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Stuff I’m reading

June 23, 2015
  1. fascinating conversation with Gerald Posner, author of God’s Bankers: a History of Money and Power at the Vaticas, with crazy and horrible details of the Vatican’s bank’s dealings with the Nazis (hat tip Aryt Alasti). Also a review of the book in the New York Times.
  2. Nerding out on an interesting blog post by Laura McClay, who describes her involvement researching flood insurance (hat tip Jordan Ellenberg). One of my favorite point about insurance comes up in this piece, namely if you price insurance too accurately, it fails in its most basic function, and gets too expensive for those at highest risk.
  3. There’s a new social network created specifically to get people more involved in politics. It’s called Brigade, and it gets users to answer a bunch of questions about their beliefs. The business model hasn’t been unveiled yet, but this is information that political campaigns would find very valuable. Also see Alex Howard’s take. Could be scary, could be useful.
  1. June 23, 2015 at 11:06 am

    Does your point about pricing insurance accurately come from point 6 of the conclusions? If not, then my comments may not be on-point, so apologies in advance.

    Alternatively, if it is point 6, then I would agree and summarize this as: “some risks are not insurable.” In another form, this also can be stated as “some borrowers are not creditworthy.” That is, once you start charging for the risk, you find that there is a negative selection that means you haven’t charged enough, leading to a negative feedback cycle that prices you completely out.

    If this subject came up elsewhere, I might be tempted to give the example of insurance for low-lying properties in a flood plain . . .

    Another way to look at it: what is insurance supposed to do? In my mind (and I think this is supported historically), insurance covers risk, especially the uncertainty of substantial losses that would otherwise be catastrophic for the individual to bear alone. However, Americans seem to have become accustomed to a form of insurance that pays for expected (and sometimes even certain) losses. For that product, you either have:
    – a sucker, the policyholder, overpaying which would be evil
    – the insurer undercharging, which would be unsustainable
    – some time-value of money discounting (a loan)
    – or a pooled-buying scheme in disguise (maybe one that is able to generate volume savings?)

    None of these is really insurance.

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    • captain obvious
      July 7, 2015 at 12:03 pm

      Insurance means paying the predicted/expected losses instead of having to reserve the worst-case loss amounts. This is consistent with the “American” idea you mention, and inconsistent with the statement in the (MB) blog post about perfect prediction of risk levels ending the basic function of insurance.

      For flood insurance the risk-based pricing has nothing to do with insurance per se, because losses are highly correlated (flood me, flood my neighbor). The risk pooling that makes it insurance is the aggregation of risky and unrisky communities into one FEMA-tax-paying collective. Risk-based pricing is not a repricing of the insurance, it is simply an economic signal from the low-risk people that they are less willing to subsidize the high-risk behavior of home builders and buyers in the “negative elevation” areas, and that prices and residential behavior should change accordingly.

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  2. June 24, 2015 at 3:36 am

    Regarding people not buying flood insurance, I don’t understand your point. People freely choose to live in the flood plains, generating no benefit to society at large, and should therefore bear the costs of their decision. If risk-based insurance turns out too expensive for their tastes they can sell the houses.

    In general, if people can’t afford risk-based insurance then they should draw the obvious conclusion and not undertake the risk. If they take the risk anyway, I don’t see why society has any obligation to rescue them. Just like the banks shouldn’t have been bailed out when their real-estate gambles didn’t pan out, homeowners shouldn’t be bailed out when their flood gambles don’t pan out. If you can’t afford car insurance rates, you probably shouldn’t be driving. If you can’t afford flood-plain insurance rates, you shouldn’t be living in the flood plain.

    Yes, in the specific case of health insurance, the situation is different — the need for the insurance doesn’t stem from a voluntary choice, and we may want to subsidize the sick — but that’s a very unusual case.

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    • June 24, 2015 at 7:08 am

      I think you guys are agreeing. Flood plain insurance isn’t insurance in the theoretical sense of “unforeseen calamity.” It is, in fact, perfectly foreseeable calamity, at least in certain places. Therefore the individual isn’t typically willing to pay for the actual costs of pre-payment. What you are adding is that the taxpayers shouldn’t bail out those people, but I don’t think anybody said they should.

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  3. Guest2
    June 26, 2015 at 12:18 am
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