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> Technology enables much more accurate and precise assessment of risk, and businesses with a lot of money riding on good risk assessment (banks, insurance comp
by noblethrasher 11y ago
> Technology enables much more accurate and precise assessment of risk, and businesses with a lot of money riding on good risk assessment (banks, insurance companies) would be stupid not to take full advantage of that. If markets tend towards efficiency, this will happen.
The problem is that you can't eliminate risk[1][2], you can only shift it to someone else. But, we now live in a time in which people with the most powerful computers can shift all of the risk away from them. Consider where that risk ends up getting shifted.
[1] http://c2.com/cgi/wiki?YouCantEliminateRisk http://c2.com/cgi/wiki?YouCantEliminateRisk
[2] Well, science probably does eliminate risk and uncertainty, but that's a totally different enterprise.
- kefka 11y agoI argue that they can eliminate risk. What happens is the top 10% of the people who cost insurance get the boot. Now, unless they choose just to not pay out, they can still reduce their risk levels below threshold of the industry. That's what actuarial science is founded on.
- omegaham 11y ago> That's what actuarial science is founded on. Oh, you mean "that branch of science that everyone ignores because it's politically unpalatable?" "Gee, we promised the moon for our pension obligations and funded them at an absurdly low level, and now we're bankrupt? I don't know how this could have happened!" ~ Municipal governments
- ubernostrum 11y agoFor some types of insurance, "top 10% get the boot" may not be possible, as there might be laws requiring the insurer to write a policy for anyone willing to pay the premium.
- riskneural 11y agoYou can diversify risk which is almost the same thing. The whole point of insurance is that each person has x% probability of dying, so they pay x% * the sum assured, and, as the pool of insured gets large enough, there is enough cheese in the fridge. Yes, the pool is not always large enough, so you can throw it into a reinsurer from the insurance company. Yes, the reinsurance pool isn't always large enough, so you can retrocede to a few other reinsurers for diversification. That pool isn't aways large enough, so you can securitise away the tail risks and aggregate loss risks into a cat bond, or a pandemic bond, or a longevity swap, or something fun. These will then in turn be bought up by pension companies, in order to diversify against their market risks, and the needle returns to the start of the song, and we all sing along like before.
- robrenaud 11y agoThey had better be paying more than x% * sum assured, or else the insurance company is going out of business.
- differentView 11y agoThey make money from the float. http://www.wikinvest.com/wiki/Float http://www.wikinvest.com/wiki/Float
- riskneural 11y agoThe price is x% of the sum assured discounted at the risk neutral rates, plus admin expenses, plus customer acquisition cost, plus a target percentage of the economic capital (because their is a wee bit of risk), plus adjustments based on your demographic's price sensitivity profile, combined with adjustments based on the market cycle. Of course, you should also factor lapse rates in. Then maybe factor in whether this is a good beginner product for new customers.
- harryh 11y agoWhen I drive slower and quit smoking cigarettes, I very much am reducing my risk of getting into a car accident or dying from lung cancer.
- freehunter 11y agoBut for every cigarette you don't smoke, someone else has to smoke it! You're just shifting the lung cancer to someone else!