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.
Topic: TANSTAAFL: Risk (Read 5436 times)
