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

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

Do you agree that banks do not state that customers loan money to them?

So, if this is indeed what we, the customers do, a massive amount of dissembling has been going on for a very long time?

I have never even heard of this concept before this thread began.

Re UNDERSTAND THE ECONOMY's claim about banks: "the money in your bank account is loaned to the bank"

it's true that this is an unusual formulation but it remains a fact: the money that you deposit in an account is money you can get back -- and (except in certain emergency circumstances) you can make trouble if they don't give it back. well that's a loan.

so why don't ppl routinely *describe* it as a "loan"? one possible reason (ie i'm guessing) is that within banking loan has become a technical term of art with legally relevant specific characteristics and requirements attached (which aren't attached when you PF loan me MS a tenner to fritter away at the dog track)

so despite being a subset of the ordinary-usage meaning, the technical-professional term has – by virtue of advertising and the financialisation that runs our lives – has swamped and perhaps even ended ordinary-usage term (which ppl now don't use bcz it seems confusing and even inappropriate)

is something shady going on here? well it's banking so possibly yes i guess! but i feel its more of a structural pressure towards sales clarity than a wicked plot (like how ppl purse their lips when you call every vacuumcleaner a hoover! it wasn't made by hoover! but in a deeper and more accurate sense be serious yes it's a hoover)

plus as i've said several time before i think there are two language-use worlds at work here with a subtle but firm barrier to understanding between them. ppl on this very thread (the estimable tracer hand for one) have used the term "loan" in the sense that alarms you.

I would think that the reason is: the idea of me giving the bank my money for safe keeping is appealing. The idea of me loaning the bank my money is not. So, in their own interests, they have dissembled for many decades.

I agree that a barrier to understanding exists.

You are also trying to compress 500+ years of history of the development of the banking system into a couple of paragraphs. There were developments that lead to a second development that lead to the present arrangements/terminology. Just because no one uses a term today doesn't mean it was for nefarious or obfuscating purposes. I would also point out from the wiki link above:

Fractional-reserve banking predates the existence of governmental monetary authorities and originated with bankers' realization that generally not all depositors demand payment at the same time. In the past, savers looking to keep their coins and valuables in safekeeping depositories deposited gold and silver at goldsmiths, receiving in exchange a note for their deposit (see Bank of Amsterdam).

money/valuables for a note = a loan

silversmiths seething at the lost trade

when i was a kid i got a Kid Account at a medium-sized local bank and they gave me a lil cartoon pamphlet w lil cartoon kids "letting the bank use" their money for loaning out to lil cartoon adults who wanted houses and things, in dutiful return for which the bank then dispensed to the cartoon kids interest in comic-book vocabulary bold, big smiles all round, from all the organs of civilization's diverse and harmonious corpus. the truth (this one anyway) has been out there

they have dissembled for many decades

it's still a loan whether or not they refer to it as loan?

i agree that "we will keep you money safe for your convenience!" is a cheerier sell than "lend us your money!" but you ARE lending them your money whatever they call it

a rose by any other name etc

pinefox, you're right that banks do not disclose upfront what they do with your money. but consider also - and I fully realize that banks are to be kept at arm's length, perhaps at a polearm's length, can't be trusted farther than you can throw them, etc. - that from a customer's perspective, what the bank does with the money deposited with them has absolutely no effect on the customer. banking products are designed so that you, the customer, can withdraw your entire account, or move it to another bank, or whatever you want, at a moment's notice, without any impact on the bank's activities. the bank doesn't need to call in any loans, because the bank keeps enough in reserve to pay out customers who do request this. furthermore, as discussed upthread, if you are worried that your bank is acting irresponsibly with your funds, that is definitely a valid worry, but one that the government solves for by providing deposit insurance. so that, even if the coop bank goes down in flames because the CEO has spent it all on K, you, as a customer of the coop bank, can be fully guaranteed to receive at least up to £85,000 of your account back.

another way to put it: other than the principle of it all, what bothers you about the fact that you are lending money to your bank?

"but you ARE lending them your money whatever they call it"

hence my suggestion that they are dissembling, by referring to one thing as another thing.

"the CEO has spent it all on K"

what is K?

k is the drug ketamine (龜 is referring to the story i linked abt the CEO of the co op where i bank)

it's both things (looking after your money and a loan)

this is the same as the table story in marx's commodity chapter -- something is two things at once which pull in different directions and also read very differently

Poster ― 龜, Tuesday, thanks for your contributions, which are interesting and appreciated, to me.

"what bothers you about the fact that you are lending money to your bank?"

Do you feel good about lending money?

If I lend Mark S £10 for his chocolates, I don't mind because I know I have more money than that, it's not such a big amount. (I'd like to add "I know he will pay it back soon" but I don't know whether that's true. I have an idea that he now lives in a different town from me. But some people, I think, would pay it back soon.)

If I lend him all the money I have, I don't feel so good about that. Just as I wouldn't feel so good about lending him all my books. Lending things is sometimes a good and generous thing to do, but it creates a precarious situation.

Mark S, actually I didn't look up your story and thought it was a beneficial story about why the co-op was good !!

Mark S: as we have noted before, I have read the commodity chapter several times, very closely, and ultimately I did not comprehend it. A worrying thing (probably also stated before) is that I have an idea that the rest of CAPITAL is *harder* than that chapter.