the Rain King. Maybe he did introduce the idea of the Magic Negro. (I think it was Mr. Clemens.)

One of the questions nagging Eugene Henderson was the persistent echoing nag of "I want." Little pedestrian but that I was at the time, I looked at my thesaurus, and found that want was synonymous with lack. Dearth, desire, wish, crave, fall short of. Mr. Roget had more. This list is illustrative, not definitive.

Ask yourself this question; "do I lead my own life, or do I let others tell me what to do?"

Will is appetite. Do you know who coined the phrase? Do you have a sense of what it means? Appetite, what we choose. Preference, based upon individual tastes, is the best determinant of what is best for you. Your tastes don't need to match my tastes, although, if you were to ask me which of two things I would choose, I would unabashedly share my view of my own, personal taste. Do I always assert my tastes?

No. I was a young man when I learned about boorish behaviours. My dad was a teacher and an impresario, and I always found those who surrounded him with fawning opinions. He had men who coveted his status. Covetous men always want.

Mr. Trumpka is a man who wants something that is antithetical to freedom. He wants control He isn't the first person I've known that wanted that thing, that antithesis to freedom. And yet, I find myself unable to supply the term, that single word, that would describe the condition that Mr. Richard Trumpka wishes we would wake up tomorrow, and finding ourselves. What could that word be? What single word, that denies want, denies wishing, denies craving, what could that word be?

Because, Mr. Richard Trumpka is a big dog in the world of American politics. Mr. Trumpka represents the will of the worker--and really, based upon his membership, a lot of his members do real, manual work--and that will should have some traction when assessing the needs of the political sphere, translated into voting blocs. Mr. Trumpka should have no problem in industrial states, states like Indiana.

Will is appetite. Mr. Trumpka's appetite is to have power. Saint Augustine didn't look for power. Thomas Aquinas wasn't looking for power. Mr. Trumpka seeks power.

And yet, I've erred.

Augustine and Aquinas did seek power. And, in my view, authority. Where does this Trumpka seek authority? And why is authority different than power? The answer, in my view, lies in "power over what or whom?" and "authority over what or whom?"

Augustine and Aquinas had a common view that they held over power and authority. They had unquestioning belief in the power and authority of God. But that view of power and authority led them to believe that other than God, the only person who could hold as much power and authority over them, was they, themselves. God does not do well, when His authority is competed for. And yet, God grants us, to follow in His footsteps. My God is a jealous God. (Exodus 20: 4-5) A man, thinking for himself does well, as long as he doesn't compare himself as equal to God. But God wants us to follow, not to supplant him, And yet, it's possible, that you haven't heard of the word, "volition." Volition is an interesting word, when compared to "want." Volition is the product of a man's earnest endeavors.

God has granted us powers, to perceive, to feel, to rationalize. What is our volition? What is it, that we choose? And, trenchant to the title of this post, who is to determine the choice?

Thug Trumpka will tell you, that those of us who are still dedicated to the teachings of the Church, or to the examination of truth, through such old school techniques as the study of philosophy, that we're better off listening to Thug Trumpka. Trumpka will decide whether or not a thought is worthy to be held. Thug Trumpka will tell his acolytes, whether or not to agree, or disagree.And Trumpka is a son of the Church.

Trumpka is a thug. Freedom is an enemy of such a thug. I'm not surprised that he is a thug, since, from what I can see, his career has been to be a thug. Mr. Trumpka doesn't believe in freedom, the preference to choose, for ones own self.

Hope and change. This is the best they have to offer?