Monday, December 22, 2008

The Global Economic Downturn: Bad For Insurance Companies?

While major insurance companies – like AIG – have recently felt the pinch of the global economic downturn big time, is the current global economic crisis really that bad for all insurance companies?

By: Ringo Bones

Even though times of economic austerity usually spells reduced profits for all sorts business activity, many in the insurance underwriting sector are now hard at work devising various schemes. Schemes not only on how to stay afloat during our on-going global economic downturn, but also ways for their company to “make a killing” despite other financial institutions failing on the left and right.

From the perspective of risk assessors, insurance companies had become very indispensable part of our modern economy. Everyone now knows that every economic unit is subject to risk. Various organizations for economic activities and business organizations may have their goals and raison d’être completely destroyed if protection by insurance doesn’t exist. Paradoxically, insurance is even more important for the small business organization than for larger business organizations - which can meet small losses without difficulty.

Financial stability can also be maintained through credit insurance. A business concern that suffers losses through the insolvency of customers can normally meet these conditions by a reserve for bad debts. However – especially during times of widespread economic crisis - a severe amount of loss due to insolvency of various customers may cause serious financial difficulties. This adverse situation may be minimized by credit insurance.

Even though credit insurance had became indispensable due to the fact that credit is already a vital part of our economy, but during times of widespread economic crisis, the consequence of unexpected losses has been inevitably turned into a model that develops slower than previously intended. I mean an insurance company won’t last very long if the funds it set aside for pay outs must be injected with funds reserved for other things. Like funds set aside to keep up with the latest Basel Accord Compliance rules, cost of running the company, etc.

By no means utterly dire, insurance companies could manage to keep themselves afloat during times of economic crisis if it is skillfully managed. But given that the Bull Market is already for all intents and purposes an extinct species for the foreseeable future, it is highly unlikely that most insurance companies can “make a killing” during times of economic austerity.

Saturday, November 29, 2008

Private War Risk Insurance Providers: Bankrupted by Piracy?

Since the incidence of maritime piracy off the Horn of Africa is on the rise, will this endanger the economic viability of private companies underwriting war risk insurance contracts?

By: Ringo Bones

Ever since that brazen act of piracy by Somali pirates that allowed them to successfully hijack a full-sized Saudi-owned oil tanker then held her for a “King’s Ransom” became headline news, many of those in the insurance industry have switched into panic mode. After all, the International Community have not even yet reached a consensus whether to classify piracy as an act of war under the Geneva Convention, or just a civil criminal act. Given the current legal debacle of Guantánamo, are war risk insurance contracts still an economically viable part of the insurance industry?

War risk insurance is defined as a type of insurance that covers damages due to acts of war. This usually includes invasion, insurrection, rebellion, and hijacking. Some war risk insurance policies cover damage incurred when weapons of mass destruction – like nuclear devices – were used. This type of insurance is mostly issued in the shipping and the aviation industry.

War risk insurance generally has two parts: War Risk Liability, which covers personnel and items within the craft and is calculated based on the indemnity amount; and War Risk Hull, which covers the craft itself and is calculated based on the value of the craft. War risk insurance premiums are usually based on the expected stability of the countries and territories to which the vessel will travel.

Back in September 11, 2001, policies for private war risk insurance were temporarily canceled but later reinstated with substantially reduced indemnities. In response to this cancellation, the US federal government set up a terror insurance to cover commercial airlines. Because of this, the International Air Transport Association has argued that airline companies operating in the United States which do not provide war risk insurance find themselves at a competitive disadvantage. Because war risk insurance is very dependent on the prevailing geopolitical climate, some insurance companies – like Lloyds for example – have even made adverts highlighting that their companies are very mindful about the prevailing global trends concerning geopolitical security and stability.

For all intents and purposes, and their actions caught on the international news media’s cameras. Somali pirates in most people’s eyes falls under the purview of the Geneva Convention Section I on Belligerents, Article 1. Stating that countries where militia or volunteer corps constitute the army, or form a part of it, they are included under the denomination “army”. So like the al-Qaeda operatives, Somali pirates are by definition enemy combatants waging a war with the Western civilization through piracy.

Given that the maritime industry is the lifeblood of our current global economy, will the threat of piracy make the shipping of goods by sea become prohibitively expensive due to security and insurance mark-ups? Piracy, like the one existing in the Gulf of Aden and the Straits of Malacca only received scant Foreign Policy prosecution by various members of the International Community. With this conundrum, insurance companies and their clients – especially the clients – who are at the sharp end of uncertain losses that’s ever increasing can finally call themselves as the “social group” claiming to be unable to pay for protection. Thus causing widespread social jeopardy to the maritime industry workers and their families, the roots of which can be traced to various governments around the world and their inaction in ending the scourge of piracy.

Thursday, October 16, 2008

The American Taxpayer: Insurance Underwriters of Last Resort?

The Bush Administration’s 700 billion-dollar bailout package is supposedly for increasing banking liquidity – i.e. make banks more confident in providing credit. But is it wise to use the American taxpayer’s money?

By: Ringo Bones

As a way of mitigating the worst effects of the US Credit Crisis - which has now become global, the Bush Administration gave the green light on the implementation of their 700 billion-dollar bailout plan. An overwhelming majority of American taxpayers now question the wisdom of using public funds to bail out the follies that was caused by Wall Street’s “Quixotic Adventurism” in pursuit of easy money. While many Americans are now beginning to understand that when major financial institutions are allowed to fail – like Lehman Brothers – the negative repercussions will surely be felt around the world. And the question now is the decision to use the American taxpayer’s money a wise choice? Those in the know will inevitably be saying: “But isn’t this tantamount to a nationalization that would inevitably transform the US banking system from a free market economy to a command socialist economy?” After all, this inevitability will surely undermine the ideological underpinnings of Wall Street’s perception of what free market capitalism should be – a paragon of the American Protestant Work Ethic.

Central banks around the world are now coordinating to implement a plan modeled after the Bush Administration’s 700 billion dollar economic bailout scheme – albeit at a more modest scale. This is due to the fact that the International Monetary Fund’s top brass’ praise of the Bush Administration’s economic bail out scheme as “the most sensible so far” in solving our current global economic crisis. Thus the taxpayers disdain of using public funds to bail out the excesses and adventurism of the banking sector is no longer confined to the United States.

If the taxpayers’ money ever becomes the financial too of choice by governments to bail out their ailing economies, then the majority of us taxpayers will inevitably be harboring resentment. Plus that ever increasing consensus that insurance companies make so much because they charge clients / their customers high premiums and then underplay or deny claims altogether. Some have even said that insurance companies are just daring us to fight back. Will incidence of insurers bad faith rear its ugly head on every government around the world attempts’ in alleviating our global financial crisis?

Wednesday, September 10, 2008

Tattoo and Piercing Insurance

Even though this form of insurance has been regularly available across the United States for more than a decade, tattoo and piercing insurance is still an esoteric idea to some bemoaning how tattooing became popular. Is this insurance really useful?

By: Vanessa Uy

Toward the end of the 1980’s, when the rise of the Los Angeles Hair Metal Scene epitomized by bands like Mötley Crüe, Guns N’ Roses, LA Guns, and Poison started to made tattoos – even body piercings - a part of Madison Avenue’s “Fashion Ethic”. Tattoo insurance was virtually nonexistent. A few years later with the rise of the Seattle Grunge scene, the concept of a “Tattoo Insurance” began to take shape.

Many in the tattoo art world credit insurance agents Ray Pearson and Susan Preston for making tattoo insurance an economically viable product. Ray Pearson is the self-proclaimed “short, hairy, fat guy in a suit that you see at the conventions behind the Alliance of Professional Tattooists or APT booth” of O.S. Bruner. While Susan Preston of Professional Program Insurance Brokerage for their hard work during the mid-1990’s to make tattoo insurance a reality. Both Ray and Susan have tattoos themselves, which make them in a privileged position understand their respective clients’ point of view. At the time, Ray Pearson and Susan Preston were very busy in providing tattoo shops with coverage at a minimum cost. The coverage also includes piercing, since this body-modification artform has risen in popularity when the 1990’s began.

Tattoo insurance starts with two basic types of coverage. The first is general liability, which provides coverage similar to that of a standard homeowner’s policy – i.e. coverage against fire, flooding etc. General liability coverage is available to professional tattoo and piercing studios that meet the eligibility requirements.

Next is professional liability, which protects an individual tattooist or piercer much like the malpractice insurance that covers physicians. Professional liability has been proved very important in most cases since judging “artistic merit” is largely a matter of taste. This coverage mainly provides legal defense costs (which can be substantial) especially in cases when a client is not satisfied with his or her tattoo. Professional liability also covers various “mistake” claims, like the perennially publicized “Fighting Irish” debacle.

Insurance companies basically judge professional liability eligibility on the normal, commercial underwriting standards. Like the cleanliness of the shop? The type of neighborhood is the shop in since geographic profiling / gentrification / red lining can be an issue (Have you observed the 2008 US presidential hopeful Barack Obama’s Chicago South Side neighborhood’s “arrested development” via Machiavellian-style political machinations?). Are there any immediate hazardous exposures next door? (Like Monsanto’s undocumented PCB dump sites). Insurance companies also look for legitimate, professional, permanently located tattoo / piercing studios as opposed to an artist working out of his or her own basement.

Some insurance companies require a tattoo shop to routinely register their clients in a log to prove that the specific person were tattooed by them on a specific date. This is distinct from the paperwork of liability waivers most tattooists and piercers require their customers to sign. Courts have been recognizing the validity of these waivers and had been enforcing them for over a decade now. When an adult enters into another contract with another adult, signed with a full understanding and approval, the artist is free of responsibility. The cost to the tattooist is then limited to legal fees, which the insurance company pays for.

As the cornerstone of a good “beauty business” has always been repeat customers and referrals. Tattooists and piercers can be considered an excellent example of a beauty business for reasons previously described, but they also did a good job of policing themselves over the years by consistently and universally operating on a safe and professional level that there haven’t been many claims. This resulted in a business that operates on minimal loss and high profit margins that insurance costs by way of premiums can be considered minimal.

Professional Program Insurance Brokerage offer insurance premiums that start as low as $615 to insure a tattoo shop or individual artist. They usually charge 10% more if a shop does facial or cosmetic tattooing – like permanent eyebrows and lipcolor - which is considered riskier than regular body tattooing.

Some insurance companies offer group policies. O.S. Bruner offers such a policy to eligible Alliance of Professional Tattooists or APT members, which significantly lower the costs of availing one. Ray Pearson says O.S. Bruner’s average shop policy with $30,000 of contents coverage, a $500,000 limit of general liability, and special perils coverage - which is “all risk”, including theft - costs around $1,175, inclusive of taxes and other fees.

Most companies offer tattoo liability limits available from $100,000 to a million dollars. And property coverage can be scaled-up for basically whatever the client needs. Premiums can be paid in a lumped sum – i.e. all at once - or through a more manageable monthly financing. Looks like the tattoo and piercing insurance providers are really looking out for both the shops and their customers, how’s that for corporate social responsibility.

The short but crowded history of tattoo and piercing artform’s assault on the money driven media mainstream – from the late 1980’s Hair Metal scene to the mid 1990’s Riot Grrrl movement epitomized by Theo Kogan and the rest of Lunachicks. With anything that had gone before, between, or after has really popularized both tattoos and body piercings. Some might be jaded, but for better or for worse (I say better) tattooing might outlast anything – the US Navy, Bike Gangs / Enthusiasts, etc - that had helped it become popular in the first place.

Friday, August 29, 2008

Collaterized Debt Obligations: Instigating the Global Credit Crunch?

Somewhat unfairly blamed as the instigating agent of the 2007 Global Credit Crunch, are collaterized debt obligations or CDO, really deserving of such infamy?

By: Ringo Bones

After reading the latest book by the billionaire investor guru George Soros titled “The New Paradigm for Financial Markets”, I recently had an epiphany that stability and equilibrium are not our Wall Street controlled global economy’s natural state of being. Instead, the quixotic adventurism in search of quick and easy profits undertaken under unacceptable levels of risk is the rule, rather than the exception. Thus explaining the inevitability of the global credit crunch and the current yo-yoing price of crude oil pegged against the US dollar. Even the rise of asset backed security based on synthetic constructs marketed as investments to anyone who likes to experience first-hand what it's like to be financially devastated by an Enron-type scheme.

Often referred to by everyone’s friendly neighborhood financial advisor as an asset backed security product that works just like a home insurance against losses from fire and theft. Except that it applies to big corporation’s credit insurance which you – a mere civilian – can easily get rich of off. By the start of the 21st Century, CDO s was being sold-off to with alarming frequency to financially ignorant civilians – i.e. people like you and me. Your friendly neighborhood financial advisor might – and it’s very likely – to have made ungodly amounts of money relatively easily. Surprisingly to you – the financially ignorant - through the sheer inherent complexity of structured financial transactions of CDO s that he or she –your financial advisor – might seem like a saint for helping you, the financially ignorant retail chump, to experience your friendly neighborhood financial advisors new found get-rich-quick scheme. Except your financial advisor forgot to mention one tiny but very important detail. You must sell – i.e. pass on / dump them – your CDO s once the financial markets turns into a “Bear”. But most of all, are collaterized debt obligations or CDO deserving of their infamy? But first, let us first explain what is a CDO.

Collaterized Debt Obligations or CDO s are often described by financial academics as a type of asset-backed security and structured credit product. CDO ’s are constructed from a portfolio of fixed-income assets. The assets are divided into different credit rating tranches: senior tranches which are rated AAA or “triple a”, mezzanine tranches which are lower on the credit rating “food chain” are rated AA to BB, and the equity tranches, which are unrated. The first CDO were issued back in 1987 by bankers of the now defunct Drexel Burnham Lambert Inc. for the Imperial Savings Association. A decade later, CDO s became the fastest growing sector of the asset-backed “synthetic” securities market.

A major factor for the further growth of CDO s at the start of the 21st Century was the 2001 introduction of Gaussian Copula Models by David X. Li. Which allowed the rapid pricing of CDO s. Because of this, Collaterized Debt Obligations became a major force in the so-called derivatives market were the value of the derivative is derived from the value of other assets. But unlike some fairly straightforward – i.e. “real” derivatives – such as stock options, calls and even the much-maligned Credit Default Swap, CDO s were nearly impossible for the average person to understand. To me at least, the higher mathematics used in creating synthetic securities constructs like Collaterized Debt Obligations and its related variants like Collaterized Insurance Obligations are better to be used in designing weapons systems that will allow a 250-gram projectile to be thrown at 2,700 feet per second. Most of all if anything goes terribly wrong, asset-backed synthetic securities are really worth less than the paper they are printed on, or the bits – one’s and zeroes – they are encoded on.

The complexity of CDO products – which the investor savvy swears by for making him or her earn easy money – is the reason why CDO s are often blamed by the mainstream news media for the 2007 credit crunch. This inherent complexity is often blamed for the failure of risk and recovery models used by credit rating agencies to value these products. Worst of all, CDO s and their ilk are just mere “financial constructs” – as opposed to concrete assets like gold or land. Complicating matters even more was that there was no market on which to sell the CDO s – i.e. CDO s aren’t traded on exchanges. Causing many CDO customers to be mauled by the impending Bear Market. Which is no Bull by the way.

Given that the math used for credit rating various CDO products is about as complex as the higher mathematics used to quantify the dynamics of certain complex sociological phenomena, its best to be pragmatic. It might lead some to some desperation in embracing Sharia Banking Laws in order to retain a semblance of financial stability in our post global credit crunch environment. Were the sobering fact fiscal austerity are forcing credit and bond insurance underwriters to finally remember what it means to be prudent in doing business.

Thursday, July 31, 2008

Credit Default Swaps: Easy Money through Complexity?

Often referred to as a sophisticated form of credit insurance that’s an easy source of big money for the financially savvy, that is until greedy speculators used them to cash in on the US subprime mortgage crisis. Green backs from Red Tape?

By: Vanessa Uy

Financial regulators now bemoan the existence of Credit Default Swaps or CDS. Some even say that trading in Credit Default Swaps ought to be crime because of the way it siphons the hard-earned money of less investment savvy folks into the coffers of greedy speculators. This almost criminal practice of earning big money easily was recently highlighted by the financially savvy purchasers of homeowners insurance who opted for Credit Default Swaps to hedge their risks, which unfortunately created a “domino-effect” that led into the US credit crunch and the subprime mortgage crisis. Because of this, majority of US banks and other financial institutions no longer trust the credit worthiness of their fellow “financial institutions” due to the effects of the unregulated trade in Credit Default Swaps. But in order for us to form a sound judgment over Credit Default Swaps, let us first define what it is.

A Credit Default Swap or CDS is a credit derivative – i.e. financial instruments of special nature – dealt between two counterparties. One party makes periodic payments – usually in the form of insurance premiums – to the other and receives the promise of a payoff if a third party defaults. The former party receives credit protection via credit insurance and is said to be the “purchaser”. The other party provides credit protection and is said to be the "seller”, while the third party is known as the “reference entity”. For all intents and purposes, Credit Default Swaps are nothing more than privately traded insurance contracts that let people bet on a certain company’s financial health.

When it comes to credit derivative products, Credit Default Swaps are the most widely traded. The usual term of maturity of a CDS contract is five years. But because it is a derivative that’s dealt over-the-counter, Credit Default Swaps of almost any maturity can be traded.

As credit derivatives go, Credit Default Swaps are a relatively recent development. Back in 1995, Blythe Masters of JP Morgan developed the first Credit Default Swap and Collaterized Debt Obligations even though other bond insurance products are already available since the 1970’s. When Blythe Masters was heading the Global Credit Derivatives group of JP Morgan, he introduced Credit Watch in April 2, 2007 as a regulatory measure and also to help evaluate credit swaps among other financial instruments. By the end of 2007, there is an estimated 45 trillion US dollars worth of Credit Default Swap contracts. But if the inherent regulatory measures are well established, then what’s the problem?

The problem with Credit Default Swaps occurs when they hit the market. Everyone knows that banks and insurance companies are regulated, while the credit swaps market is not. Because of this, contracts can be traded – or swapped – from investor to investor without any regulatory body overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends – the insured and the insurer – with nary an oversight. Thus your typical greedy speculator has now been granted “free reign” to prey upon the financially ignorant and those with gullibility for get rich quick schemes. For all intents and purposes, the current market in credit derivatives has now become Mephistopheles’ playground due to lack of regulation and oversight. Thus perpetuating our current financial crisis in which these forms of credit insurance were built to prevent in the first place.

Friday, June 27, 2008

Environmental Coverage: Corporations versus Mother Nature?

Legislated environmental laws not only vary from country to country it is also evolving over time – in favor of the environment. Using this rationale, are existing environmental coverage clauses just a thinly veiled right for companies to pollute?

By: Vanessa Uy

Ever since the term Corporate Social Responsibility became the latest buzzword in the world, corporate leaders keeping their promises to shareholders and the company’s “bottom line” is no longer enough. Corporate leaders must also fulfil their promise to their employees and the community that their business practices are not placing our environment at risk. But when push comes to shove, how many of our so-called corporate leaders choose in favor of the environment instead of just “looking out for number one”? Especially when there are Environmental Coverage already available that not only turn “unforeseen disasters” that they create in the first place out of greed and ignorance – or a bit of both – into manageable situations. If you choose to define manageable situations as “immunity from prosecution” to “profiting from their own apathy”, which explains the popularity of every G8 summit to unruly teenagers.

There are now a number of insurance companies that offer environmental coverage with well-backed claims of underwriting authority for environmental risks. Some of them with reputations solidly backed by Triple-A-rated financial strength, the latest Basel Accord compliance and what have you. The question now is, are products like Cleanup Cost Cap and Pollution Legal Liability Select and their ilk nothing more than a thinly veiled rights for companies to pollute while avoiding the pay out of punitive damages?

The most commonly perceived truth states that this problem is either too complicated to the average layman or can be easily manipulated by the demagoguery of every environmentalist / vote-for-me politician come lately who favors passion over rational thought. Fortunately one can easily “hedge their bets” so to speak by utilizing the aid of one of the latest mathematical tools in assessing whether a corporations “green credentials” are nothing more than misspent PR – namely Quantitative Risk Assessment.

As of late, Quantitative Risk Assessment has been utilized by insurance companies I cited before that offer Cleanup Cost Cap and Pollution Legal Liability Select services as a form of corporate transparency. Stating that their products are not just thinly veiled provisos that allow corporations to pollute and ruin our environment with impunity. Insurance companies that provide environmental coverage always stay abreast with the latest Quantitative Risk Assessment findings especially ones pertaining to the protection of our environment. I just hope when insurance companies custom-tailor an environmental coverage policy to a certain company; it would be equitable to the needs of our environment and to the local economy. The world doesn’t need another corporate injustice like the still unresolved compensation claims of the victims of the 1984 Union Carbide insecticide plant disaster in Bhopal, India.

Monday, May 5, 2008

The Emergency Landing Brace Position: A Lethal Proposition?

Conspiracy theorists reasoned out that the emergency landing brace position is really designed to kill airline passengers in a crash because its cheaper to pay wrongful death suits than medical injury compensation. Is there a truth to this?

By: Vanessa UY

Our technological ability to fly – make that heavier than air technology – is now well over 100 years old, and yet quite a large portion of our populace still harbor this irrational fear of flying even though statistically air travel is the safest way to go. This is probably the reason why unfounded myths and rumors pertaining to the airline industry have become so prevalent lately. But one of these somewhat controversial myth / rumor being spread around by conspiracy theorists is about the one pertaining to the brace position instructed to be performed by airline passengers in case of an emergency landing.

According to the conspiracy buffs, the brace position is intended to kill airline passengers by breaking their necks easily rather than saving their lives. This is so because it’s cheaper for airline companies to pay out to the wrongful death lawsuits than to pay for the surviving passengers’ medical treatment and rehabilitation which could last the survivors entire natural life. In wrongful death pay outs, the airline companies typically pays 3 to 5 million dollars while for survivors medical treatment and lifetime rehabilitation, it could reach 50 million dollars. The risk assessment in dollar terms alone is very scary, reinforcing the typical conspiracy theorists conjecture about insurance and underwriters companies in collusion with the airline industry. By placing profits first before the safety and lives of their passengers, conspiracy theorists never had a better excuse in thinking so. But is there any truth to this?

A very entertaining science program on the Discovery Channel called Mythbusters routinely dispel and test suspected myths like the one previously mentioned by performing visually extravagant but valid scientific experiments that had gained them a cult following – especially to the younger viewers who desperately needed scientific enlightenment. In one episode, they did an experiment to test the validity of the myth that the brace position is designed to kill airline passengers during an emergency landing. Their high tech sensor loaded (actually they used postal / parcel service shock measuring stickers) crash test dummy named “Buster” was used to substitute a human passenger in an emergency landing situation. Sure enough, Buster demonstrated that the brace position actually reduced the shock or G load to a typical passenger by as much as 20 G s. That’s 20 G s less shock compared to a passenger in a normal sitting position. That’s a very significant difference of an outcome between survival and death.

To evaluate the big picture on why this myth ever came about in the first place, let’s examine first the history of manned aviation. When the Wright Brothers first demonstrated their newfound prowess of manned flight, they spawned a host of barnstormers i.e. early aviation enthusiasts. Even though they are very much popular and widespread, most people back then were still deathly scared by flying. Even witnessing a plane flying 30 feet above their heads is enough to terrify them even though there’s also a large majority who are curious to experience themselves the magic of flight. So when business entrepreneurs started the airline business back then, they have to convince the people how safe their planes are – or at least they cared about the safety of their passengers. And since airline companies are still around till this day, then safety concerns did came hand and hand with profits.

Sadly, there’s this other thing that the conspiracy theorists overlook that was always part and parcel of profit generating enterprises – namely corporate social responsibility and ethical business governance. Even though these concepts only became unique selling points of customers quite recently. It’s only common sense that your customers and clients will only do business with you again if you treat them right. Even private security contractors are subscribing to the corporate social responsibility and ethical business governance fad by using the phrase “at least we’re not killing innocent civilians” as their unique selling point. Maybe conspiracy theorists need to study the history of aviation first. If these conspiracy theorists don’t find history or science as a “sexy subject” anymore, then they should blame the Board of Education, not the airline industry.

Wednesday, April 23, 2008

Risk Calculations: On the Mark or Missing by a Mile?

Ever since it was mathematically proven that air travel is actually much safer than driving, risk calculations has become a perennial topic of discussion by anyone too worried to be worried. Are we being scared unnecessarily?

By: Vanessa Uy

There’s this very funny anecdote that I heard quite recently about how much air travel is safer compared to your typical “little girls bike”. You also probably heard it before. The punch line goes: “At least when my little girl falls from her bike, its not a 30,000 foot drop. This could very well serve as a rationale for the toy manufacturer Mattel to start competing with the jumbo jet manufacturer Boeing once the scandal over the high lead content of Mattel’s PROC-manufactured toy products eventually dies down.

Basing from such tales of perception and of opinion from the general public with regards to the risks that they face everyday, its no wonder that people who do risk assessment for a living harbor a pre-conceived notion. A notion that the general public is largely irrational when it comes to risk assessment, but there’s a kernel of truth regarding this matter.

Calculations used for risk assessment are based on averages, so they have limited value to the individual. Air travel, for instance, may be safe in terms of deaths per passenger mile. But that says little about the specific flight you are about to board. The very one that will subject you and your fellow passengers to a number of takeoffs and landings in bad weather, not to mention the flight crews’ forays into alcohol addled hedonism that previous night.

To define a certain risk implies that the risk assessor resorts to foretelling, but the accuracy of the math’s predictive power can be misleading. This is so because risk assessors’ calculations – by and large – always use historical data while adhering to the dubious assumption that the future will behave like the past. It seems like risk and uncertainty always goes hand in hand, even under mathematical scrutiny.

On the other end of the risk spectrum, examine for a moment the unthinkable scenario when almost all life on Earth – including humans - being wiped out by a catastrophic comet, meteorite or asteroid impact. Due to Hollywood cashing in the legitimate concerns of astronomers warning us of this “Doomsday Scenario”, the general public has been fascinated on what might happen as we prepare, during, and after a catastrophic asteroid or comet impact during the last ten years or so.

One asteroid that got famous after receiving it’s “15 Minutes of Fame” in the mainstream media spotlight is 99942 Apophis. This 320 meter wide asteroid was first discovered in 2004 and was supposedly calculated to hit our planet on April 13, 2029. Though by no means dead certain, estimates for the asteroid 99942 Apophis hitting us ranges from a “scary” 1 in 27 to NASA’s “somewhat reassuring” official estimate of 1 in 45,000.

As of late, NASA’s official estimate has recently recalculated by an “astronomically curious” high school student using off the shelf computer software. Using such modest resources, the student’s findings that the asteroid 99942 Apophis now has a probability of 1 in 459 in hitting our planet. The student’s findings were later proven by NASA to be correct. But for those who based their calculations via current geological evidence that catastrophic impacts that wiped out the dinosaurs 65 million years occur regularly at 13 million- year intervals. Therefore the chances of our planet being hit catastrophically by a comet or asteroid in a span of one year comes to about 1 in 20,000. Even though I’m worried, I do keep my worries to an absolute-minimum. Anymore than that is an unacceptable risk to my overall wellbeing.

Wednesday, March 26, 2008

Genetic Science and Life Insurance Companies: An Unholy Alliance?

As the science of genetics advances to a level where someone’s future health status and life span can be calculated with unprecedented degrees of accuracy. As these tools will be utilized by life insurance companies. Will the establishment of a voluntary code of conduct in the rate - making procedures of life insurance providers be the norm rather than the exception?

By: Vanessa Uy

In a typical contemporary life insurance company, the actuary knows only that ultimately that the policyholder will die. The factors governing the event as they apply to any given individual-the when, the why, and the how-are still a mystery beyond casual prediction. Insurance experts must therefore draw up their actuarial tables entirely from death statistics, separating into categories of such subdivisions as age, sex and occupation. The expert thus starts with known statistics and from these, works out the probabilities. As always in the case of probability, the greater the sampling, the more accurate the resultant forecast will be.

Recent advances in genetic science can now allow scientists to predict with ever increasingly accurate forecasts of the probable characteristics of even the unborn. Characteristics such as height, weight, intelligence, even longevity. These tools now in use routinely by genetic science has become increasingly harder to be overlooked by life insurance actuaries. Surely, the element of gambling can be eliminated if the customer’s premiums are like the proverbial “money in the bank” since the life insurance company will now be less likely to pay out with most of their policyholders are now living as long as sequoia trees.

Will life insurance policies in the future be tailored to the individual customer’s “genetic endowment”? The sad news is that it will be a definite certainty despite the resulting resentment that will be harbored by a working underclass. To me, this is where a voluntary code of conduct should be adopted by “mainstream” life insurance companies to avoid the increased customer exclusion that would result if life insurance actuaries adopt a method that by all intents and purposes is unfair. But the bad news is life insurance companies primarily are a business entity that’s primarily concerned with their “bottom line”. If life insurance actuaries see that an unjust method of customer exclusion or insurance policies can fatten up their bottom line, then surely, they will accept it with open arms despite of the ensuing social turmoil.

Friday, February 8, 2008

Credit Insurance: A White Knight against Recession?

As Bond Insurers loose their “triple A” credit ratings thanks to the US economic turbulence towards the end of 2007. Can Credit Insurance providers still be counted on as recession looms?

By: Vanessa Uy

In today’s world, credit has become a vital part of our modern economy. If large credit losses occur, profits may be totally lost. Manufacturing and wholesaling firms always have that looming threat that someone to whom they extend credit may become insolvent and will be unable to meet their obligations.

Ordinarily, it is possible to estimate probable losses caused by extending credit and to add this cost to the price of the goods. It is also possible to be very cautious about extending credit. However, one large loss may upset all plans and methods for meeting the losses, and if too restricted credit practice is followed sales and thus profits will be cut even greater than credit losses. Credit insurance was developed, therefore, to protect business against undue credit losses. This insurance does not cover credit transactions between retailers and customers. Credit insurance policies do not place any serious restrictions or limitations on the cause of the debtor’s insolvency and thus contain broad coverage after the title of the goods has passed to the various debtors.

The principal kinds of credit insurance policies are general coverage policies. With the general coverage policy, all customers are included subject to the limitation of the policy. The financial standing of the customers and their credit ratings determines whether he or she is to be covered and for what limit.

The Dun & Bradstreet, Inc., mercantile agency manual is generally relied upon for information concerning customers, although there are other approved agencies. The insurance companies require that the customers have a capital and credit rating in a recognized mercantile agency because of the nature of the fluctuating hazard of credit.

The mercantile agency books show the approximate amount of net worth and the promptness of meeting obligations of the various concerns. The better firms receive high or good credit ratings and are regarded as preferred ratings. Usually the much coveted “triple A” rating badge. Other, less secure enterprises are rated as fair and limited and are considered inferior ratings. Often credit – insurance policies do not cover concerns rated as limited as these firms represent great hazards. Under such circumstances credit afforded to customers in this class is extended at the insured own risk. The liability of the insurance company on any one loss is limited in relation to the credit and financial standing of the customer.

Credit insurance does not cover loss of profits involved in a failure of the customer to pay for the goods. An amount, representing the estimated profits, generally 10 per cent, is deducted from the total of the uncollected accounts for which indemnity is provided. This deduction of a stated percentage from provable losses is known as coinsurance. By payment of an additional premium the coinsurance clause will be eliminated.

Since all concerns normally expect to suffer some credit losses every year, an amount known as the normal loss, is deducted. This is done way before any of the losses be paid by the company. Generally the amount is based upon the total sales of the insured and the ratings on which coverage is required.

So in today’s financial climate that’s fast heading into uncertainty, do credit insurers help manufacturers and wholesalers from going under? Well, if one looks our global financial system from the perspective of “enlightened self interest” the answer is a big fat yes. This is so because manufacturers and wholesalers are the main customers of credit insurance providers. And credit insurance providers are not stupid enough to sacrifice their own “cash cows” just to protect their own interests. But when bad goes to worse especially if your specific credit insurance provider can’t reimburse you because it went bust. Then, this is surely a sign that a full blown economic recession is in progress. Just hope that a full blown economic depression doesn’t come next.

Sunday, January 6, 2008

Does Anyone Need Climate Change Insurance?

Should we all go out and purchase “Climate Change Insurance” –like Life and Car Insurance- to protect our beachfront properties of the inevitable if-and-when?

By: Vanessa Uy

Like the establishment of the US Environmental Protection Agency back in 1970, there -as of yet unless you exclude Munich Re's Climate Change Insurance proposal that's still under evaluation - no existing legal precedents that allow –let alone to regulate- the sale of “Climate Change Insurance” policies to the average homeowner. I mean average because how many of us could afford the insurance premiums of Lloyd’s of London style insurance companies that provides coverage to risk whose mathematical evaluation borders on the non-existent? Also, the existing conservative political climate in the United States could easily allow existing insurance companies to classify the negative effects resulting from climate change –like sea level rise and increased frequency of hurricanes- as “Acts of God” which almost all existing insurance companies around the world won’t settle. And finally, is it wise to use the funds generated from “Carbon Offsetting” that’s already slated to bankroll sustainable / green development programs in “poor” countries be used as funds to settle the damages resulting from Climate Change?

Ever since “modern” insurance companies were established, they declared that the first essential factor in insurance is that the element of gambling must not be present. Since then, insurance companies had been eliminating the “element of gambling” by making it possible –through mathematics- to make accurate and scientific calculations of the extent of the hazard, so as to charge a fair premium. This is why it is important to study all the available scientific data to properly gauge the extent of Climate Change –now and in the future. The study can also be used to gauge if the risk must be important enough to warrant insurance. To make such a venture economically viable, the insurance company must have a large number of risks –spread out geographically- so that it will not have a concentration of risks in one area. And finally, the cost of the insurance –i.e. premiums- must be within the reach of a large number of people.

A couple of leading authorities –namely Michael Schlesinger and Natalia Andronova- professors of atmospheric sciences at the University of Illinois at Urbana-Champaign says that low cost climate-change insurance could help ensure a better future. By implementing a “Carbon Tax” of five US cents per gallon of gasoline and gradually increasing the tax over the next 30 years is the optimal solution, the researchers report. “You can think of the tax as a low- cost insurance policy that protects against climate change,” said Michael Schlesinger. The policy premiums –according to Professor Schlesinger- could be used to develop alternative energy technologies. Doing a little now to mitigate long-term climate change would cost much less than doing nothing and making adjustments in the future.

Because mitigation would impose immediate costs, with any long –term benefit unknown, some scientists and policy-makers have argued that nothing should be done until the “uncertainty surrounding the climate issue” is substantially reduced. But Professor Schlesinger says:” By then, however, it may be too late to and we will have foreclosed certain options. Rather, the uncertainty is the very reason we should implement a climate policy in the near term.”

Professor Michael Schlesinger’s idea of a taxation-bankrolled Climate Change insurance is somewhat similar to a State Insurance where state funds –i.e. tax revenues- are organized for the insurance of the compensation risk. To me, this is more or less similar to Social Security insurance. Like state funds, a government controlled Climate Change insurance has the advantages of costing much less than that of private organizations because no commissions are paid to brokers or agents and the work is handled by state employees. Also, some state funds may not emphasize the prevention of losses. Finally, if the premiums collected are insufficient to pay losses, the state may have to make up the difference if permitted by law.

Despite of all the rigmarole and red tape surrounding the establishment of a Climate Change insurance, the lack of legal precedents is the greatest obstacle for providing a system to mitigate the damages that might be incurred by the effects of Climate Change / Global Warming / sea-level rise. And by increasing the tax on gasoline incrementally over the years for the next 30 years could cause an- uproar to all of the petrochemical companies around the world. But –to me at least- a binding legislation of a Climate Change insurance based on the established principles of the modern insurance company / industry is probably the best solution where conservationist and the corporate / industrial world can reach a common ground.

Meteorite Strike Insurance: Absolute Necessity or Needless Luxury?

Will insurance companies provide a proviso on their personal risk insurance for a phenomenon that boarder on the “Act of God”?

By: Ringo Bones and Vanessa Uy

Throughout recorded history, only one person has been documented to having been hit by a meteorite from space. Fortunately, she survived. Because of this, opinions have always been divided in the insurance underwriters’ community whether the incident with Mrs. Hewlett Hodges should have been treated as a “freak occurrence.” She was extremely lucky though to have survived by being hit with a 10- pound fragment that pierced her roof and struck her left side. But first let us define which is which.

When the “rock” is still moving through the vacuum of space, it’s called a meteoroid. When the “rock” is glowing “pyrotechnically” as it enters the earth’s atmosphere, it’s called a meteor. When the said “rock” or “object” hits the earth surface, a house, or other unfortunate soul, it’s called a meteorite. These are the natural ones, while the increasingly commercial utilization of orbital space has created the problem of “space junk” that are the by - products of the launch of communication satellites which is also a possible source of meteorite strike hazard.

Concerns over the possibility of humans being injured or killed when hit by a meteorite strike usually becomes a topic of conversation during the annual meteor shower season that starts in August all through to mid –to- late November. These annual meteor showers occur in streams with established orbits. These meteor showers are named after the constellation from which they appear to radiate. Like the recent Perseid meteor shower that occurs in early August, which the one that occurred this year received heavy press coverage because of the ideal “viewing” conditions appear to radiate in the constellation Perseus. For those who missed it, don’t worry cause this coming late October the Orionid meteor shower will be radiating in the constellation of Orion. Though most of my buddies prefer the Leonid meteor shower because it’s occurrence from mid – to –late November in the constellation Leo are more likely to provide an ideal “viewing” conditions from our regular vantage point. Recent scientific studies have shown that that all recurrent meteor showers are mostly composed of debris left in the wake of comets, past or present.

Currently, Lloyds of London are the only known major insurance company that provides services on meteorite strike insurance policies. But the firm seriously advises anyone planning to purchase their meteorite strike “policies” to “think it over thoroughly” because these are somewhat expensive and meteorite strikes are statistically evaluated to a degree that their occurrence –in an average human lifetime- borders on the nonexistent. In the UK, meteor strikes (as written on their Webpage) are generally defined as an “Act of God.” According to the Website of Car Insurance in the UK ( which defines “Act of God”; as an event not caused directly by an individual that causes damage to your vehicle. An example (albeit an unlikely one) would be a meteorite strike. More often than not, “Acts of God” are uninsurable.

While the “budget” side of the insurance industry doesn’t do business when it comes to insuring our person and property against meteorite strike insurance. There is also the rigmarole that they also fail to classify meteorites that are made by man i.e. spent rocket parts and other by-products of space travel and commerce (communication satellite launches) from those that are natural i.e. left over material from the creation of our solar system. Most of these insurance companies just classify these occurrences / incidents under the “Act of God” clause.

For all intents and purposes, its in the insurance companies of the world’s best interest to provide an insurance proviso on meteorite strikes, especially objects that are a product of the commercial utilization of space like the regular launching of communication satellites used for cellular phone and Internet data traffic. The profits generated by this activity has the mathematical equitability to make the meteorite insurance proviso economically viable to the average prospective client.

Divorce Insurance: Equitability in Marriage?

In today’s post-modern society driven by capitalist consumerism, could a divorce insurance with really good provisos be the answer in keeping “modern love” equitable?

By: Vanessa Uy

Ever since Pope Gelasius declared February 14 as a Red Letter Day in honor of St. Valentine back in year 496, anyone from bards to scientists and even lawyers had lend a hand in gaining insight on this thing we call love. Although gaining insight means different things to different people, in this day and age, gaining insight on love usually means making the damned thing equitable to the parties involved. Love used to be the business between two loving couples, but in our present age, greeting card companies and those “weird people” who claim to be close to God by virtue of celibacy all lay claim to be the sole authority on love and marriage. I think these two camps are what’s been making Valentine’s Day a very interesting holiday for over a millennia.

When capitalist consumerism declared that it knew the price of everything – including devotion and obligation – did it made equitable ground rules? Or are we now so cynical that nothing free has value anymore? How could Calvinism put a price on one’s own devotion and obligation? Only the Anglo-Saxon God knows and He’s not talking. To me, this makes it a situation where only lawyers have free reign on arbitrarily deciding what’s equitable or not. I just hope that more prenuptial agreements be offered in pro bono flavor.

To me, it’s just sad that the thing we call money – whose value is backed up by our increasing materialism - is also the very thing that could get us out of this specific dilemma. In this day and age, divorce insurance with proviso for legal separation and prenuptial agreements really has existing demand. Divorce insurance really has legitimacy because the element of gambling – the first essential factor in insurance – is not present. This is so because countless people get married on a regular basis with the knowledge that over half of it will end in divorce and currently divorce proceedings are always messy affairs by judicial standards. Then, only a couple of things are left to be studied to make divorce insurance an integral part of most insurance companies’ / providers’ retinue. Like the possibility in making accurate and scientific calculations of the extent of the hazard, so as to charge a fair premium. Remember, irreconcilable differences causes stress and stress leads to ill health mental or otherwise. The other is the cost of divorce insurance must be within the reach of a large number of people.

Forgive me for being too cynical – even by “Michael Moore Documentary” standards – but divorce insurance, in my opinion, could really revolutionize how our present generation look at and approach “Romantic Love”. Divorce insurance could end once and for all the blatantly ithyphallic way young couple decide to get married – by whim – with utter disregard to the hardships that they will certainly encounter in marriage. Just something to think about during Valentine’s Day.