TANSTAAFL: Risk

[unimercio]

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.

The nice thing about the free market is that political correctness is irrelevant and only value/free exchange matters.  I think this is more of a GOOD THING than having to suffer through ObamaCare and its PC insurance that makes men pay to be covered against pregnancy...

The second part would also be balanced by the market.  The more you are willing to let the adjustor pry, the lower your rates can be.  You pay for privacy.

In the spirit of "Political Incorrectness", I'd like to start by saying, "Obama Care is an abortion waiting to happen at best a still birth".

But, long before it reared it's head, we had an unsolved problem.

Can a DAC solve the healthcare crisis? Absolutely.
Do we in this community have the skills and resources to take on the task? Yes, without a doubt.

Though, I believe Einstein once said, "Things are simple, but not simpler".

If we are to tackle this Goliath we'll need to start with low lying fruit, easy and obvious solutions with short times to market, each serving as incremental steps complementing each other.

I see the MAS DAC as one of these incremental steps, many will follow, not all decentralized (at least not at first).

[bytemaster]

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.

The nice thing about the free market is that political correctness is irrelevant and only value/free exchange matters.  I think this is more of a GOOD THING than having to suffer through ObamaCare and its PC insurance that makes men pay to be covered against pregnancy...

The second part would also be balanced by the market.  The more you are willing to let the adjustor pry, the lower your rates can be.  You pay for privacy.

[puppies]

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.   

[unimercio]

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 .

[wasthatawolf]

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. 

[CWEvans]

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?

[wasthatawolf]

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. 

[CWEvans]

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.

[wasthatawolf]

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?

[CWEvans]

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.

[CWEvans]

Not all sailing ships are created equal.

Indeed, some are riskier than others.

[wasthatawolf]

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.

[CWEvans]

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.]

[wasthatawolf]

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.


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[puppies]

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.