When the banks and real estate market were plummeting, I believe much of the credit goes to the ‘credit default swaps’ falling apart. I was marveling that it could be ok to take out what was basically an insurance policy on someone else’s risk. Yet again, Wall Street is coming up with another way to profit on individual misfortune, by investing in individual’s life insurance policies. Check out this link to the article describing the brilliant ‘new idea’ in Saturday’s New York Times:
http://www.nytimes.com/2009/09/06/business/06insurance.html?th&emc=th
How could this be good for the economy or the individuals involved? The basic idea is, the banks will bundle up and sell our insurance policies as an investment instrument, so that when we die they can collect the money! Imagine that?! Is that what insurance was developed for? For bankers to make profit from? I don’t understand it. Insurance is a regulated industry, how can this be possible to do? I am sure it will be marketed as a public service: When you or I are most needing money, the banks will be happy to cash in that life insurance policy you have been paying on for years. Then they will hold it, and it appears hope that you die young so they will get a bigger payout!
I know someone who still smokes, maybe he smokes at night, gets sleepy and is at risk for burning his house down… let’s buy his insurance policy rights! Maybe we can also take out a policy on his house when it burns down!
How can we go so wrong? By the way what happens when a lethal pandemic does hit and all those chronically ill people cannot survive it? Or a natural disaster? Will we again need to bail out Wall Street or the insurance companies having to pay out all those policies at once? Hopefully the higher risk of death from other events in ill people is a consideration of the computer model they are running. On the other hand, regardless of computer models, there is always the risk of the worst happening all at once… didn’t we just live through that in the past year?
Tuesday, September 8, 2009
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Business schools and academics have learned from the recent past and are turning their collective attention to three critical areas for business reform - improving the regulatory environment, refining and building transparency into financial modeling, and re-establishing ethical practices. My prediction - if this concept even makes it off the ground (and the regulators and insurance companies are going to resist), it will be bought only by those investors with the wherewithal to take significant risk. Yes, those investors may be rewarded however most of us will not be exposed as risk managers who invest our penisons, IRAs, 401k, etc, will not be allowed to get into the game.
ReplyDeleteJudy Kunisch