Author [EN] [ZH] [ES] [PT] [IT] [DE] [FR] [NL] [TR] [SR] [AR] [RU] [EN] [ZH] [ES] [PT] [IT] [DE] [FR] [NL] [TR] [SR] [AR] [RU] [EN] [ZH] [ES] [PT] [IT] [DE] [FR] [NL] [TR] [SR] [AR] [RU] Topic: TANSTAAFL: Risk  (Read 1431 times)

0 Members and 1 Guest are viewing this topic.

Offline CWEvans

  • Full Member
  • ***
  • Posts: 183
    • View Profile
TANSTAAFL: Risk
« on: March 24, 2014, 06:52:37 PM »

Risk The risk of a particular course of action is like energy or subatomic spin; it cannot be created or destroyed, only transformed or transferred. Like pollution, risk never vanishes, even if it is spread so thinly across the environment that one does not notice it, it is buried in a remote dump, or it is poured into a river to be carried out to the open ocean.

In efficient markets, the party transferring the risk pays a premium to the party that bears the risk, whether it is for an insurance policy, an appliance warranty, a loan guarantee, or any other similar arrangement. Although one is covered, the risk does not cease to exist; someone else has agreed to bear the cost.

When one transfers one's risk to others without compensating them, this creates market inefficiencies, as we see with bailouts of 'too big to fail' firms that do not pay for this coverage during upward phase of the business cycle, with relief payments to property owners in areas prone to natural disasters who pay no premiums to relief agencies, etc.

The same holds true with a mutual aid society (MAS), which is a voluntary association formed by a group of individuals with a common bond to provide mutual aid to its members for relief from sundry difficulties, to which each member pays a fee to compensate the other members for bearing his or her risk.

In other words, in exchange for the expectation of aid in time of need, each member incurs some cost that he or she should consider to be sunk. Participation in the MAS should not be seen as a speculative investment, as the purpose of insurance—most broadly speaking—is to compensate one for one's losses, and not to enable one to profit from them.

We should bear this in mind, when developing the payout scheme.
« Last Edit: March 25, 2014, 04:00:56 PM by CWEvans »

Offline onceuponatime

Re: TANSTAAFL: Risk
« Reply #1 on: March 25, 2014, 12:11:28 AM »
A very simple model to work on might be burial costs. The risk of needing burial expenses is virtually 100% (with the exceptions being if you are lost at sea or maybe a passenger on a Malaysian jet, etc.). The probability of a payout in any given amount of time is unknown - but can be accurately predicted by actuarial means. Unknown/unforeseeable natural disasters would be the black swans.

I would want to be a participant in a burial MAS DAC.

Offline puppies

Re: TANSTAAFL: Risk
« Reply #2 on: March 25, 2014, 02:19:59 AM »
I'm not sure I agree with your argument that risk can't be created nor destroyed.  While of course it can never be truly eliminated it can be lowered by not engaging in risky behavior. 

In a free market the cost to insure against losses from engaging in risky behavior would be so prohibitively expensive that they would have the effect of preventing much of this risky behavior.  Thus reducing risk.
https://metaexchange.info | Bitcoin<->Altcoin exchange | Instant | Safe | Low spreads

Offline wasthatawolf

  • Full Member
  • ***
  • Posts: 188
    • View Profile
  • BTS: loon3
Re: TANSTAAFL: Risk
« Reply #3 on: March 25, 2014, 03:09:32 AM »
Risk can be mitigated by reducing factors that contribute to risk.  For example, property insurance premiums are much lower for a building with a sprinkler system vs a building without. 

This is a pretty big flaw in the insurance DAC model.  It doesn't take into consideration the risk factors of the individual policy holder / insured asset.  This essentially encourages participation of higher risk individuals and discourages that of lower risk individuals.


Sent from my iPhone using Tapatalk

Offline CWEvans

  • Full Member
  • ***
  • Posts: 183
    • View Profile
Re: TANSTAAFL: Risk
« Reply #4 on: March 25, 2014, 03:58:34 PM »
I'm not sure I agree with your argument that risk can't be created nor destroyed.  While of course it can never be truly eliminated it can be lowered by not engaging in risky behavior. 

In a free market the cost to insure against losses from engaging in risky behavior would be so prohibitively expensive that they would have the effect of preventing much of this risky behavior.  Thus reducing risk.

Thank you for pointing this out. I meant the risk of a particular course of action. One can reduce risk by not engaging in risky behavior, like sending sailing ships across uncharted seas in search of exotic treasures. I was referring to the risk involved, once one has decided to commission a sailing ship for such a journey.

[Text above edited to reflect this.]
« Last Edit: March 25, 2014, 04:02:25 PM by CWEvans »

Offline wasthatawolf

  • Full Member
  • ***
  • Posts: 188
    • View Profile
  • BTS: loon3
Re: TANSTAAFL: Risk
« Reply #5 on: March 25, 2014, 04:00:50 PM »
One can reduce risk by not engaging in risky behavior, like sending sailing ships across uncharted seas in search of exotic treasures. I was referring to the risk involved, once one has decided to commission a sailing ship for such a journey.

Not all sailing ships are created equal.

Offline CWEvans

  • Full Member
  • ***
  • Posts: 183
    • View Profile
Re: TANSTAAFL: Risk
« Reply #6 on: March 25, 2014, 04:01:50 PM »
Not all sailing ships are created equal.

Indeed, some are riskier than others.

Offline CWEvans

  • Full Member
  • ***
  • Posts: 183
    • View Profile
Re: TANSTAAFL: Risk
« Reply #7 on: March 25, 2014, 04:05:44 PM »
Risk can be mitigated by reducing factors that contribute to risk.  For example, property insurance premiums are much lower for a building with a sprinkler system vs a building without. 

This is a pretty big flaw in the insurance DAC model.  It doesn't take into consideration the risk factors of the individual policy holder / insured asset.  This essentially encourages participation of higher risk individuals and discourages that of lower risk individuals.

That's what the claims adjusters are for.

One possibility is to engage specialists, as Dan describes in the Insurance/MAS video. Another possibility is to use a consensus market made up of those in the same pool. If the others in the pool feel that one has violated some unstated rule, then they can reduce the payout.

Offline wasthatawolf

  • Full Member
  • ***
  • Posts: 188
    • View Profile
  • BTS: loon3
Re: TANSTAAFL: Risk
« Reply #8 on: March 25, 2014, 04:14:25 PM »
If the others in the pool feel that one has violated some unstated rule, then they can reduce the payout.

Why would anyone risk their coverage in a pool like this?  So all I'd need to do is buy up a bulk of the shares and I could decree who gets what as a payout?

Offline CWEvans

  • Full Member
  • ***
  • Posts: 183
    • View Profile
Re: TANSTAAFL: Risk
« Reply #9 on: March 25, 2014, 04:18:41 PM »
If the others in the pool feel that one has violated some unstated rule, then they can reduce the payout.

Why would anyone risk their coverage in a pool like this?  So all I'd need to do is buy up a bulk of the shares and I could decree who gets what as a payout?

Word would spread, and that pool would become unpopular.


Offline wasthatawolf

  • Full Member
  • ***
  • Posts: 188
    • View Profile
  • BTS: loon3
Re: TANSTAAFL: Risk
« Reply #10 on: March 25, 2014, 05:30:15 PM »
If the others in the pool feel that one has violated some unstated rule, then they can reduce the payout.

Why would anyone risk their coverage in a pool like this?  So all I'd need to do is buy up a bulk of the shares and I could decree who gets what as a payout?

Word would spread, and that pool would become unpopular.


So the existing shareholders are left holding the bag?  Or selling their shares for pennies on the dollar? 

As I said before, insurance is for mitigating risk.  These pools sound awfully risky to those they are supposed to provide insurance. 

Offline CWEvans

  • Full Member
  • ***
  • Posts: 183
    • View Profile
Re: TANSTAAFL: Risk
« Reply #11 on: March 26, 2014, 05:16:41 PM »
If the others in the pool feel that one has violated some unstated rule, then they can reduce the payout.

Why would anyone risk their coverage in a pool like this?  So all I'd need to do is buy up a bulk of the shares and I could decree who gets what as a payout?

Word would spread, and that pool would become unpopular.

So the existing shareholders are left holding the bag?  Or selling their shares for pennies on the dollar? 

As I said before, insurance is for mitigating risk.  These pools sound awfully risky to those they are supposed to provide insurance.

What I described above is modeled on fraternal societies, benevolent orders, and lodges that were popular before the creation of the social welfare state.

An alternative to having everyone in the pool vote on each claim is to have specialists, whom the pool participants are expected to monitor, act as claims adjusters. This alternative introduces the potential for the kinds of principal/agent moral hazard that we see with modern corporate governance, but that system works in the real world, as well.

The only way to settle this is to run the experiment.

What would you suggest as a solution to the problems that you have identified?

Offline wasthatawolf

  • Full Member
  • ***
  • Posts: 188
    • View Profile
  • BTS: loon3
Re: TANSTAAFL: Risk
« Reply #12 on: March 27, 2014, 02:30:13 AM »
I'm not convinced that the adjusters would act in the best interest of the shareholders.  It's risky to the insured if the adjuster has the ability to interpret the intention of the coverage in addition to judging whether the claim meets the requirements of the policy.  You're essentially paying premium before you've even bought the policy.

To keep with the comparison to a fraternal order and help eliminate the need for adjusters to judge intention, you could allow only existing shareholders the ability to issue new shares.  Policies/pools/MAS could be started by the first person or persons seeking the coverage. Those persons would then own 100% of the shares and be discriminate when issuing new shares to build the pool. 

Offline unimercio

  • Sr. Member
  • ****
  • Posts: 245
  • The opportunity of a lifetime comes by every 7 day
    • View Profile
    • Conscious Entrepreneurship Foundation (CEF)
  • BTS: unimercio
Re: TANSTAAFL: Risk
« Reply #13 on: March 29, 2014, 10:52:21 AM »
I like the following analogy to explain how this experiment could proceed. It's very simple if thought of in these terms and very complex otherwise:

An architect builds an office complex with several buildings in the center of a field. No parking or walkways to each building are designed or provided. Over the course of several months a beaten path develops and patterns are made visible.  The path becomes a dirt trail and eventually is paved.

Risk cannot be managed effectively by market forces. It requires knowledge and wisdom, acquired through experiences, failure and success. The conservative investor will not participate in a DAC where he or she funds this discovery process. Only the benefactor, benefited or gambler would invest.

The burden on the adjuster and investor is too great without substantial predictability. I believe a third actor is required, an "oracle". Ideally the oracle: is developed and then self evolves without intervention. The oracle(s) could initially be semi static repositories, eventually self correcting.

The oracle might then hone its power to assess risk. Pools of varying risk would organically form  over time, investors could then decide when, if and how to jump in. Some pools will be too shallow and fail to attract swimmers while others could prove to be popular and become overcrowded.

While being quite possibly the most lucrative proposed DAC, it's certainly the most complex I've seen envisioned with the most unknown factors, ergo the need for an oracle(s). For a taste of the complexity, google "ruin theory". it's way over my head and thoroughly humbling.

Btw, As I wrote this post, I felt as though I was channeling Peter Sellers/ Chancy from the movie "Being there". First comes spring, then summer, fall, winter then spring again .
« Last Edit: March 29, 2014, 11:57:49 AM by unimercio »
Conscious Entrepreneurship Foundation (CEF)

Offline puppies

Re: TANSTAAFL: Risk
« Reply #14 on: March 31, 2014, 04:10:00 AM »
Perhaps allow people to buy into protection against a specified risk level.  Perhaps I would like to purchase protection against driving while obeying all laws pertaining to operating a motor vehicle in my jurisdiction.  If I then later enter a claim, The adjuster only has to verify that I was obeying all laws while said accident happened.  If I was speeding at the time of the accident, or drunk then I am out of luck.  Perhaps I would be willing to purchase a more expensive insurance product that covers my expenses If I am speeding or drunk or whatever other risky behavior I choose to engage in.  This of course requires an adjuster to verify I am within parameters.

There are two problems I see with this approach.

First of all is the political problem.  It would be very un PC that the heterosexual male that does not engage in any anal intercourse has a much lower health/STD premium than the homosexual male. 

Secondly would be the market pressure to lie about ones risky behavior, and the necessity of allowing the adjuster to examine very personal parts of our lives to determine if we are within acceptable risk parameters.   
« Last Edit: March 31, 2014, 04:13:00 AM by puppies »
https://metaexchange.info | Bitcoin<->Altcoin exchange | Instant | Safe | Low spreads

 

Google+