a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

I can do insurance. And insurance has historically been an engine for societal change. First forms of insurance were insuring ships and other forms of trade over distances which allowed trade and mercantilism then capitalism to flourish. Might not be the societal change you were looking for.

Deciding which things companies can and can't be held liable for is an underrated aspect of government power. For instance, deciding that internet companies are not responsible for things users post (unlike say book publishers) basically created the internet in its current form. Or deciding that gun manufacturers are not liable for things people do with their guns.

well, it's true that the main way that insurance is different from gambling, is that the risk involved is partially determined by societal factors, as opposed to just statistical data, whereas gambling only relies on statistical data and/or superstition. Granted, you could argue it's just statistical data _about_ societal factors.

I mean, if you think about how "pig shit" (not in the Thunderdome sense) is punished/accepted and societal changes in re that ... if it is becoming way more likely that cities have to pay out large sums of money in legal settlements because of pig shit due to juries, judges, etc. determining that pig shit isn't acceptable, then insurers should determine that the financial risk to them for betting on the pigs is too great.

However, insurance, itself, is a construct. Insurance, and insurance requirements, are definitely more a factor of the Repressive State Apparatus as opposed to the Ideological State Apparatus.

You can even think about how societal factors have created certain types of insurance! Like coverage against sexual harassment, discrimination, molesting kids, etc.

Conversely allowing almost unlimited liability for certain claims has made companies very risk averse in other areas, which has stifled innovation.

First forms of insurance were insuring ships and other forms of trade over distances which allowed trade and mercantilism then capitalism to flourish. Might not be the societal change you were looking for.

I would argue that it goes back farther, to dowries and other payments made around marriages. Also, the concept of the "bondsman" (which has evolved into the oppressive bail bond industry), and people's service functioning as insurance premiums.

Also I just want to read dayo’s cowrie-shell-based explanation of risk pools or whatever

― G. D’Arcy Cheesewright (silby), Friday, November 11, 2022 2:01 PM (thirty-four minutes ago)

I don't really understand insurance that well, tbh! the way I think of insurance is the world's worst lottery.

spousal insurance, for example, is a lottery in which everybody with a spouse is forced to buy a lottery ticket every month for as long as their spouse is alive. the proceeds (or 'insurance premiums') from the lottery tickets are kept by the insurance company, who sets aside a certain amount to pay expenses, but otherwise sits on the money. the way to win the lottery, nobody wants to win - your spouse has to die unexpectedly! when your spouse dies unexpectedly, you win the lottery, even though you would rather not win! you'd rather not have your spouse die in a plane crash instead of a million dollars. unless you've been feeding your spouse arsenic with his morning tea! then, it is the world's best lottery for you.

(you might ask, is there something the insurance company can be doing with that pot of money from the lottery tickets while it waits to pay out on an insurance claim. absolutely! this has led to insurance being a very stringently regulated enterprise by the state, because you can imagine what might happen otherwise.)

Conversely allowing almost unlimited liability for certain claims has made companies very risk averse in other areas, which has stifled innovation.

― o. nate, Friday, November 11, 2022 2:23 PM (eighteen minutes ago)

the actual secret engine of capitalism, imo, is "limited liability" (https://en.wikipedia.org/wiki/Limited_liability)

where are people forced to have "spousal insurance"?

(also i just want to say everything i have been posting itt is just matt levine-lite, a bad imitation of matt levine, and if you'd like to talk about matt levine please head on over to silby's thread Matt Levine’s Money Stuff )

where are people forced to have "spousal insurance"?

― sarahell, Friday, November 11, 2022 2:45 PM (one minute ago)

sorry, that is a bad example - a better example is car insurance if you own a car, but not everybody is sad when they lose their car. i guess i could have also used health insurance - something only americans would understand, and which would not be fair to our companions across the pond.

I mean, lots of people do have life insurance for their spouses. Life insurance is one of the most common employee benefits in the US. One could argue that the "force" comes from Ideology (the pressure for care through capital security, a "responsible" adult has insurance, etc.) but not the Repressive State Apparatus, which requires one to have insurance on a car if you are driving said car, otherwise the car could be seized ... or insurance requirements for tradespeople and certain professions, where you could lose the ability to legally make a living without said insurance.

Thus, there are different models of insurance -- there is the "3rd party" insurance, which is coming out of PBKR's historical reference to the shipping industry, but for various things, it is also possible to "self insure" without a 3rd party.

And ... this notion of "self-insurance" is tied to the Pension Funds that we were talking about earlier

I will write something up later, but my professional experience in insurance is limited to US commercial property/casualty insurance so I have limited knowledge of personal lines (i.e. homeowners/auto insurance) and almost no knowledge of health insurance. Some of the very basic principles are the same though.

can you write about how commercial property insurance is related to building & fire codes?

it would be cool to have someone to bounce these things off of / discuss it with

Insurance is a risk sharing and risk spreading mechanism. Assume an insurance company, PBKR Indemnity, sells a single policy of insurance (a contract) to a business, ILXCO (the policyholder), for $100 (the premium). If ILXCO has a $1,000 claim, PBKR Indemnity may be in big trouble since it only has $100 of premium plus whatever other capital it started with. If PBKR Indemnity sells 100 such insurance policies to 100 franchisees of ILXCO for $100 each ($10,000 total premium), then if one or even a few ILXCO franchisees file claims for $1,000, then PBKR Indemnity should have sufficient funds to pay claims and continue in business.

So an insurance policy is a contract between an insurance company and its policyholder (the purchaser of the policy) whereby the insurance company will pay the policyholder in the event of certain losses specified in the policy. Some policies are considered to provide "first party" coverage: the claimant under the policy is the policyholder themself, so that if ILXCO buys a property policy from PBKR Indemnity and then has a fire that damages ILXCO world headquarters, PBKR Indemnity (the insurance co) will pay ILXCO, the policyholder, for the damages to their building. Other policies are considered "third party" coverage: the claimant under the policy is a third party making a claim against the policyholder, so that if ILXCO buys a liability policy from PBKR Indemnity and then is sued by a third party, PBKR Indemnity (the insurance co) will defend ILXCO (the policyholder) from the claim by the third party and indemnify ILXCO (pay on behalf of) any damages actually awarded to the third party against ILXCO.

So how does insurance work from the insurance company's standpoint? PBKR Indemnity sells a policy to ILXCO for $100 in premium. PBKR Indemnity bases that premium on an insurance rate that is often, but not always, previously filed with or approved by the state (in the US, insurance is regulated by the individual states, not by the Federal govt). The rate might be based on a number of factors depending on the type of insurance but always involves an actuarial projection of future losses. In the case of a property policy, rate is often based on location, construction type, age, and condition of the building. For a liability policy, rate is often based on the policyholder's headcount, revenue, or other metrics deemed relevant by the insurance company, with loss experience (prior claims of the policyholder) often a significant positive or negative factor. The state may regulate what factors can be used or not used by an insurance company in setting rates. In the past, insurance companies would base rates for personal lines (like personal auto or homeowners insurance) on income level, gender, marriage status, age, zip code, employment, race, etc. Some of these factors (but not all) are now prohibited by law.

So what does PBKR Indemnity do with the $100 premium it receives for the policy it sold to ILXCO?* Well, PBKR Indemnity knows it may have to pay claims (losses) on ILXCO's policy at some point in the future, so PBKR Indemnity sets aside (reserves) a portion of the premium for payment of these potential future claims. The amount it sets aside is again based on an actuarial analysis of likely future losses. These reserves are determined and combined in the aggregate then invested to generate a return (investment income). The amount and type of investments PBKR Indemnity can make are heavily regulated by the state. PBKR Indemnity will also use premiums to pay prior claims and current operating and other expenses.

Each year, PBKR Indemnity will compare the premium it took in to the amount of claims (actual losses and loss expenses, plus loss reserves for claims not yet reported**) and non-claim expenses it paid during year. The losses divided by the premium are the insurance company's "loss ratio" - if PBKR Indemnity wrote $100 in policies during the year and had $63 in losses paid, loss expenses, and reserves, then PBKR Indemnity's loss ratio is 63%. If PBKR Indemnity also had $35 in (non-claim) expenses (salary, overhead, commission, etc.) during the same year, then PBKR's "expense ratio" is 35%. The "loss ratio" plus "expense ratio" is referred to as the insurance company's "combined ratio", which is a measure of the profitability of the insurance company for the year. If the combined ratio is over 100%, the insurance company lost money from underwriting for the year, if the loss ratio is under 100% the insurance company made money from underwriting for the year.

In our example, PBKR Indemnity has loss ratio of 63% and an expense ratio of 35%, for a combined ratio of 98%, meaning PBKR Indemnity's insurance operations made money for the year. Traditionally, and in high interest rate environments, insurance companies would try to write to a 100% combined ratio, meaning break even from insurance operations, and make their profit off their investment income.

*Often the insurance company pays a % of the $100 of premium (the commission) to a broker/agent who sold the policy to the policyholder. Commission % varies by type of policy/coverage, but in property/casualty is usually in the 10-15% range. This commission is one of the expenses that is factored into the insurance company's expense ratio, since it is an expense of selling the policy and obtaining the premium.

**This is very surface level and I could do a deeper dive on many of these topics, such as how an insurance company handles reserves if it would help.

thank you PBKR! ... so, we might also want to talk about these actuarial projections! For certain types of losses these projections are way easier to make (i.e. more accurate) than others, isn't that right? Like, car insurance. There are a lot of cars, a lot of drivers, a lot of incidents resulting in losses related to cars and drivers. Thus, I would assume, the actuarial projections for auto insurance are fairly accurate, because of the large data set.

For other types of losses, the projections are relying on a lot less actual data. Either because of the rarity of the type of loss, or the relative uniqueness of the facts and circumstances around them. Earthquake insurance is a good example, I would think. Fire insurance for commercial buildings is potentially another (though there are a lot more fires than earthquakes that cause significant damage and/or loss of life). Both Earthquake and Fire go into Property Insurance policies.

In the case of a property policy, rate is often based on location, construction type, age, and condition of the building.

Isn't it also based on the use of the building? And size? And then there is the issue of the factors that constitute the "condition" of the building. ... I'm gonna stop before I get super nerdy.

For certain types of losses these projections are way easier to make (i.e. more accurate) than others, isn't that right? Like, car insurance. There are a lot of cars, a lot of drivers, a lot of incidents resulting in losses related to cars and drivers. Thus, I would assume, the actuarial projections for auto insurance are fairly accurate, because of the large data set.

There are obscure/risky coverages where there is little data. Stuff like that often doesn't get written in the admitted (licensed) insurance market, but usually goes to the surplus lines market where there are far fewer regulations and consumer protections. Surplus lines insurers don't have to file rates and can pretty much charge whatever they want.
There are limits on how consumers (commercial, mainly) can access that the surplus lines market in theory.

For more routine coverages, it is less a matter of accurate or inaccurate data than it is maintaining or not maintaining underwriting discipline. Insurers will sometimes charge less than the rate (i.e. data) would indicate or under-reserve their claims to chase (short-term) profits, resulting in poor loss ratios and potential insolvency.

Isn't it also based on the use of the building? And size? And then there is the issue of the factors that constitute the "condition" of the building. ... I'm gonna stop before I get super nerdy.

Use and size both are factors, since they have bearing on the value of the building. That is the starting point of property insurance because if the building is a loss the value of the building is ultimately what the policy will pay.

I'm curious about this surplus lines market -- could you use it to get some measure of the risk of ownership for properties in flood zones or wildfire zones where most companies won't offer coverage? If not, how else could you try to estimate it? It seems like for earthquakes in particular, being closer to a faultline ought to raise your hypothetical rates even if most places won't offer actual coverage.

Actuarial tables are constantly being re-weighted and refined as new indicators are brought into the overall equations and trend lines revised by emerging data. The recent decreases in life expectancy among US adults is an example of a totally shocking trend reversal in the actuarial universe.

xp Not that familiar with earthquake or fire in CA but I would think if you can't get insurance that would tell you something about the risks of a property. Generally speaking the surplus lines market will ensure risks that the admitted market won't touch, albeit at a high cost. I'm sure there are risks/classes that surplus lines won't touch at any price.

Flood is the same way except the federal govt has created a national flood program where FEMA backstops (100% reinsurance) certain flood policies for properties that would otherwise not be insurable. One criticism of the national flood program (which I kind of subscribe to) is that this encourages more risky behavior by allowing people to build (and rebuild) in flood prone areas. Obviously global warming has exacerbated these kind of issues.

Would it be feasible to have such insurance be mandatory but with rates allowed to rise to whatever level makes sense (even if that level is absurdly high)?

Not really sure. Flood insurance isn't really insurance on some level because of the federal backstop - the program is notoriously under water (pun intended).

Flood insurance is often mandatory in one sense - a bank may require it in order for you to get a mortgage. There are other examples of mandatory insurance - auto and workers' comp.

It seems like for earthquakes in particular, being closer to a faultline ought to raise your hypothetical rates even if most places won't offer actual coverage.

I think that this really depends on the construction type of the building -- and the condition -- has it been seismically reinforced, etc. In various places, there are incentives and mandates for seismic reinforcement of certain building types ... back in 1989 it was URM (Unreinforced Masonry) and recently it's soft story buildings ... there was some super in depth article years ago about how shitty and worthless earthquake insurance was, but idk if that's still the case.

Would it be feasible to have such insurance be mandatory but with rates allowed to rise to whatever level makes sense (even if that level is absurdly high)?

Reading this again. If you are asking could the govt legislate changing homeowner behavior by mandating flood insurance even if the cost was prohibitive, I think they could though I imagine that would be politically very difficult. But I have heard that FEMA has bought damaged homes in certain flood prone areas and torn them down rather than paying the homeowner to rebuild.

Which accomplishes the same thing in essence.

re the statement discussed upthread, that depositing money in a bank is loaning money to a bank.

For instance, like loaning Mark £10 to buy his Quality Street (cf top of thread).

Some reasons that people might find this difficult:

1: it is never described this way. A bank says it will loan you money, but it never says "loan us money, by depositing money in our bank". As this is never said, it is no wonder if people do not think it is the case. Perhaps a massive deception has been going on.

2: if my employer pays me, say £1000, and it goes into my bank account (before I am even aware of it) - then this implies that the money is loaned out before I even have it myself. This contradicts the practice where I have £10 in my hand and can then decide to hand it to Mark S.

3: if I lend Mark S £10, he has it till he pays it back to me. But with the bank, I can take out £20 from a cashpoint; go into M&S and pay £10 for a box of quality street with my debit card; go on to online banking [NB this is not very easy, but it does exist] and move £100 from account A to account B ... In other words the money appears to be mostly under my control. It is pretty much as if I have the money. If I have taken out the cash from a cashpoint, it is literally the case that I have the money.

All this differs from the experience of loaning Mark S £10.

You may already be clear on this, but FWIW, in the case of 2, you "decide" this when you fill out the direct deposit paperwork with your employer.

Certainly I make an agreement that the money should be paid into the bank. "For safe keeping", as I would imagine it.

But my impression is that it's my money. Not that it's loaned to someone else before I ever have it.

Well, you're wrong then! :)

I've been reading, and trying to understand, this long post above.

you can imagine the world's first bank, where somebody said, instead of keeping your cowrie shells at home, which we have established is burdensome and detracts from your quality of life, give your cowrie shells to me and I will keep them safe

The character here doesn't say "lend me your cowrie shells". Their statement, rather, implies the idea of "safe keeping" that has already been mentioned.

The story also implies that the bank pays money (in this case shells) to its customers. But my bank doesn't do that.

Many banks do pay their customers. I get some interest on my current account, albeit only a fraction of a percent. Even if your account doesn't pay interest you're getting something for 'nothing', in that it has buildings, employees to help you and complex and hopefully secure IT systems to allow you to set up direct debits, standing orders and make withdrawals form cash machines etc.

I'm sure you don't think banks are doing this out of altruism, this infrastructure doesn't come cheap. It's a pact in that if you deposit money with them, they can use it for mortgages, business loans, currency speculation etc, in return you get cheap or free banking unless you have an unauthorised overdraft.

At the very least pinefox you should look to switch to an account which does pay interest.

That post makes sense.

I agree, I don't seem to be getting enough out of having my money in a bank. Whether there are better alternatives, I don't know.

pinefox, perhaps you could switch to one of these banks?

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

It's also worth saying that if you need access to a physical bank e.g. for depositing cash etc the Post Office allows you to do so at their branches for several banks. https://www.postoffice.co.uk/everydaybanking

These ones?

Top-pick savings accounts
Easy-access savings: allows withdrawals
Aldermore – 2.75%
Skipton BS – 2.65%
Notice savings: give notice to withdraw
OakNorth Bank – 3.07% for 90 days
OakNorth Bank – 3.2% for 120 days
Fixed-rate accounts: must lock cash away
Atom Bank – 3.95% for nine months
Kent Reliance – 4.45% for one year
RCI Bank – 4.85% for two years
Tandem – 4.9% for three years

I haven't heard of them. Don't know if that matters.

as established previously, it shouldn't matter if you haven't heard of a bank so long as that bank is covered by your country's deposit insurance regime. in the UK, it looks like that is the FSCS https://www.fscs.org.uk/ which covers up to £85,000 per person.

if one of those accounts looks pleasing to you, let us know and perhaps we could walk you through the pros and cons of it?

The character here doesn't say "lend me your cowrie shells". Their statement, rather, implies the idea of "safe keeping" that has already been mentioned.

― the pinefox, Tuesday, November 15, 2022 8:14 AM (one hour ago)

yes, the construct of the world's first bank was meant to show how a bank built around safekeeping, rather than borrowing money from its customers, would go out of business

pinefox you are very wisely aren't saying online where you bank but i will say that i am 99% certain your bank offers more than one kind of account besides a current account (the others are usually called savings accounts)

while a current account doesn't always offer any kind of interest growth to speak of (tho dan worsley's apparently does), a savings accounts generally will -- so you will not have to switch away to some obscure bank to access such a feature. the interest is how the bank "pays you" to bank with them.

there can be drawbacks with the savings accounts offered (for example you sometimes don't get speedy access). generally you have read the fine print (no one does this) or speak to someone at the bank (risk of being subtly misled; possibly less than it was in the 90s in the UK)

there is much competition between high street banks so they all offer various nice-sound things and switch them up all the time -- which can be both confusing and annoying

i bank with the co op and here's why: https://www.mirror.co.uk/news/uk-news/former-co-op-chairman-paul-flowers-3016064

pour one out for the crystal methodist

Mark S -- thanks for your helpful comments. Basically I have a current account and a savings account with the same bank and they are connected, ie: money from one flows into another - thus, in theory, a little bit of my income (less than I would like, no doubt) goes into the savings account. Except that, from today (!!), it doesn't. They have turned off that feature, for some reason, which was the main feature that made this account somewhat useful to me.

But AFAIK the savings account doesn't really pay me any interest either!

You are correct, I think, that I should talk to a banker and say: I want an account that pays me some money, or I will take it elsewhere. But do I really feel able to take my money elsewhere, with the upheaval involved? No.

"yes, the construct of the world's first bank was meant to show how a bank built around safekeeping, rather than borrowing money from its customers, would go out of business"

I don't think I comprehended this.

Transferring to a new bank should be a painless process and there's several websites which will do it for you e.g. https://www.currentaccountswitch.co.uk/ or https://www.uswitch.com/

to compress that long post into a few sentences, a bank that does nothing with the money you've deposited to it will need to charge you money to cover its expenses and to make a profit, which means it will lose out to the bank that doesn't need to charge you anything because it is loaning out the money you've deposited with it on the side and generating profit from the interest it charges. why would you bank with bank #1 that charges you money and doesn't pay you anything when you could bank with bank #2 that doesn't charge you anything and in fact may pay you interest?

I see. That seems to make sense.

So do you state that when I use them, I am not loaning money to the first bank, but am loaning money to the second bank?

correct, pretty much all banks now are in the vein of bank #2! the system has a fancy name, 'fractional reserve banking' - https://en.wikipedia.org/wiki/Fractional-reserve_banking