I have a fairly substantial backlog of ideas which would conform to the stated objectives o’ this site but I have always sorta had a thing for this one so it will be my first (post) (on this site) (actually my second but my first substantive non-administrative one anyway). And it just so happens to be on the prosaically fascinating subject of non-actuarial risk management.
So here goes. Insurance, as far as I am aware, only exists significantly in the form subscriber-compensation plans, i.e. I pay you some money at regular intervals in the hopes that someday you’ll give me a bunch more money when I really need it. This is obviously a good thing and has done a great deal towards lubricating and standardizing the wheels of capitalism. However there are some fairly significant economic disconnects with this system (a term I am rather fond of though I’ve never heard anyone use it except me). An economic disconnect is anytime a person makes a decision when they have little or no stake in the outcome of that choice. The easiest example is a government functionary of some sort who decides to take money from one person(taxes, fines) and give it to someone else (government contractors) the politician feels no personal loss from the appropriation of the citizens assets and likewise no personal gain from the proper or profligate spending of those assets, so instead bases their choices on whatever he or she does have some emotional stake in which may or may not be anywhere near what the tax base gives two shits about. This isn’t about the merits of collective taxation though, it’s just a useful way of illustrating an economic disconnect.
In the case of insurance the disconnect comes in the scintillating form of risk ownership. Basically the people who are taking the risks are not the same people who are paying for them.
“That’s the whole point” says anonymous detractor, “the risk takers couldn’t otherwise afford to take risks so we need an overarching system of available guarantees in order to foster basic decision making confidence”.
“Yes but that doesn’t mean the wrong people have to own the risk” says me, somewhat repetitively and unhelpfully.
Basically if I crash my car or intentionally set my widget warehouse on fire, you have to pay for it. Likewise if you crash your car or intentionally set your widget warehouse on fire, I and the rest of the insurance collective have to pay for it; not really a good system for encouraging accurate and beneficial decisions. So because Johny’s bumper was scratched and he claimed the full replacement cost even though he is really just gonna use the money to buy weed, my premiums go up and I have to deal with a bunch of understandably skeptical and combative insurance adjustors. Essentially, the fact that the person who wants the car to be fixed (Johnny) is different from the person actually paying for the car to be fixed (insurance collective) means that the value of fixing the car becomes completely distorted because normal economic rules of supply, demand and opportunity cost cannot come into play. Meaning that a minor scratch that no one in their right mind would pay to fix, suddenly entitles johnny to a years supply of premium marijuana at the expense of everyone else who contributes to the insurance fund.
On the other side of the coin, from the provider standpoint, when someone actually does need money for something, once again the person deciding how much to pay for it, what the value of the damage is, is not the person who will benefit and so has really no idea what fixing that need is really worth to the claimant. “oh you need a double bypass, well we really think you only need a single bypass and we would like Dr Seuss to handle it” I have no real first or second hand knowledge of this process and my sense is that insurance companies aren’t generally that evil but I know it happens to a certain extent and it is entirely because the incorrect person owns the risk.
Get to the point. Ok. It’s a problem, but really you can only call something a problem if there exists a viable solution which is an overall improvement at least from the perspective of the problem solvers, otherwise it’s just um you know…life. So here’s my solution: amortized insurance loans; essentially you take out a loan for access to money in an emergency situation, so instead of renting access to disaster recovery you own it. The benefits and drawbacks are very similar to the cost/benefits of owning a home verses renting one. The system would work like this. Say I am a small business and I need $1m worth of asset risk protection. Instead of renting protection like I normally would, I go down to a bank or some other sort of capital accumulation/distribution entity and and I take out a loan for $1m but since I don’t need the money right now or hopefully ever, the interest rates and credit terms can be very favorable because the money will technically stay in the hands of the bank. I then pay a monthly rate exactly like I would if i were renting protection and if a “disaster” occurs in a manner described in the terms of the agreement, I can then access as much of the funds as I deem necessary to cover my losses. The numerical value of my policy then goes down by an equal amount. The very cool thing about this system is that when the coverage is payed off, it now belongs to the policy holder free and clear with no need to be permanently chained to an insurer and inevitable monthly payments. it can even be sold or passed on to children etcetera.
The first and most significant question someone would wonder about this sort of set-up would be, what happens if the disaster occurs in the early stages of the loan process? Meaning I have only paid a few thousand towards my policy but now I need access to the whole of the coverage. The answer would of course be that you are given as much money out of the principle as you require but you are now in debt.
ex: Jill gets $1m insurance loan
she pays on it for a while totalling $100k
she then needs to repair her fire damaged home for $300k
Jill now owes $1m-$100k=$900k
and still has $1m-$300k=$700k worth of coverage
Now, if Jill needs the full $1m she will then be $1m in debt with no coverage whatsoever and that is a risk that both Jill and her banker will have to take into account when figuring out the terms and amounts of her loan policy.
The true worth of this system is that a) Jill never loses any money that she doesn’t get some return on, i.e. she is not buying Johnny a year’s supply of weed with her monthly premiums.
And b) she only spends as much of the disaster funds as she actually really needs because it is her money not someone else’s
The second question is of course, how does one handle costs over or equal to the amount of the loan. A possibility would be that you are covered through your loan up to some multiple of the principle you have paid. say you have paid $20k, you would be able to use the loan to pay up to $40k and the rest of the total would be provided by a standard protection rental policy which would slowly diminish and eventually disappear as the principle got closer and closer to being paid off.
The ultimate goal here would be to create the legal and financial institutions for people to buy and own “risk” the same way they buy property. “Hi I’m jill, I own .4 acres and $90k worth of risk.”
The other question one might ask about is: what about the usury value of the money that is being payed on the policy? If it’s my money shouldn’t I get a return on it? Uh..yes. That’s something that I think the individual lenders and borrowers would have to hash out, not to mention a means of indexing the payout value to inflation in some way. Of course once the money is paid off, it would then be the owners to invest as they saw fit presuming the money met the liquidity requirements to be available in a disaster and thus could still qualify as an insurance replacement.
Really this is just a fancy, more rigorous, fleshed out and robotic form of a rainy day fund. The major difference is that the money would be tied to a usage protocol so that it is not wasted frivolously. The legal basis of that usage protocol would allow (in the version of the future that I am proposing) the money to replace the legal as well as common sense need for monthly insurance rental. And the structure of the businesses who provide these loans would allow for the money to be used in a much more effective and profitable yet still liquid manner than if it was stuck under a bed or even in a savings account.
The end.
